The United Arab Emirates will introduce a federal corporation tax on business earnings starting on June 1, 2023, according to a statement released by the Ministry of Finance on Monday. The government intends to keep the base rate low to maintain the country’s attractiveness to enterprises.
The United Arab Emirates (UAE) intends to enact a federal corporate tax to strengthen its position as a premier global center for investments and commercial activity and to quicken the country’s strategic goal of moving toward development and transformation. Furthermore, the idea of corporate taxes helps to comply with international standards for tax transparency and stop harmful tax practices.
Firms must thoroughly understand corporate tax in UAE because it is a relatively new concept in the UAE. We have tried to address some of the more frequent questions you might have about the business tax.
It was discovered that businesses operating in the United Arab Emirates, a financial hub for the region, are immune from paying taxes on dividends and capital gains received from shareholdings. Under the new policy, the exemption from income tax, capital gains tax on real estate and other investments, and tax on other non-business incomes were all retained, but people were not forced to pay them.
The UAE’s corporate tax framework will continue to honor the corporate tax advantages now given to free zone businesses that abide by the relevant criteria.
How does the United Arab Emirates impose tax on corporations?
Historically, many businesses operating in the UAE have not had to pay any kind of income tax on their profits. This will change, though, since the Ministry of Finance (MOF) stated on January 31, 2022, that the United Arab Emirates will enact a federal corporate income tax (CIT). The CIT regime is projected to go into effect for fiscal years starting on or after June 1, 2023.
The UAE made this change in order to comply with international tax standards and to follow similar steps taken by other Gulf states, while also reducing the burden of compliance on UAE corporations and protecting start-ups and small businesses from any potential detrimental repercussions of the change. In spite of the change, which would diversify the state’s income away from its dependence on hydrocarbons, the United Arab Emirates, which is home to the significant business hub of Dubai, will keep one of the lowest corporation tax rates in the world.
The taxation of corporations and other commercial entities, whether sole proprietorships or publicly traded companies, is a form of direct taxation. In some circles, it is referred to as the “Corporate Income Tax” or the “Business Profits Tax.”
The United Arab Emirates has enacted a business tax on June 1, 2019.
What is the corporate tax rate in the United Arab Emirates?
Whether sole proprietorships or publicly traded enterprises, corporations, and other commercial entities are subject to taxation, it is also known as the “Corporate Income Tax” or the “Business Profits Tax” in some areas.
In other words, it is a tax that the corporations must pay based on the net profit they generate. It requires companies to pay tax on a predetermined portion of their profits. Firms will pay taxe at 9% of their annual net income. For businesses with net income up to AED 375,000, the corporate tax rate will be 0% to help smaller and newly started businesses even more.
In the United Arab Emirates, who is liable to pay taxes?
UAE Corporate tax is imposed on all firms with taxable profits (net) of more than 375,000 AED, and these companies must pay a predetermined percentage of their net profits as corporation tax. A business’s taxable earnings exceed 375,000 AED; it is liable to corporation tax.
What types of businesses or incomes are exempt from the corporate tax, and what are those businesses and earnings?
Because the AED 375,000 threshold for taxable profits has been established, all businesses with profits above the level must pay corporation tax. However, not all commercial income or business activity types are subject to corporate tax. The organizations on the list below are exempt from paying corporate income taxes:
There will be no concern over personal taxpayers paying at the same rate as enterprises. As a result, any money received in the UAE from employment, stock investments or real estate, or other personal income unrelated to a business or trade will not be liable to the UAE’s corporate tax.
This condition does not apply to foreign investors who do not operate active enterprises in the UAE.
Businesses operating in free zones that abide by all legal criteria are currently receiving corporation tax incentives, and this practice will continue.
This restriction does not apply to transactions and restructurings that meet the criteria for belonging to the same group.
What does the future hold for businesses regarding the proposed corporation tax in the UAE?
There is much more to develop on the federal corporation tax as we get closer to the “d-day” of June 2023, which is still some time away from where we are now. Before the suggested corporate tax implementation date, businesses have a sizable window of time to get ready. Additionally, although it is anticipated that they will be made public over time, the rules and guidelines have not yet been published.
Implications:
Companies must assess the potential impact of the Corporate tax in UAE on their daily operations and prepare for the UAE‘s implementation of Corporate tax compliance criteria. More specifically, companies should:
Find out if the current tax function, operational model, and governance (including people, processes, systems, and technology) are sufficient to fulfill the requirements of the Corporate tax regime.
Analyze how the effects of UAE Corporate tax will be felt within the current legal and corporate frameworks. Here, there may be a quantitative analysis illustrating the expected financial impact of Corporate tax.
To create tax efficiencies from both an administrative and tax expense viewpoint, it is critical to identify potential exposures and possibilities before adopting corporate tax. Examples of potential vulnerabilities and opportunities include rationalizing legal entities, local and international restructuring, and transfer pricing.
Additionally, businesses must assess whether their accounting practices and data management systems are sufficient to fully comply with the reporting requirements for the existing Value-Added Tax and the Corporate tax.
Financial statements will now become even more necessary for businesses, even though there isn’t enough information on corporation tax to study and fully understand its complexity. This is because the net profit reported in these accounts serves as the foundation for determining the corporation tax a company must pay.
The accuracy of the company data will be used to determine the accuracy of the financial accounts, which will then ensure that the proper amount of corporation tax is calculated.
