UAE Taxation System: A Comprehensive Guide for Individuals and Businesses

Explore the intricacies of the UAE Taxation system in our comprehensive guide. Designed to help both individuals and businesses navigate the tax landscape with confidence. Gain insights, tips, and ideas to optimize your financial management in the UAE.

On January 31st, 2022, the UAE’s government announced it would introduce a new corporate UAE taxation. Historically, the United Arab Emirates has not imposed taxes on the profits of corporations. Except those in a handful of industries, such as resource extraction and foreign banks. However, from the financial year beginning on June 1st, 2023, many more companies operating in the territory will need to begin paying the new 9% corporate tax rate.

The new corporate tax in the UAE

The new corporate UAE taxation will only affect some businesses, and many will not need to pay the tax at all. Let’s learn more about the new UAE corporate tax and what it means for you.

In this comprehensive guide, you will know about:

  • The UAE’s corporate tax history
  • The UAE’s 2023 corporate tax – what is it?
  • Features of Corporate Tax – What Is It?
  • Will free zone companies be taxed?
  • Will personal income be taxed in Dubai?
  • Will there be a capital gains tax on dividends in Dubai?

You must know everything about the United Arab Emirates’ newly announced corporate tax.

The UAE’s corporate tax history

For many years, the United Arab Emirates operated as a very low tax jurisdiction. Citizens do not pay tax on their income, and most companies have never had to pay any corporate UAE taxation. Most of the state’s revenues came from nationalized and private fossil fuel extraction industries. In fact, these paid around a 50% tax on revenues. Meanwhile, foreign banks have long paid a 20% corporate UAE taxation on operating profits. At the same time hotels and restaurants in Dubai have paid certain taxes, too.

However, in recent years, the United Arab Emirates has begun trying to diversify its economy away from fossil fuels. These changes mean that there are a growing number of businesses that currently do not pay any tax at all. With less potential revenue from fossil fuels and a fast-growing economy, it makes sense for the government to tax revenues on businesses to enable further investment in infrastructure, education, and healthcare.

The United Arab Emirates first introduced a VAT tax in 2018, which imposed a 5% levy on all consumer purchases. Then, in January 2022, the government announced a corporate UAE taxation of 9% that would come into effect the following year.

Another reason is that the United Arab Emirates has introduced its new corporate UAE taxation to bring the country in line with international norms. This is to help tackle tax avoidance. Most other advanced economies worldwide impose taxes on business profits. The 9% tax on UAE companies is still significantly lower than the norm in most other developed countries (usually around 20%). The new UAE corporate tax will also help disincentivize foreign businesses from using the country as a base to avoid tax in their home countries.

The UAE’s 2023 corporate tax – what is it?

The UAE’s 2023 corporate tax will be a 9% tax on the profits (revenue minus expenses) of all businesses. This is for all businesses generating over 375,000 AED (about USD 100,000). Businesses that generate less than this sum will continue to pay a 0% tax rate.

In addition to the corporate tax, the UAE has also announced large multinational firms with profits of more than EUR 750 million. They will have to pay a 15% tax – this is in line with the International Minimum Corporate Tax Rate agreement.

The new UAE corporate tax will come into effect in the tax year beginning June 1st, 2023. Thus, most companies will have to start setting aside money to pay their taxes from that date. Businesses whose tax year begins in January will not have to start paying tax on revenues generated before January 1st, 2024.

Features of UAE Corporate Tax 

The corporate tax regulations in Dubai include diverse policies. These range from tax-free zones to corporate taxes, VAT systems, and the absence of federal income tax. Read on to find out notable features of the tax regulations.

  • Who can be taxed?

Legal entities with notable legal personalities like LLCs, PSCs, PJSCs, LLPs, and others will be levied with tax. On top of that, any foreign legal entity that earns income in the UAE tax system and is a tax resident will be charged. Although free zones will incur 0% corporate taxes in return they comply with all regulatory requirements. This is also applicable to free zone companies that engage in trade activity with the mainland. Non-residents and residents of the UAE may also be subjected to corporate taxing policies.

  • Tax rates

If a business earns income that doesn’t exceed AED 375,000. In such cases, 0% tax will be charged, and 9% will be charged if income earned exceeds AED 375,000. Also, a different tax rate will be charged for larger multinational companies with different business conditions.

  • Who is exempted?

Corporate tax law will include a participation exemption from corporate tax upon receiving dividends or selling shares of a subsidiary company. Also, charities, public benefit organizations, investment funds, and businesses engaged in the extraction of oil and resources. Along with these wholly government-owned companies are excluded from corporation taxes.

Calculating taxable income

Generally, the account net profit or loss is shown in the company’s financial statements. These will be used to determine the tax percentage and income. In case of a company loss, the business could offset the value against taxable income in future financial years up to 75 percent

  • Groups

A group of companies may be able to form a tax group in which they would be capable of being treated as a sole taxable entity. To do so, a company or subsidiary needs to refrain from being an exempted party or being registered in a free zone.

  • Tax credits

In order to avoid double taxation, the regime will allow for a credit in parallel with foreign tax paid in another jurisdiction. That is against foreign tax income, which has not been exempted.

Will free zone companies be taxed?

It still needs to be clear how the new UAE corporate tax will apply to businesses based in free zones. According to the official announcement, free zone companies will still benefit from the advantages of their specific free zone’s pre-agreed incentives. However, free zones may decide to change the rules in the future and could introduce a tax.

If free zone firms do business with mainland businesses, they normally pay the corporate tax on revenues generated by working with them.

Free zone entities will also need to register and file a corporate tax return, even though they won’t have to pay any tax.

Will personal income be taxed in Dubai?

No, there are no plans to tax people’s income in Dubai or the rest of the UAE. Dubai’s only form of personal income tax is the 5% VAT tax, which everyone must pay on consumer goods and services.

Will there be a capital gains tax on dividends in Dubai?

No, there are no plans to introduce a capital gains tax on dividends received in the United Arab Emirates or Dubai. At the time of writing (March 2022), business owners and investors do not pay any capital gains tax on dividends from the businesses they’ve invested in.

Frequently Asked Questions 1: Is UAE tax-free for business?

Businesses set up in the UAE mainland will be subjected to certain taxes. However, free zones in Dubai, such as the Meydan Free Zone, allow 0% corporate and personal tax to be levied upon business profits.

Frequently Asked Questions 2: Who pays corporate tax in the UAE?

All businesses operating in commercial activities and other businesses are subjected to paying corporate tax. However, a few business models have exemptions. Ex- Businesses involved in the extraction of oil.

Frequently Asked Questions 3: Why is corporate tax introduced in the UAE?

A detailed and extensive corporate regime in the UAE was introduced to amplify Dubai’s global position as a hub for investment and innovative startups. Dong this with affordable registration costs, inclusive of no corporate taxes.

Frequently Asked Questions 4: How much is corporate tax in the UAE?

Dubai follows a progressive corporate tax system with rates between 9 percent to 55 percent.

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