The UAE government’s announcement to implement corporate taxes from June 1, 2023, has aroused interest and curiosity in the country’s business world and among corporate tax consultants.
Our article explores all the major and minor details of corporate taxes in the UAE. If you own a business in the UAE, you should pay attention to the nuances and intricacies of the UAE's corporate taxes.
UAE Corporate Taxes: Let’s Understand Them Better
Corporate Tax is otherwise known as Business Profits Tax or Corporate Income Tax. As the name suggests, it is a tax imposed on the total profit of a business or company based in the UAE.
By implementing the corporate tax, the UAE government hopes to accomplish three goals:
- Strengthen UAE’s credibility as a major business hub.
- Prevent tax-related frauds and unwanted tax practices.
- Meet international requirements regarding transparency in taxation.
Keeping these objectives in mind, the government has formulated corporate tax laws with several key elements, which we have listed below for your reference.
Corporate Tax Rate
You should be aware of the corporate tax rate in the UAE if you are liable to pay it.
- 9% for taxable income over AED 375,000
- 0% for taxable income up to AED 375,000
The government sets all UAE corporate tax rates. An OECD Base Erosion and Profit Shifting project, 'Pillar Two', specifies a different corporate tax rate for multinationals that meet certain criteria.
10 Prime Elements of Corporate Taxes in the UAE : A Quick Glance
According to the laws of the United Arab Emirates government, the following elements comprise the core of its newly announced Corporate Taxes:
1. Corporate taxes are not applicable for foreign investors not involved in businesses in the UAE.
2. Qualified intra-group transactions and reorganisations will not be subject to corporate tax.
3. Businesses operating in free zones are still eligible for corporate tax benefits if they follow the rules.
4. A UAE-based business's capital gains and dividends from its related shareholdings will not be subject to corporate tax.
5. Businesses are subject to corporate tax on their adjusted accounting net profits.
6. International and domestic payments are not subject to withholding tax.
7. Emirate-level corporate taxation applies to resource exploitation.
8. Businesses can offset their corporate tax liability using foreign tax credits.
9. Companies can take advantage of loss transfer and utilisation laws.
10. Corporate tax is not applicable for those deriving income from:
- Real estate
- Stock investments
- Income from jobs
- Income from sources without connection to business activities in the UAE
How to Accurately Calculate Corporate Tax
What are the particulars that should be considered when calculating corporate tax?
Well, calculating corporate tax after adjusting accounting profits will look like this:
| Particulars | Amount (AED) |
|---|---|
| Net Profit/loss as per the financial statement | xx |
| Add/Less: Adjustments as per the CT legislations | xx |
| Taxable Income | |
| Taxable Income up to AED 375,000 | @0% (A) |
| Taxable Income above AED 375,000 | @9% (B) |
| CT Liability | A + B |
| Less: Foreign Tax Credit | xx |
| CT Payable | xx |
Among the most common questions business owners ask is, “Is my business subject to corporate tax in the UAE?” Since tax compliance is mandatory in the UAE, and corporate tax is levied at 9%, it is only natural to ask this question. Let’s explore these details.
The Detailed List of Exemptions from UAE Corporate Tax
In the UAE, corporate tax applies to all incomes earned with a commercial license. However, natural resource extraction businesses will be subject to Emirate-level corporate taxes instead of UAE Corporate Tax.
We have listed below both individual and corporate exemptions from the UAE's 9% corporate income tax that will go into effect on 1 June 2023:
1. UAE-based individuals deriving income from:
- Employment.
- Freelancing income from professional, business, commercial and economic activities is permitted with a business license.
- Real estate investments made personally and not as a business.
- Any business or commercial activity for which the UAE law does not require a license or permit.
- Dividends, capital gains, and income earned from investments in stocks and bonds.
- Income and interest earned from savings and deposit accounts.
2. For UAE-registered businesses
- Large-scale MNCs that meet specific requirements will have to pay higher corporate taxes, which are yet to be communicated by the government.
- Companies with registered income that does not exceed AED 375,000.
- UAE-based businesses earning capital gains and dividends from shareholdings.
- Companies registered in the free zone that comply with all regulations and do not conduct business with mainland UAE firms. ( These companies are also exempt from income taxes.)
3. Free Zone Companies
Despite confusion about how the government plans to tax companies operating in the free zone, early reports have good news for them. To recognise the contribution of the free zone-based companies to the UAE economy, the new corporate tax regime will continue honouring free zone incentives. Hence, companies operating in the free zone that do not do business with mainland UAE companies will still have an advantage over those operating in non-free zones.
4. Offshore Companies
Corporate tax consultants in the UAE are unclear whether offshore companies are subject to corporate tax. According to UAE's business advisory grapevine, offshore firms will follow the same rules as free zone businesses. Additionally, the requirements for audited financial statements from foreign companies may also differ.
How UAE Corporate Tax Impacts Expense & Loss for Companies
UAE-based companies that incur tax losses can now deduct these losses from future taxable income under the newly proposed UAE corporate tax regime. While the law allows the company to carry forward losses indefinitely, the loss itself cannot exceed 75% of taxable income. To qualify for this benefit, the company must maintain 50% of its shareholdings during the period in which losses are incurred until the end of that period.
Additionally, several expenses are not deductible under the UAE's corporate tax regime. They are:
- Donations made to charitable organisations or public benefit bodies that are not recognised by the UAE government.
- Administrative penalties.
- Recoverable Value Added Taxes.
How Will Corporate Tax Impact Businesses in the UAE?
Tax experts in the UAE predict that introducing corporate tax will significantly impact the UAE's business community. Among the changes that organisations can expect are:
- Increase in compliance costs because corporate tax is levied on profits.
- Unequal effect on bottom-rated UAE GREs and onshore, privately owned companies or standalone entities.
- Increase the overall tax burden of UAE-based businesses.
The Final Say
The corporate tax will be a topic of much debate. However, UAE businesses must wait until June 2023 to see how things will pan out. Until then, here are some crucial pointers to bear in mind:
- You require a commercial license to run a business in the UAE.
- Businesses should adhere to generally accepted accounting principles while drafting their financial statements.
- All financial statements for the current year should be audited.
- The UAE will offer corporate tax incentives to free zone companies that aren't based on the UAE's mainland but comply with every legal requirement.
- Corporate tax applies to foreign individuals and entities doing commerce or trade on a consistent basis in the UAE.
When it comes to taxes in the UAE, never make assumptions or remain in the dark. To stay compliant with UAE’s tax regime, always seek the guidance of experienced corporate tax consultants from Fortius Consulting. Talk to our consultants today!
