
What is Corporate Tax in UAE, and how will it benefit the economy of UAE?
The UAE's Ministry of Finance has stated that corporations will be subject to a federal corporate tax of 9% on profits above the threshold of AED 375,000. As of the start of the financial year in June 2023, this will be in effect.
With only Bahrain remaining in the GCC without a CT regime, the United Arab Emirates has one of the world's most competitive corporation tax rates. It has been notified that the Corporate Tax regime in the UAE will be implemented with simple corporate tax compliance standards, in line with best global practices.
United Arab Emirates corporations will be required to pay corporate tax on their consolidated net income as shown in their audited financial statements prepared in line with generally accepted accounting principles. Exceptions and adjustments shall be kept to a minimum. Consequently, audits of financial accounts must now be performed on schedule, without exception.
According to the announcement, the only business activity that will be exempt from taxation is the extraction of natural resources, which will likely continue to be subject to emirate-level corporate taxation (for example, a different corporate tax in Dubai from one in Abu Dhabi or any other emirate). Companies functioning within Free Zones will also be eligible for exemptions; however, they will come with stipulations.
The conditional introduction of a global minimum income tax of 15% is expected to alleviate worries in this area. Due to the Foreign Tax credit available in the United Arab Emirates, no additional taxes will need to be paid on the amount of withholding tax that is waived.
The holding company structure will receive further support from the UAE's decision to eliminate corporate tax on capital gains and dividends. Group tax registrations and taxability at the group level are now possible under the new tax system. Therefore, taxable profits can include inter-company losses.
By the OECD Transfer Pricing Guidelines, UAE enterprises must maintain detailed transfer pricing and documentation records.
The Standard Statutory Rate
Small firms and startups are encouraged by a 0% tax rate on profits up to AED375,000, in addition to the ordinary statutory tax rate of 9%. This means that the corporate tax policy in the United Arab Emirates will be among the most competitive in the world.
Businesses in the United Arab Emirates (UAE) will be required to pay corporate tax on their income as recorded in their financial statements prepared in line with internationally accepted accounting standards, with limited exclusions and adjustments. Except for the extraction of natural resources, which will continue to be subject to corporate taxation at the Emirate level, the corporation tax will equally apply to all enterprises and commercial activities.
There will be no tax on an individual's labor, property, or investment income. Income obtained by individuals from sources other than businesses or commercial activities licensed or otherwise authorized in the UAE is not subject to corporation tax. This includes revenue gained from employment, real estate, and other investments. Corporate tax benefits granted to free zone enterprises that meet all legal requirements and do not do business with mainland UAE will continue to be honored by the UAE corporate tax regime.
Given the United Arab Emirates' status as a global financial center and international business center, it does not impose withholding taxes on domestic or cross-border payments. It does not subject foreign investors who do not conduct business in the UAE to corporate tax. If your company's primary office is in the United Arab Emirates, you can avoid paying tax on capital gains and dividends from eligible shareholdings and use foreign taxes paid as a credit against your UAE corporate tax liability.
UAE groups can elect to be taxed as a single company or apply for group relief in respect of losses and intragroup transactions and restructurings, and the UAE corporate tax regime will feature liberal loss utilization provisions.
Businesses that take the time to create and keep accurate financial records will have a light compliance load thanks to the UAE's corporate tax framework. There will be no requirement for businesses to file provisional tax returns or make advance tax payments, and they will only need to file a single corporate tax return each fiscal year. UAE enterprises should look to the OECD Transfer Pricing Guidelines to comply with transfer pricing and documentation requirements.
What is the Starting Date of Corporate Tax in the UAE?
Companies operating in the United Arab Emirates will have plenty of time to prepare for the introduction of corporation tax in the UAE, which is scheduled to take effect for financial years beginning on or after June 1, 2023. More details on the UAE corporate tax regime are expected to be released by the UAE Ministry of Finance in the middle of the year to give firms more time to prepare and ensure full compliance.
The Bottom Line
Based on the details mentioned above, businesses based anywhere in the world but registered in the United Arab Emirates do not need to file corporate tax returns in the UAE.
Domestic CIT issues such as expense deductibility, (possible) double taxation of profits and gains, and the ability to carry forward tax losses are now of low practical relevance to most enterprises operating in the United Arab Emirates, given the current tax system.
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