After more than a decade of enjoying exemption from corporate tax, the United Arab Emirates reached a significant milestone as it began implementing a new tax regime on June 1, 2023. This groundbreaking development witnessed the introduction of a 9% corporate tax (CT) on companies, marking a momentous shift in the nation’s taxation policy.
Impact on Economy
For years, the UAE has relied heavily on oil as its primary source of income, which has made it vulnerable to fluctuations in the global oil market. With the imposition of the new tax regime, the government will be able to diversify its revenue streams, reducing its dependence on oil leading to a more stable source of income. This will also provide the government with an additional source of revenue that can be used to fund critical public services, infrastructure, and other initiatives that can help promote economic growth. Furthermore, the new CT will help promote the country’s image as a well-regulated and stable business environment.
Impact on Businesses
The introduction of a corporate tax in the UAE may have several impacts on businesses operating in the country. Companies making profits/taxable income of more than AED 375,000 will now be subject to a 9% corporate tax rate, which could potentially reduce their profits. However, it is worth noting that the UAE still has one of the lowest corporate tax rates in the world.
On the other hand, this new tax regime can promote business competitiveness in the market, as they now must consider this factor when setting prices for their products or services.
Scope of UAE Corporate Tax
Under the new regime, corporate tax will be applied to the following:
- Businesses and individuals conducting business activities
- Free Zone businesses (can benefit from Free Zone tax regime if they comply with all regulatory requirements)
- Foreign companies and individuals are subject to CT if their business is effectively managed and controlled in the UAE.
- Automatically exempt: Government entities
- Exempt if listed in a cabinet decision: Government-controlled entities and qualifying public benefit entities.
- Exempt if notified to Ministry of Finance (and subject to meeting certain conditions): Extractive and non-extractive natural resource businesses.
- Exempt if applied to and approved by FTA and subject to meeting certain conditions: public and private pension and social security funds, qualifying investment funds, and wholly-owned and controlled UAE subsidiaries of a government entity, a government-controlled entity, a qualifying investment fund, or a public or private pension or social security fund.
- CT won’t apply to dividends or capital gains that a UAE business makes from its qualifying shareholdings.
- Qualifying intra-group transactions and reorganizations will not be subject to CT, provided the necessary conditions are met.
Non-resident person’s Corporate Tax
In order to maintain fairness between local and foreign companies earning money from properties in the UAE, the UAE’s Ministry of Finance (MoF) has introduced a Corporate Tax for Non-Residents. This means that foreign companies and other legal entities will have to pay tax on the income they make from properties (like buildings or land) situated in the UAE. This applies to properties used for business purposes as well as those held for investment.
In Free Zone jurisdictions, businesses can avail the benefit of a 0% corporate tax regime if they earn qualifying income (subject to other conditions). As defined by MoF, Qualifying income includes revenue from transactions with other Free Zone entities and income from specific qualifying activities.
- Manufacturing of goods or materials
- Processing of goods or materials;
- Holding of shares and other securities;
- Ownership, management, and operation of ships;
- Reinsurance, fund management, wealth and investment management services that are subject to the regulatory oversight of the competent authority in the state;
- Headquarters services to related parties;
- Treasury and financing services to related parties;
- Financing and leasing of aircraft, including engines and rotatable components;
- Logistics services;
- Distribution in or from a designated zone that meets the relevant conditions and any activities that are ancillary to the above-mentioned activities.
On the other hand, excluded activities, do not fall under qualifying income, whether conducted with a Free Zone entity or as part of a qualifying activity.
- Activities with natural persons with some exceptions,
- Certain regulated financial services activities
- Ownership or exploitation of immovable property, except for transactions with Free Zone Persons in relation to commercial property located in a Free Zone.
- Ownership or exploitation of intellectual property assets, and
- Activities ancillary to the above
If a Free Zone entity earns income that does not qualify, it will not be eligible for the beneficial tax regime unless it meets the de minimis requirements. To fulfill these requirements, non-qualifying revenue must not exceed either 5% of the total revenue or AED 5,000,000, whichever is lower.
Non-qualifying revenue refers to income derived from excluded activities or activities that are not Qualifying Activities with non-free zone persons. Revenue attributable to a domestic or foreign permanent establishment (PE) of the Free Zone entity and revenues from immovable property located in a Free Zone (except transactions with Free Zone persons in respect of commercial property) is not considered while calculating non-qualifying or total revenue.
Conditions for Maintaining Adequate Substance
To maintain adequate substance, Free Zone entities must fulfill certain conditions, these include:
- Conducting core income-generating activities within the Free Zone
- Possessing sufficient assets
- Maintaining an adequate number of qualified employees, and
- Incurring an appropriate amount of operating expenditure.
If the qualifying Free Zone person fails to meet any of the conditions and becomes disqualified, it will cease to be a qualifying Free Zone person for a period of 5 years.
Businesses can check with their Free Zone Authority to confirm if their Free Zone qualifies for the 0% tax rate.
Navigating the changes in the UAE Corporate Tax
It is important for businesses to understand the impact of the new tax and to take steps to mitigate its impact.
Here are some tips for businesses on how to navigate the impact of the UAE’s corporate tax 2023:
- Review your business operations: Determine how the new corporate tax will impact your business. From here, you can consider the potential costs and adjust your financial projections accordingly.
- Implement tax strategies: To mitigate the impact of the new corporate tax, consider implementing tax strategies such as optimizing your corporate structure, utilizing available deductions and exemptions, and maximizing your use of tax credits.
- Seek advice from an accounting professional: The most important thing to do in navigating the new tax regime is to get insights and advice from qualified tax professionals. This can ensure compliance with all relevant regulations.
- Stay informed: The UAE government is constantly updating information about the new corporate tax. Make sure that you are up-to-date on the latest changes so that you can make adjustments to your business.
How Creative Zone can help
If you’re feeling overwhelmed by the implementation of corporate tax in the UAE, Creative Zone is here to provide expert guidance. Our team of professionals, including tax and accounting experts and legal advisors, will assist you in navigating the new process, ensuring compliance while maximizing the benefits of the new corporate tax regulations. To get started, contact us at 800-LICENCE (5423673) or reach out to us here to speak with one of our consultants.
Head to the link to know more. https://www.creativezone.ae/extended-services/cz-tax-accounting/