UAE Corporate Tax: All you need to know

With the introduction of corporation tax in the UAE, the tax and compliance needs of the vast majority of UAE companies are expected to fundamentally change. Because corporate tax is new to the UAE, firms will need the help of a consultancy with a knowledgeable tax staff. The appropriate assistance will be provided, and our knowledgeable tax staff will address your business tax-related queries. 

The UAE has made the decision to impose a Corporate Income Tax (CIT) on corporate revenues made within the nation. It will go into effect for financial years that begin on or after June 2023.

Corporate taxes in the United Arab Emirates

One of the lowest corporation tax rates in the world will continue to be in the United Arab Emirates. This plan is a result of the UAE’s desire to adhere to international tax regulations, which are consistent with initiatives made by other Gulf countries. It also aims to lighten regulatory burdens on UAE companies while safeguarding start-ups and small businesses.

Taking Effect

The UAE has made the decision to implement corporate tax, which will take effect for financial years starting on or after June 1, 2023.

Suggested rates

The planned company tax rates are as follows:

  • Taxable income up to AED375,000 (about US$102,095) is subject to a 0% tax rate.
  • Over AED375,000 ($102,095) in taxable income is subject to a 9 percent tax rate.
  • All multinational companies covered by OECD Base Erosion and Profit-Sharing rules that fall under Pillar 2 of the BEPS 2.0 framework, i.e., have combined worldwide revenues over AED 3.15 billion, will be eligible for a range of rates.

What is the purpose of the UAE’s new corporate income taxes?

  • Enhancing the nation’s standing as a major hub for trade and investment
  • To accelerate the UAE’s growth and change in order to achieve its strategic goals
  • Addressing standards for global tax transparency
  • Preventing the system from being corrupted by unfair tax practices to reduce reliance on oil

Taxable persons,

Under the UAE CT regime, there is a suggested treatment for various types of people. The 3 types of persons are:

  1. Natural persons
  2. Legal persons
  3. Exempt persons

1. Natural persons

There won’t be a parallel tax imposed on the income of natural persons, or individuals, under the UAE CT regime. 

  • Natural people conducting business or engaging in commercial activity in the UAE will likewise be subject to UAE CT. This covers sole proprietorships, solitary establishments, and individual partners in an unincorporated partnership. Other countries use comparable strategies without imposing parallel taxes on personal income from a firm.
  • In general, whether a person has a commercial license or an equivalent permit from the relevant competent authority in the UAE determines whether they are engaging in a business that is subject to UAE CT.
  • The government of the United Arab Emirates (UAE) has declared that the proposed tax regime will not apply to personal income received by UAE citizens or foreigners. Employment income, dividends, and rental income from UAE real estate investments will likewise be excluded from the proposed UAE CT’s application.

2. Legal Persons

  • UAE companies and other legal persons incorporated in the UAE will be treated as UAE-incorporated entities from 1 January 2017. 
  • Legal persons include Limited Liability Companies, Private Shareholding Companies, Public Joint Stock Companies, and other entities established under the laws of the UAE that have separate legal personalities. 
  • In order to apply UAE CT, legal entities that are effectively managed and controlled in the UAE will be treated as if they were UAE-incorporated firms.
  • Limited and general partnerships and other unincorporated joint ventures and associations of persons will be treated as ‘transparent’ for UAE CT purposes. This means they will not be taxpayers in their own right, but their income will instead ‘flow through’ and be taxed in the hands of partners or members.
  • Tax treatment of unincorporated partnerships in a cross-border context can create difficulties and unintended tax consequences, according to the United Arab Emirates (UAE) Tax Office (UTA) has outlined its plans to improve the tax treatment of partnerships between the UAE and foreign jurisdictions.

3. Exempt Persons

The following set of people will be exempt from UAE CT automatically or upon application;

1. The Federal and Emirate Governments, as well as its agencies, commissions, and other public institutions

2. UAE enterprises that are fully owned by the government and that are listed in a cabinet decision and perform a required or sovereign activity

3. Companies that harvest and use natural resources in the UAE are taxed at the Emirate level

4. Charities and other public benefit organizations that are included in a Cabinet Decision

5. Public and regulated private social security and retirement pension funds

6. Investment funds, provided they meet the requirements outlined in section

Basis of Taxation

Residents: UAE resident persons will be taxable in the UAE on their worldwide income. However, certain income earned from overseas will be exempt from UAE CT. Income taxes paid in foreign jurisdictions can be taken as a credit against the UAE tax payable in the United Arab Emirates to prevent double taxation.

Non-residents: Non-residents are subject to UAE CT on two types of income: (1) Taxable income from their Permanent Establishment in the UAE, and (2) Income sourced in the UAE.

Groups

Tax Groups: UAE resident group of companies can elect to form a tax group and be treated as a single taxable person. The parent company holds at least 95% of the share capital and voting rights of its subsidiaries. Neither the parent company nor any of the subsidiaries can be exempt or a Free Zone Person that benefits from the 0% CT rate.

Transfer of losses: The UAE CT regime may permit a transfer of Tax losses from one group company to another group company with profits for groupings of firms that do not fulfill the minimum 95% common ownership criterion or that do not wish to create a tax group. Transferring losses would result in a value shift from the losing company to the successful company. 75% of the entity receiving the transferred losses’ taxable income cannot be offset by all tax losses combined.

Corporate Income Tax’s Scope (CIT)

All businesses and economic activity within the emirates is subject to the United Arab Emirates’ federal tax system. Let’s examine the below-listed corporation taxation scope.

The planned CIT regime is intended to apply to all commercial, industrial, and professional businesses in the UAE, aside from the extraction of natural resources, which is currently subject to Emirate-level taxes up to 55%, and the branches of foreign banks, to whom 20% tax is applicable.

Companies registered in free zones are required to adhere to all legal requirements and refrain from conducting business with the UAE mainland.

All UAE enterprises will be subject to corporation tax, with the exception of those engaged in the extraction of natural resources like oil and gas and overseas bank branches.

A legal entity’s actions are all regarded as “business activities” and fall under the corporate tax structure.

CIT is not applied to income

  • Earnings from Foreign Bank Branches
  • Profits from intra-group trades and group reorganizations
  • Earnings from dividends, capital gains, interest, royalties, and other investments by foreign investors.
  • Exploiting natural resources generates income
  • Non-constant or infrequently conducting business in the UAE are foreign companies and individuals.
  • According to DIFC and ADGM legislation, a company that is incorporated in one of these jurisdictions is subject to a zero tax rate for a period of 50 years after the statute in question becomes effective.

Foreign Direct Investment and Corporate Tax

The introduction of a corporation tax is only one illustration of how quickly the UAE is developing and expanding. In addition to trying to position itself as a digital and technology powerhouse, the government’s goal is to restructure the country’s economy by weaning it off of its reliance on oil and gas.

The first comprehensive transformation of labor law, the removal of the requirement that a UAE national own at least 51% of a UAE company and the change of the workweek from Sunday to Thursday to Monday to Friday are all indications that the UAE wants to change its corporate structure and adhere to international regulations. Since work income would continue to be tax-free and earnings from personal holdings will not be subject to tax, the UAE will continue to entice highly trained people. But as a result of these changes, both living expenses and business expenses have increased.

Effect on the UAE Free Zones

According to the rules of each Free Zone, the UAE intends to uphold its commitment to enterprises registered in Free Zones that do not conduct business with the mainland and that will benefit from corporate tax incentives. For every free zone, a yearly CIT return must be filed.

With a portion of their revenue coming from onshore sales of goods or services, it is not uncommon for businesses to operate out of a free zone. Future implementation of excessive administrative requirements to contribute to onshore-generated revenues is likely. It’s feasible that companies with headquarters in free zones might think about establishing a presence onshore as a result of the relaxation of restrictions on foreign ownership and the expansion of real estate possibilities.

MNC’s Corporate Tax

In June 2023, the UAE will likely implement one of the lowest corporation tax rates in the world, which would likely draw in foreign businesses. Taxing corporate profits may seem strange with its goal of promoting investment and attracting global corporations. The implementation of a competitive tax policy, however, may make a nation attractive to multinational corporations looking for “transparent and vibrant” nations.

The effect of corporate tax on enterprises in the UAE

The tax and compliance costs of the majority of UAE firms are anticipated to significantly change with the implementation of corporation tax in the UAE. Entities must be in compliance with the new tax regime, which necessitates correct tax impact analysis and adjustments to the corporate structure, operational model(s), finance/tax operations, reporting systems, legal agreements, and transfers pricing policies, if necessary.

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