Brief Overview of the New Corporate Tax Law in the UAE

The UAE government announced the introduction of a new corporation tax on January 31, 2022. Except for a handful of industries, such as resource extraction and foreign banking, the United Arab Emirates has historically not placed taxes on firms’ revenues. However, beginning with the fiscal year starting on June 1, 2023, a significantly more significant number of enterprises operating in the area will be required to start paying the new corporate tax rate of 9%.

The Emirates Corporate Tax will apply to all enterprises operating in the UAE, except for those engaged in resource extraction, which will continue to be taxed at the Emirate level. Only foreign corporations and their owners that frequently engage in commercial activity within the United Arab Emirates (UAE) will be subject to corporate taxation.

The UAE corporate tax is applied uniformly to all profits and other (net) income reported in financial accounts produced following generally accepted accounting principles.

The Corporate Tax Background in UAE

The United Arab Emirates has been a low-tax jurisdiction for quite some time. There is no income tax for citizens, and most businesses have never been required to pay corporate tax. The state’s funds came from the nationalized and private fossil fuel extraction sectors, which produced a tax rate of roughly 50%. In the meantime, foreign banks have long paid a 20% corporate tax on operating income, and hotels and restaurants in Dubai have also paid certain taxes.

The United Arab Emirates has been working on weaning itself off its reliance on fossil fuels and diversifying its economy in recent years. This means that many companies are currently avoiding all forms of taxation. Since the government can no longer count on the revenue from fossil fuels to fund its spending, it makes sense to increase taxes on companies to support the expansion of public services like transportation, education, and healthcare.

In 2018, the United Arab Emirates instituted its first value-added tax, or VAT, charging a 5% surcharge on most purchases. The administration then stated in January 2022 that a 9% corporate tax would be implemented the following year.

The United Arab Emirates has implemented its new corporate tax to combat tax evasion and to bring the country into line with international standards. While tariffs on corporate profits are commonplace in developed economies, the United Arab Emirates’ comparatively low rate of 9% is still well below that of most other developed countries (which is often around 20%). The new corporate tax in the United Arab Emirates will deter multinational corporations from using the country as a tax haven.

What is the UAE’s Corporate Tax for 2023?

In 2023, the United Arab Emirates will impose a 9% corporate tax on all enterprises’ net income (sales minus costs) with an annual turnover of more than 375,000 AED. Companies with annual revenues below this threshold will continue to enjoy a 0% tax rate.

By the Global Minimum Corporate Tax Rate agreement, the UAE has also declared that major multinational corporations with income of more than EUR 750 million will be required to pay a 15% tax.

In preparation for the new UAE corporation tax, most businesses will need to set aside funds on or around June 1, 2023, the start of the new tax year. There would be no retroactive taxation for businesses whose fiscal year begins in January, meaning they won’t have to start paying on revenues made before their fiscal year in 2024.

Effective Dates of the New Corporate Tax Law in UAE

The UAE Corporate Tax will be in effect for fiscal years beginning on or after June 1, 2023. Any company or business that follows a calendar starting on January 1, 2023, and ending on December 31, 2023, will be subject to corporate tax starting on January 1, 2024, with a filing deadline around the middle of 2025.

UAE Corporate Tax Notable Features 

Many different regulations make up Dubai’s business tax framework, including tax-free free zones, corporate taxes, VAT systems, and the absence of a federal income tax. Keep reading to learn about the UAE’s unique aspects of the tax system. 

Who Can Be Subject to Taxation?

LLCs, PSCs, PJSCs, LLPs, and other legal entities with distinct legal personas will be subject to taxation. Additionally, any foreign legal entity that is a tax resident of the UAE and has sourced income in the UAE will be subject to corporate tax. However, free zones will be subject to 0% corporation taxes if they comply with all regulatory criteria; this also applies to free zone businesses that engage in trade with the mainland. Corporate taxation policies may apply to both UAE residents and non-residents.

Determining Taxable Income

The tax rate and income are typically calculated from the company’s net profit or loss as reported in the financial accounts. In the event of a loss, the corporation might apply up to 75% of that amount to reduce its taxable income in subsequent years.

Tax Group

A collection of businesses can band together as a “tax group,” at which point the government views them as a single organization for tax purposes. To avoid this, a corporation or its subsidiary must not be a party exempt from taxation or registered in a tax haven.

Tax Credits

To prevent being taxed twice on the same income, the regime will give a credit for taxes already paid in a foreign jurisdiction against any foreign-source income subject to taxation.

Key Features of the UAE’s Corporate Tax System

The main features of the UAE corporate tax are as follows:

  • Earnings from employment, real estate, stock investments, or other non-business sources are exempt from corporate taxation in the UAE.
  • Corporate tax will not be levied on foreign investors who do not function within the United Arab Emirates.
  • The company will pay corporate tax on its “adjusted accounting net profit.”
  • Free zone businesses that comply with all regulations are still eligible for corporate tax benefits.
  • At the Emirate level, corporate taxes on resource extraction will remain in effect.
  • No taxes will be withheld from either domestic or foreign payments.
  • Capital gains and dividends received by a company based in the United Arab Emirates (UAE) from eligible shareholdings will be exempt from corporate tax.
  • No corporate tax is required for qualifying intragroup transactions and restructurings.
  • Foreign tax credits can reduce the total amount of UAE corporation tax owed.
  • Excellent loss transfer and utilization laws are available for corporations to exploit.

UAEs Corporate Tax Exemption

There are also some exemptions from corporate tax. In addition to the ones below, we can help you with tax consulting in Dubai, UAE. The corporate income tax usually doesn’t apply to the following types of income:

  • Dividends a UAE-based business receives from its permissible stockholders (to be defined in the law).
  • Financial gains.
  • Gains from reorganizing the group.
  • Profits from intragroup transactions.

No UAE withholding taxes will be charged to domestic or international payments. Regarding the excluded income scheme, it can be predicted that the law will feature a participation exemption or other similar concepts commonly found in foreign markets.

If a business wishes to take advantage of the exempt income plan, it must assess if it can meet the requirements. The UAE’s primary objectives in implementing the Corporate Tax are:

  • Strengthening the UAE’s standing as a leading worldwide business and investment destination.
  • Adhering to worldwide standards of tax transparency and avoiding damaging tax practices.
  • Escalating the rate of change and growth in the UAE so that its most important goals can be attained more quickly.

UAE Corporate Tax and Its Substantial Impact

The government of the UAE has said that all enterprises and employees in the country are required to obtain valid commercial licenses. The UAE corporate tax regime will continue to honor the corporate tax incentives now available to free zone businesses that meet all legal requirements and do not have their headquarters on the UAE’s mainland.

Only foreign businesses and individuals who regularly or constantly do business in the UAE are eligible. That includes financial institutions and companies that handle real estate in various capacities (such as management, development, construction, agency, or brokerage).

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