Corporate Tax in UAE
On January 31 2022, the UAE government announced the introduction of a new corporate tax. Historically, the United Arab Emirates had not imposed corporate tariffs, except for a few specific industries like resource extraction and foreign companies. However, starting from the financial year beginning on June 1, 2023, a new corporate tax rate of 9% will be applied to many companies operating in the UAE.
The new UAE corporate tax will only affect some businesses, and many will not need to pay the tax at all. Let’s learn more about the new UAE corporate tax and what it means for you.
In this quick guide by Elite Financials, you will learn everything about the United Arab Emirates’ recently announced corporate tax.
The Taxation Landscape and Corporate Tax in the United Arab Emirates
Over an extended period, the United Arab Emirates stood as a tax-friendly jurisdiction. Income tax was not levied on its citizens, and corporate taxes were notably absent for most companies. The government primarily relied on revenues from state-owned and private fossil fuel extraction sectors, subject to approximately a 50% income tax. In contrast, foreign enterprises historically faced a 20% corporate tax on their operational profits, and certain taxes applied to dining and hospitality establishments in Dubai.
Nevertheless, recently, the United Arab Emirates has embarked on a journey to broaden its economic horizons beyond fossil fuels. This shift has resulted in an increasing number of businesses currently enjoying tax exemptions. Given the reduced dependence on fossil fuel revenues and a rapidly expanding economy, the government has found it prudent to impose taxes on business profits, facilitating enhanced investments in infrastructure, education, and healthcare.
United Arab Emirates Tax History
The United Arab Emirates introduced a value-added tax (VAT) in 2018, placing a 5% charge on all consumer transactions. Subsequently, in January 2022, the government unveiled a 9% corporate tax set for the following year.
Another motivating factor behind introducing the new corporate tax in UAE is alignment with global standards and the proactive stance against tax evasion. Many advanced economies across the globe impose taxes on corporate profits, with the 9% rate applicable to UAE companies remaining notably lower than the average in most developed nations, typically around 20%. This move also serves as a deterrent for foreign businesses considering the UAE as a tax avoidance base in their home countries.
The 2023 corporate tax in The UAE and it’s specifics
The 2023 corporate tax in UAE comprises a 9% tax imposed on the profits of all businesses, calculated as revenue minus expenses. Companies with earnings exceeding 375,000 AED (approximately USD 100,000) will be subject to this tax, while those generating less will maintain a 0% tax rate.
Moreover, in conjunction with the corporate tax, the United Arab Emirates has disclosed that substantial multinational companies with profits surpassing EUR 750 million will be obliged to remit a 15% tax. It aligns with the provisions of the Global Minimum Corporate Tax Rate agreement.
The new UAE corporate tax will be implemented from the start of the tax year on June 1, 2023. It means that most companies will need to initiate preparations for setting aside funds to fulfil their tax obligations beginning on this date. Companies whose tax year commences in January will not be liable for taxes on revenues generated before January 1, 2024.
Characteristics of Corporate Tax
Dubai’s corporate tax framework encompasses many policies, ranging from tax-free zones to corporate taxes, VAT systems, and the absence of federal income tax. Continue reading to explore the distinctive elements of this tax system.
Who Falls Under Taxation?
Taxation applies to legal entities with distinct legal structures, including LLCs, PSCs, PJSCs, LLPs, and similar entities. Moreover, any foreign legal entity that generates income within the UAE and maintains tax residency will incur tax liability. Free zones enjoy a 0% corporate tax rate, provided they adhere to all regulatory prerequisites. This condition extends to free zone companies engaged in trade activities with the mainland. Both non-residents and residents of the UAE may also be subject to corporate tax regulations.
Tax Rates Level in UAE
For businesses with earnings not surpassing AED 375,000, a 0% tax rate will be applied, while a 9% tax rate applies to income exceeding AED 375,000. Large multinational companies with diverse business circumstances may be subject to distinct tax rates.
Who Qualifies for Exemptions?
Under corporate tax regulations, there is a participation exemption from corporate tax when receiving dividends or divesting shares of a subsidiary company. Charities, public benefit organizations, investment funds, oil and resources extraction businesses, and wholly government-owned companies are exempted from corporate taxes.
Determining Taxable Income
Typically, the net profit or loss figure displayed in a company’s financial statements is the basis for calculating the applicable tax percentage and income. When a company reports a loss, it may offset this value against taxable income in subsequent financial years, potentially offset up to 75% of the loss.
About Groups of Companies
A group of companies can form a tax group to be treated as a sole taxable entity. To achieve this, a company or subsidiary must abstain from being an exempted entity or being registered within a free zone.
Tax credits
Avoid taxation confusion! The authorities will allow for credit in parallel with foreign tax paid in a foreign jurisdiction against foreign tax income, which has not been exempted.
Taxation of Free Zone Enterprises
The specific application of the new UAE corporate tax to businesses operating within free zones remains an area that necessitates further clarification. According to the government statement, free zone companies will continue enjoying established incentives within their respective free zones. However, it’s essential to note that free zones retain the flexibility to alter regulations in the future, potentially introducing taxation.
When free zone companies engage in business with mainland enterprises, they typically incur corporate taxes on the revenues generated through such collaboration.
“It is important to note that Free zone companies must also register and file a corporate tax return, even though they will not have to pay any tax.”
Taxation of Personal Income in Dubai
As of the current information available (March 2022), there are no intentions to impose income taxes on individuals in Dubai or the broader UAE. The singular form of personal income taxation in Dubai is the 5% VAT tax, which applies to consumer goods and services and is obligatory for all residents.
Capital Gains Tax on Dividends in Dubai
As of March 2022, there are no proposals to introduce a capital gains tax on dividends within the United Arab Emirates or Dubai. Business owners and investors are not obligated to pay capital gains tax on the dividends generated from their invested enterprises.
Frequently Asked Questions about Corporate Tax in UAE:
Q 1: Is after corporate tax, Business in UAE Tax-Free?
While businesses established in the UAE mainland are subject to specific taxes, free zones in Dubai, provide a tax-friendly environment with 0% corporate and personal tax on business earnings (minus expenses).
Q 2: Who Bears the Burden of Corporate Tax in the UAE?
All businesses engaged in commercial activities and other company types are responsible for paying corporate tax, with specific business models eligible for exemptions. For instance, companies involved in oil extraction are among those exempt.
Q 3: Why Has Corporate Tax Been Introduced in the UAE?
Introducing a comprehensive corporate tax regime in the UAE is geared towards enhancing Dubai’s global standing as a hub for investment and innovative startups. It offers cost-effective registration options and a lack of corporate taxes.
Q 4: What Are the Corporate Tax Rates in the UAE?
The UAE’s corporate tax system is progressive, with rates ranging from 9% to 55%, depending on various factors and business conditions.