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All You Want to Know About the UAE Corporate Tax

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Corporate tax (CT) – In January 2022, the Ministry of Finance announced that it will introduce federal corporate tax (CT) on the net profits of businesses. The tax will become applicable either on 1 July 2023 or on 1 January 2024, depending on the financial year followed by the business. CT will be applied across all the emirates. – The Official Portal of the UAE Government

As the UAE, with a stringent focus, moves toward a modernized and futuristic infrastructure, here is an exciting announcement that it makes. On 31st January 2022, the Ministry of Finance (MoF) in the UAE announced that it will incorporate a Federal Corporate Tax (CT) with effect from 01st June 2023.

The UAE, as a member of the OECD inclusive framework, is presenting the federal CT regime as a foothold to the implementation of its responsibility to the global minimum effective tax rate idea suggested by Pillar II of the OECD Base Erosion and Profit Shifting project (“OECD BEPS”).

Till now, many businesses in the UAE have experienced zero income tax on their earnings. This is now set to change with the ministry announcing the above. The UAE currently does not have any set federal corporate tax regime. It levies corporate tax only on oil and gas companies, branches of foreign banks, etc. There are multiple free zones that enjoy tax exemptions and have their own rules and regulations.

The new tax regime will be based on a self-assessment rule and must be submitted to Federal Tax Authority (FTA) with all necessary and accurate documents. The FTA will be responsible for its administration, collection, and enforcement. The UAE corporate tax will be application across all Emirates since it is a federal tax. The MoF will continue to be the competent authority for all bilateral or multilateral agreements and international information exchange related to tax intent.

Before we go into the highlights of this announcement, let us understand the basics of corporate tax and its key features.

Corporate Tax – An Overview

A corporate tax, also called corporation tax or company tax, is a direct tax imposed on the income or capital of corporations or analogous legal entities. – Wikipedia

Corporate tax is a form of direct tax that is levied on the net profit or income of corporations or businesses, and it is also known as ‘business profit tax’ or ‘corporate income tax’. The rate at which tax is imposed as per provisions of the Income Tax Act is known as the Corporate Tax Rate. It is based on a slab rate system based on the corporate individual and the type of revenue generated. The key features that a fair corporate tax regime can highlight is adequacy, administrative efficiency, transparency, equality, and a progressive infrastructure.

Key Objectives of Introducing CT in UAE

The major objectives of getting in the corporate tax regime in the UAE are:

  • Strengthen the position of UAE in the global market as a business leader
  • Fasten development and business transformation to meet strategic goals
  • Endorse a responsibility to meet international tax standards
  • Ensure secure tax practices free from any harmful effects

Scope of Corporate Tax in UAE

The scope of CT in UAE includes the following:

  • Individuals, residents, legal entities, and businesses that conduct business activities under a commercial/business license in the UAE
  • Banking operations
  • Organizations including Freezone business areas. These freezone areas can avail benefit of 0% CT if their financials are audited by the firm and it complies with conditions.
  • Business segments involved in construction, estate management, brokerage, development, agency etc.
  • All commercial and business activities except for extraction of natural resources
  • A legal person incorporated in foreign jurisdiction but managed in the UAE
  • Non-residents will be taxable on income based on their permanent establishment in UAE
  • The UAE CT regime intends to utilize the accounting net profit (or loss) standing in the financial statements of a business as the beginning point for regulating taxable income

UAE Corporate Tax Rates

As decided by the Ministry of Finance, the Corporate Tax rates that will be applicable, based on different slabs are:

  • 0% for taxable income till AED 375,000
  • 9% for taxable income over and above AED 375,000
  • A specific tax rate for large multinationals based on ‘Pillar Two’ of OECD Base Erosion and Profit Shifting project

Corporate Tax Administration

  • Registration And Deregistration: The business unit needs to register with FTA and get a tax registration number within the stipulated time. If the business unit terminates to be subject to corporate tax, it must apply to FTA to be deregistered within 3 months.
  • Filing, Payment, And Refund: For each tax period, the business must file a tax return with supporting documents to be submitted to the FTA within 9 months of the tax schedule.
  • Assessment And Clarifications: The entire tax regime is dependent on a self-assessment basis. When there is lack of clarity, the business may apply for further interpretation to the FTA.
  • Documentation And Transitional Rules: Financial rules that apply must be followed. An individual’s opening balance sheet will be the closing balance sheet for the time schedule that ends prior to the first period.

Good Read: Tax Consultant Responsibilities & Roles in a Company

Exemptions from Corporate Tax

There will be a few situations that will be exempted from the corporate tax, here are they:

  • Businesses involved in extraction of natural resources
  • Charity or public benefit organizations mentioned in a cabinet decision
  • A wholly owned government owned UAE organization that operates on a mandated activity
  • A retirement pension fund or regulated social security organization
  • A regulated investment fund that has call for a corporate tax exemption
  • Dividends and capital gains obtained by a UAE business from relevant share holdings
  • An individual’s earnings or income received either through a private or public sector
  • Interest income generated from fixed deposits or saving schemes
  • Real estate investment, dividends, capital gains, income from shares by individuals on a personal basis

Summing It Up

The implementation of the new Corporate Tax regime in the UAE is well thought of and has a broader perspective, in the long run. It is bound to accelerate the growth of the Gulf in terms of business prosperity and increased revenue growth. It has adopted a global taxation base and extends to encompass foreign bodies anywhere in the world being controlled from the UAE.

The implication of having the new CT culture will be many and only time will tell how advantageous it will prove to be. As per trade analysts, a bright future lies ahead of the UAE and there is no looking back.

If you need expert advice on understanding the implications of Corporate Tax pertaining to your business, our taxation experts are here to offer any kind of financial and corporate services related to VAT, Excise, Corporate tax etc. We have been one of the leading tax advisors in Dubai, UAE. Feel free to contact us and avail the best of tax consultation for your organisation.

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