Many companies operating in the United Arab Emirates have traditionally been exempt from paying income tax on their revenues. As part of the most significant legislative change in the country’s history, the UAE government has announced the implementation of a federal corporate income tax.
The relevant corporate tax legislation is still in the works and has not yet been made public. However, businesses operating in the UAE (especially those with dual licences in mainland UAE and free zones) should examine the implications of the proposed regime and prepare for the anticipated legislative change.
In this post, we examine how corporate tax would affect businesses and what UAE companies should be aware of. We cover the following:
• What is corporate tax, and why is the UAE introducing it?
• When will the UAE corporate tax regime become effective?
• Scope and UAE corporate tax rate
• Working with Creative Zone
What is corporate tax, and why is the UAE introducing it?
Most nations, including other GCC members, have a comprehensive corporate tax policy. Corporations and other business entities are subject to a form of direct tax known as ‘Corporate Tax’ (CT) on their income or profits. It is also known as ‘Corporate Income Tax’ and ‘Business Profits Tax’ in other countries.
By implementing this legislation based on worldwide best practices, the United Arab Emirates can further its position as a major global centre for business and investment. It will also be able to expedite the country’s growth and transformation to meet its strategic goals.
When will the UAE corporate tax regime become effective?
The United Arab Emirates’ Ministry of Finance stated on 31 January 2022 that starting with the fiscal year commencing on 1 June 2023, the federal government will begin collecting a corporate tax from businesses on their annual revenues.
Hence, any company with a fiscal year commencing on 1 July 2023 and ending on 30 June 2024 will be required to comply with UAE CT. For those businesses with a fiscal year starting on 1 January 2023 and ending on 31 December 2023, UAE CT will be applicable beginning on 1 January 2024.
Scope and UAE corporate tax rate
The UAE is reiterating its commitment to international tax transparency and eliminating harmful tax practices by instituting the corporate tax system. All commercial and industrial enterprises in the UAE will be required to pay UAE CT, except those engaged in extracting natural resources, which will continue to be subject to corporate taxes at the emirate level. Hence, all operations carried out by a legal entity shall be considered ‘business activities’ and fall within the purview of UAE CT.
The corporate tax fee schedule is as follows:
• zero per cent for taxable income up to AED 375,000
• nine per cent for taxable income over AED 375,000
Large multinationals that fulfil specified requirements established concerning ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting initiative will be subject to a different tax rate than individuals and small businesses.
Will an individual’s salary income be subject to UAE CT?
Salaries and other employment income, whether from the governmental or private sector, are exempt from UAE CT.
Will an individual with a commercial licence to conduct business in the UAE be subject to UAE CT?
Business earnings from a business operating with a valid commercial licence are subject to UAE CT.
Will an individual who invests in UAE real estate be subject to UAE corporate tax?
People who buy real estate for their own use should not have to pay UAE tax on it, as long as they do not need a business licence or permit to do so in the UAE.
Will an individual be subject to CT on investment returns?
Dividends, capital gains, and other forms of income obtained by individuals due to their ownership of shares or other assets are exempt from UAE CT.
If a business has earned a taxable income of AED 400,000 in a given financial year, what will be the UAE CT amount payable?
As per the CT regime, no tax is due if your income is below AED 375,000; 9% tax is due if your income exceeds AED 375,000.
The calculation for the CT liability is as follows:
• Taxable income of AED 0 – AED 375,000 at 0% = AED 0
• Portion of taxable income exceeding AED 375,000 (i.e. AED 400,000 – AED 375,000 = AED 25,000) at 9% = AED 2,250
The UAE CT liability for the year will be AED 0 + AED 2,250 = AED 2,250. Any foreign taxes paid on the relevant income will lower the total amount of UAE CT owed.
Will a free zone business be subject to UAE CT?
Free zone companies will be subject to UAE CT. However, the UAE CT regime will continue to honour incentives granted to free zone businesses that comply with all regulatory requirements and do not do business with mainland UAE.
Will a free zone business be required to register and file a CT return?
Companies operating inside a free zone are subject to CT registration and reporting requirements. The UAE CT treatment for businesses operating in free zones will be uniform throughout all free zones.
Will the UAE CT regime allow prior year losses to reduce future taxable income?
The UAE CT system will enable businesses to offset taxable revenue with losses accrued after the UAE corporate tax implementation date. A tax loss occurs when a company’s total deductions exceed its income for a given period.
Will excess CT losses be allowed to be carried forward and used in future years?
Businesses can carry forward excess tax losses and utilise them against taxable income in future years if specific requirements are satisfied.
Working with Creative Zone
Introducing a corporate tax in the UAE will affect how you operate and structure your business. Feel free to contact us if you have questions about how UAE corporate tax legislation can affect your business setup in Dubai.
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Quick, reliable, hassle-free, and expert support are just some of the hallmarks of how we approach helping new company owners.
Helping you establish your company formation in Dubai is merely the beginning. We also provide various ancillary services, such as tax preparation, legal counsel, and human resource management.
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