Corporate tax in the UAE: A Guide for Businesses

In the ever-evolving tax landscape of the UAE, the introduction of corporate tax for businesses operating in the country represents a significant milestone. While the introduction of value-added tax (VAT) in 2018 marked a notable shift, it is now crucial to understand the details and impact of this new tax system. Exploring corporate tax regulations and tax-free salary options in the UAE is essential. It helps individuals and businesses seize new opportunities in the dynamic business world.

To comply with the new UAE law, businesses of all sizes must comprehend the details of corporate tax. Professional guidance can help corporates achieve this. Professional help is crucial for entrepreneurs due to the complexity of the UAE corporate tax law. A tax advisor can accurately prepare tax returns, offer advice on business tax liability, assist with business activity classification, and offer insights on tax grouping strategies. By understanding corporate tax in the UAE and leveraging expert advice, businesses can save money, prevent penalties, and strategically plan their operations to minimise tax liability and maximise profits.

In this article, we examine the corporate tax laws in the UAE and explain how businesses can thrive in a competitive market.

what is corporate tax in uae?

The United Arab Emirates (UAE) is known for its favorable corporate taxation environment. However, a significant change is underway. On January 31, 2022, the UAE government announced the introduction of a new corporate tax. From June 1, 2023, all businesses in the country are required to pay a federal corporate tax (CT) on their net income. This tax, also known as business profits tax, or corporate income tax, will be implemented and is mandatory for businesses to follow. The introduction of the new corporate tax marks a significant shift for businesses operating in the UAE.

what is the corporate tax rate?

The implementation of the UAE’s 2023 corporate tax introduces a 9 percent tax rate on the profits generated by businesses exceeding AED 375,000. However, companies generating less than this amount will continue to enjoy a zero percent tax rate.

UAE corporate tax rate is among the lowest worldwide and aligns with the region’s goal of being a top business and investment hub.

In addition to the corporate tax, the UAE has also aligned itself with the Global Minimum Corporate Tax Rate agreement. This means that large multinational firms with profits exceeding EUR 750 million will be subject to a 15 percent tax rate.

benefits of taxation in the uae

The UAE maintains one of the world’s lowest corporate tax rates at 9%. This tax advantage makes UAE an attractive destination for businesses looking to save on taxes. In addition, the UAE has many other tax benefits, such as a tax-free salary for expatriates, 0% withholding tax on dividends and capital gains, and a simplified tax law.

The UAE’s low corporate tax rates and business-friendly environment makes it a prominent hub for international trade and investment. The country is home to several tax free zones, which offer even more tax benefits to businesses. These benefits can help businesses to attract and retain talent, invest in new projects, and expand into new markets.

The corporate tax measure, aims to increase the UAE’s revenue and maintain its competitiveness in the global business and investment environment. By implementing the corporate tax in the UAE, the country aligns with international tax transparency standards and actively fosters financial discipline while promoting proper record-keeping practices. Additionally, it safeguards the interests of start-ups and small businesses.

who is subject to corporate tax?

Now, let’s explore who needs to pay corporate tax in the UAE. CT applies to companies and other legal entities incorporated or effectively managed within the country. It also includes individuals conducting business activities in the UAE and non-resident legal entities with a Permanent Establishment (PE) in the UAE.

While implementing corporate tax brings changes, there are exemptions to consider. Dividends received or shares sold from a subsidiary company qualify for a participation exemption from corporate tax. Furthermore, certain entities, including charities, public benefit organizations, investment funds, businesses involved in oil and resource extraction, and wholly government-owned companies, are excluded from corporate taxes.

corporate tax considerations for businesses in the uae

Several factors influence corporate tax in the UAE, including the type and location of the business and the amount of revenue generated. The UAE has a standard corporate tax rate of 9%. However, there are exemptions and deductions available that can lower the tax liability for businesses.

The industry in which a company operates affects its tax liability. For example, companies involved in the oil and gas industry may face a higher corporate tax rate compared to other businesses. Furthermore, the location of a business can impact its tax liability. Companies in free zones enjoy a lower corporate tax rate, unlike those operating in other areas of the UAE.

To calculate taxable income, deduct allowable expenses from gross income. It is crucial to understand what qualifies as taxable income. Taxable income represents a business’s net income after accounting for necessary expenses, such as salaries, rent, and depreciation, incurred in its operations.

Capital gains are profits that are made from the sale of assets, such as shares, property, and businesses. Capital gains are subject to corporate tax in the UAE. The rate of tax that is applied to capital gains depends on the type of asset that is sold.

Businesses in the UAE must comprehend these factors and regulations as they play a vital role in efficiently managing their corporate tax liability. Staying informed enables them to optimize obligations and minimize their overall tax burden while ensuring compliance.

recent changes and updates in corporate tax in the uae

The UAE has implemented new tax regulations that pertain to public benefit entities. These entities focus on activities that contribute to the welfare of society, including public welfare, philanthropy, community services, and corporate social responsibility. In order to be eligible for exemption from UAE corporate tax, these entities must meet the conditions stated in Article (9) of the Corporate Tax Law and comply with relevant laws. They must register with the Federal Tax Authority, obtain a tax registration number, and fulfill their reporting obligations. The Cabinet may modify the list of qualifying entities based on suggestions from the Minister, and it must notify any changes that affect their eligibility.

taxation in uae free zones

More than 40 free zones exist in the UAE, offering numerous advantages to businesses. These zones provide complete ownership of companies and ensure the confidentiality of asset-related information by the free zone authorities. Trade barriers do not restrict free zone companies, enabling seamless trade with other free zone entities. Import duties and corporate taxes are waived within free zones, allowing customs duty-free imports.

Additionally, free zone companies enjoy repatriation benefits, allowing them to transfer assets abroad without complications. Entities must follow the Federal Tax Authority’s (FTA) website’s guidelines to register as a Free Zone Person, irrespective of eligibility. Corporate tax returns must also be filed per the corporate tax regime, regardless of qualifying income rates.

Qualifying free zone Persons enjoy a 0% corporate tax rate on their qualifying income in the UAE. However, for taxable income that exceeds the qualifying income threshold, a 9% tax rate is applied. Enforcing tax regulations in the UAE ensures favourable tax rates based on income categorization.

compliance and reporting requirements for corporate tax in the uae

Businesses need to be aware of when corporate tax payments are due. In most cases, the tax year commences on June 1, 2023, and companies should allocate funds to meet their tax obligations from that point onward. However, for businesses with a tax year starting in January, taxes are only applicable to revenues earned after January 1, 2024.

Non-compliance with corporate tax regulations can result in penalties. Late payment may lead to interest charges and additional fees. In severe cases, businesses may even face criminal prosecution.

To ensure compliance with corporate tax laws, businesses in the UAE must register with tax authorities, file tax returns, and make timely tax payments. Seeking professional assistance from tax advisors can be beneficial in navigating the complexities of corporate tax compliance.

Here are some additional tips for businesses subject to corporate tax in the UAE:

• Maintain meticulous records of all financial transactions to facilitate accurate calculation of taxable income.
• Regularly review expenses to ensure they qualify as allowable deductions.
• Consider engaging the services of a tax advisor to aid in corporate tax compliance.

By following these tips, businesses can demonstrate compliance with the CT law, mitigating any potential penalties and optimizing their tax obligations.

conclusion

In conclusion, the introduction of corporate tax in the UAE marks a significant shift for businesses operating in the country. It is crucial for businesses to familiarize themselves with the CT law and take the necessary steps to comply with it. By doing so, they can avoid penalties and ensure accurate tax payments.