UAE Federal Corporate Tax: What You Need To Know

The Corporate Tax UAE Law will come into force in the United Arab Emirates on June 1, 2023. With this, the government is introducing new principles for the taxation of companies. However The regulations comprise a tax rate of 9%. The Ecovis experts explain in detail what companies and investors can expect in the future. 

Introduction: Background Information On The UAE As A Strategic Business Objective 

The United Arab Emirates (UAE) is a leading business hub and a global financial center, offering various incentives and benefits to attract foreign investment. In December 2022, the UAE government promulgated a federal law implementing federal corporate tax. The region has traditionally been a tax haven for companies, with zero taxes on profits made in the UAE, except for taxes on profits from oil exploration. 

The Corporate Tax Law will come into force on June 1, 2023, and its implementation is aimed at supporting the UAE’s strategic objectives, accelerating its development and also transformation, and strengthening its competitiveness as a business location. 

This law contains principles that are generally accepted and understood throughout the world, making it clear and predictable for taxpayers. Additionally, the UAE is keen to adapt to new international standards, particularly the G20-approved move towards a global minimum tax for multinational corporations. 

What Tax Rates Will Apply In The Future? 

 UAE corporate tax will come into force on June 1, 2023, and will be applicable from the beginning of the first financial year starting on or after that date. Companies must pay a 9% tax on taxable profits above AED 375,000 (AED 1,000 is equivalent to approximately USD 272). Taxable income below AED 375,000 is not taxed. The UAE corporate tax system also has several reliefs and exemptions, including for small and medium-sized enterprises whose total turnover for the previous and current financial year does not exceed AED 3 million. 

Artificial segmentation of business operations to obtain minimum standards of profit is fully covered by the GAAR provisions of Section 50 of the CT Act, and such arrangements shall not be considered. Therefore, the maximum income taxable under zero percent tax is only Dh375,000. 

Do You Have Business Connections, Or Are You Considering Investing In The UAE? 

We would be happy to advise you on the new corporate tax. 

Rameshwar Lal Kabra, Chairman Emeritus, ECOVIS RKCA, Mumbai, India Corporate Tax Exemption .Non-residents who do not have a permanent establishment (PE) in the UAE or who derive income from the UAE independent of a permanent establishment person are subject to this. However The withholding tax (WHT) is 0%. This means that only non-residents with a permanent residence in the UAE are required to pay tax. 

Additionally, in the UAE, non-residents who derive their income solely from government sources are not taxed unless there is a withholding tax. However, the  WHT tax rate is expected to increase from 0% in the future, potentially making WHT the ultimate liability for non-residents. 

The following persons are exempted from registration under the Corporate Tax Law: 

1. A government entity 
2. A government-controlled entity 
3. A person engaged in an extractive business 
4. A person engaged in a non-extractive natural resource business 
5. A non-resident person who derives only state-sourced income and does not have a PE in the UAE 
6. Revenue Threshold and Small Business Regulation 
7. The revenue threshold for the purpose of small business relief, as per Article 21, is set at AED 3,000,000 
8. This threshold applies from 1st June 2023 to 31st December 2026 
9. The threshold must be checked for any of the applicable tax years 
10. A qualifying free zone person and a constituent entity of an MNE group (revenue > AED 3.15 billion) are not eligible for small business relief 

From the text of the decision, it can reasonably be concluded that the taxpayer is free to opt in or out of this relief at their choice for each year. This relief is aimed at encouraging small businesses and start-ups, and it also keeps small businesses outside the ambit of preparing transfer pricing documentation, which can be a costly affair. 

Mandatory Audited Accounts 

Under the powers defined in Article 54(2) of the corporate tax law, the Ministry of Finance has issued a list of persons who are required to prepare and maintain audited financial statements. This list includes: 

1. A taxable person with revenue exceeding AED 50 million 
2. A qualifying free zone person 
3. The Definition of Micro, Small and also Medium-sized Enterprises in UAE 
4. In Dubai, micro, small and also medium enterprises (MSME) are defined as follows: 
5. Source: 
6. Dubai SME, an agency of the Department of Economic Development 

The threshold to prepare and maintain audited financial statements is kept at a higher level to prevent micro and small businesses from falling into this ambit. Moreover, a free zone person who wishes to take advantage of the beneficial corporate tax rate of 0% will also have to maintain audited financial statements. 

Major developed free zones already require free zone entities to produce audited financial reports in order to enjoy the benefits of the free zone. Becomes the general policy of 

Conclusion

The importance of corporate tax for multinational companies 

The UAE’s move towards a global minimum tax for multinational companies, approved by the G20, demonstrates its commitment to international tax reform and equal taxation for all companies. It emphasizes its willingness to cooperate with other countries to ensure competitive conditions. Overall, the introduction of corporate tax in the UAE is an important milestone in the country’s economic development, and its successful implementation will have a positive impact on the country’s future economic growth and prosperity. Nevertheless, the tax rate is still very moderate and belongs to one of the lowest of all double taxation agreements with India. 

UAE Corporate Tax From June 1, 2023 – Answers To The Seven Most Frequently Asked Questions 

1. What Is Corporate Tax In The UAE? 

Corporate income tax is a type of direct tax levied on the net income or profits of corporations and other businesses. It is also commonly called “corporate tax” or “corporate profits tax.”

However it is a tax levied on a company’s net profits. Companies are required to pay a certain percentage of their profits as tax. 

2. Who Has To Pay Corporate Tax In The UAE? 

All companies with net taxable profits above AED 375,000 are subject to corporate tax and also must pay a  percentage of their net profits as corporate tax. 

3. What Is The Corporate Tax Rate In The UAE? 

The corporate tax rate is  9% of a company’s net profit. To extend support to small and medium-sized enterprises and start-ups, the corporate tax rate will be ‘0 on net profits up to  AED 3,75,000. 

4. When Will Federal Corporate Tax Be Introduced In The UAE? 

The corporate tax implementation date will be effective for fiscal years beginning on or after June 1, 2023. 

5. When Will The Corporate Tax Law Be Published By The Authorities? 

The authorities have already published the Corporate Tax Law on December 9, 2020. However Corporate taxis in the UAE are made available through Federal Decree No. 

47 in 2022 on the official website. To download the UAE Corporate Tax Law, please visit the  Ministry of Finance’s website. 

6. Which Companies Or Incomes Are Not Subject To Corporate Tax? 

Given that the break-even point is Dh3,75,000, all companies that exceed this limit will have to pay corporate tax. However, certain types of business or income are exempt from corporate tax. Below is a list of businesses or income that is exempt from corporate tax. 

Natural persons are not subject to corporate tax. As a result, all income derived from employment, real estate, stock investments, and other personal income not related to  trade or business in the UAE is exempt from corporate tax.

It does not apply to foreign investors who do not carry out business activities in the UAE. However Companies that meet all the legal requirements of a free trade area will continue to receive corporate tax benefits. Capital gains and also dividends received by UAE companies from eligible holdings are exempt from corporate tax. Does not apply to qualified intercompany transactions and reorganizations. 

7. How Is Corporate Tax Calculated In The UAE? 

 UAE corporate tax is calculated at 9% of the net profit reported in a company’s financial statements. The 9% corporate tax is only payable if the taxable net profit exceeds AED 375,000. This means that net profits up to AED 3,75,000 are subject to 0% tax. 

For example, if the net profit is AED 4,75,000, the corporate tax is AED 9,000  (4,75,000-3,75,000 x 9/100)