All You Want to Know About the UAE Corporate Tax

The UAE government has introduced a new tax that companies will have to pay called the “corporate tax”. This tax can have a big effect on businesses in the UAE. So it is important to understand what it is all about. This article explains all the key details about the UAE corporate tax in an easy way.

What is the UAE Corporate Tax?

The UAE corporate tax is a new tax companies in the UAE will have to pay on their profits. It will be charged at a rate of 9% across the UAE. Some sectors will be taxed differently.

When Will Companies Have to Pay This Tax?  

The UAE corporate tax will apply from June 1, 2023. Companies will have to submit their first tax returns in 2024 for the profits they earned in 2023.

What Businesses Will Have to Pay This Tax?

The tax will apply to most types and sizes of companies in the UAE. Exceptions are made for some like oil and gas companies which already pay tax in the Emirates.

Small businesses, startups with taxable income less than AED 375,000 and individuals earning business income can be exempt from paying this corporate tax.

How is Taxable Income Calculated?

Taxable income is the key figure on which the 9% UAE corporate tax will be levied. It refers to company profits remaining after allowable deductions from total revenue.

Calculating the taxable income involves three main steps:

Determine Gross Income

Gross income comprises all revenues received from the sale of goods and services before making any deductions. It could include overseas income too if the company has tax residency status in the UAE.

For banks, insurance firms and oil and gas companies, specific rules define which revenue components make up the gross income.

Allowable Deductions

Companies can reduce gross income figures by claiming deductions on common expense items like:

• Cost of goods sold – Expenses linked to manufacturing or purchasing the products sold.
• Staff costs – All types of employee salaries, bonuses, retirement payments paid out.

Operating expenses – These include expenses like office rent and utilities, insurance premiums, maintenance charges etc.

• Interest expenses – On business loans taken to fund working capital or other costs.
• Depreciation – A proportion of capital equipment costs like machinery, vehicles etc. can be deducted.

Similarly provisions, royalties, inventory losses, fines, donations, R&D costs may be deducted.

There could be specific caps, limits or approvals required for some deductions to be claimed.

Arrive at Taxable Income

Taxable income is calculated as:

• Gross Income – Total Allowable Deductions = Taxable Income
• The 9% corporate tax will apply on this final taxable income figure.

Maintaining accurate financial statements will help reliably compute deductions and taxable income.

What Are Some Key Terms to Understand?

Knowing the following terms will help understand the working of UAE corporate tax better:

• Tax residency – Whether a company will be considered a UAE tax resident based on factors like country of incorporation, place of management etc. Tax residents have to pay UAE corporate tax on income from all sources globally.
• Permanent establishment – Foreign companies doing business in the UAE could create a permanent establishment here and trigger tax obligations. 
• Group relief – Losses under one group entity can be offset against profits of another entity under group relief rules. 
• Transfer pricing – Transactions between group companies should follow arm’s length transfer pricing principles.
• Withholding tax – Applicable where certain UAE-source payments have a tax percentage deducted at source before payer releases full amount.

How Will This Tax Impact Businesses in UAE?

The UAE corporate tax will have several implications:

• More financial reporting – Detailed income statements, financial records etc may be required frequently for tax compliance.
• Higher business costs – The 9% tax on profits will directly reduce bottomlines. For some firms, the actual tax rate could be higher.
• Tax registration and filing – Companies will have to register for corporate tax and submit the required returns every year. This will involve added administrative work.
• New processes – Tax calculations, documentation, audits will require dedicated finance staff or outsourced tax experts to handle.

How Should Businesses Prepare for This Tax?

To ensure smooth compliance when the tax comes into force, companies should take these steps:

• Evaluate impact – Assess implications for your profitability based on your revenue models and projections.
• Gather documents – Start compiling required information for tax reporting right away. 
• Have dedicated resources – Assign staff to handle compliance or outsource to a tax specialist.  
• Seek tax advice – Consult a tax expert to plan accordingly.
• Assess IT infrastructure – Upgrade systems if needed to keep track of finances and tax.
• Consider restructuring – Check if group relief, tax exemptions etc can reduce tax outgo.

How Do Free Zones Differ in Their Tax Treatment?

Free zones will have a different tax treatment compared to mainland companies:

• Zero tax rate – Firms setting up in free zones can avail of a 0% corporate tax rate.
• Limited benefits – Need tax residence certificate to claim foreign tax credits. 
• Strict rules – The zero tax advantage only applies if sufficient economic substance is demonstrated within the free zone.

So tax exposure can be lower in free zones. But also consider other factors like customer proximity, licenses offered etc when deciding company location.

Conclusion

The upcoming UAE corporate tax will require businesses to re-evaluate their financials and operations in the country. With the right planning strategies and preparations, companies can ensure they are fully compliant and minimize the impact on profitability when the new tax regime takes effect.

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