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Post By: admin June 14 2022

Everything You Need to Know About Corporate Tax

In January 2022, the UAE Ministry of Finance announced the implementation of Corporate Tax all over the United Arab Emirates. As per the Ministry, the Corporate Tax law will be effective from the 1st of June 2023. The Corporate Income Tax will be applicable on or after 1st June 2023, depending on the financial year of the businesses. Corporate Income Tax is a form of direct tax levied upon income. The United Arab Emirates is not the only country that practices corporate tax in the global market. If we look into it, we can find that the US, India, France, and also other GCC countries such as Oman, Kuwait, and Qatar have implemented the Corporate Tax. Compared to these countries, UAE has the least corporate tax rate which is 9%. At the G7 countries meeting held in 2021, gulf countries entered into an agreement where a global minimum corporate tax of 15% was introduced. 

The Federal Tax authority will be responsible for the administration, collection, and enforcement of UAE Corporate Tax, whereas the Ministry of Finance will remain as the competent authority for the intention of bilateral or multilateral agreements and the international exchange of information for tax purposes. 

Implementation of Corporate Tax has always helped the countries in sustaining their economy. The acknowledgment of the corporate tax in the UAE also intends to enhance corporate governance and thus reinforce the economy of the nation. The corporate tax can also be considered as the bullet train for the UAE to reach its strategic economic transformation. 

Through the implementation of the Corporate tax, the UAE aims to cement its position in the global market as the leading hub for businesses and investments, to accelerate the development of the country, and also to reaffirm the country’s commitment in meeting the international standards for tax transparency and prevent unauthorized tax practices. 

According to the Corporate Tax regime, Corporate Tax is applied on: 
  1. All the Businesses and Individuals conducting business activities under a commercial license in the UAE
  2. Free zone Businesses (The UAE corporate tax regime will continue to honor all of the corporate tax incentives offered to free zone businesses that comply with all regulatory requirements and that do not conduct business on the mainland of the UAE.)
  3. For foreign entities and individuals who conduct an ongoing or regular trade or business in the UAE.
  4. Banking operations.
  5. Natural resource extraction enterprises are excluded from CT because they will continue to be subject to the present Emirate level corporate taxation.
Along with the inclusion, there are certain categories that are exempted from Corporate Tax, mentioned below the exempted categories.
  1. Natural resource extraction enterprises are excluded from CT because they will continue to be subject to the present Emirate level corporate taxation.
  2. CT will not apply to dividends and capital gains made by a UAE company from its qualifying shareholdings.
  3. Providing the necessary conditions are met, qualifying intra-group transactions and reorganizations will not be subject to CT.
  4. Salary and other employment income received by an individual, whether from public or private sources.
  5. Individuals' interest and other income from bank accounts or savings plans
  6. A foreign investor's income from dividends, capital gains, interest, royalties, and other investments.
  7. Individuals investing in real estate on their own behalf.
  8. Individuals who own shares or other securities in their own capacity get dividends, capital gains, and other income.
As per the Ministry of Finance, Corporate Tax rates are as mentioned
  1. 0% for taxable income up to AED 375,000
  2. 9% for taxable income above AED 375,000 and
  3. An additional tax rate (not yet specified) for multinationals that meet the 'Pillar two' criteria of the OECD's Base Erosion and Profit Shifting Project.

It is also notable that for the purpose of UAE Corporate Tax, a group of companies can be elected to form a tax group and can be treated as a single taxable person, provided that  certain conditions are met. For a UAE tax group, it will be only required to file as a single tax return for the entire group. And also for foreign investors, the foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against the UAE Corporate Tax Liability. 

The Corporate tax will need to be filed per financial period, which means one filing per year. No provisions or advance Corporate Tax Filing will be required under the UAE Corporate Tax regime. According to the Ministry of Finance, the Corporate Tax return needs to be filed electronically and does not require any advance UAE Corporate Tax payments. The Ministry also informed that the guidelines on the corporate tax filing will be released at a later stage. As the advance payments are not required, the ministry has also urged everyone to pay the corporate tax on time because any non-compliance with the UAE Corporate Tax regime is subjected to penalties and has to be paid on time like any other tax imposed on businesses. 

Like a breath of fresh air, the UAE corporate tax regime has allowed businesses to use the losses incurred (as from the UAE corporate tax effective date) to offset the taxable income in substantial financial periods. A loss for corporate tax purposes which is the tax loss would arise when the total deductions the business can claim, and that is greater than the total income of the relevant financial period. It is also said that excess tax loss may be carried forward and used against the taxable income in future years, provided that certain conditions are met. It is applicable to the tax group as well; it is said that the tax losses from one company may be used as an offset taxable income. 

More detailed information on the UAE Corporate tax will be released in June 2022. But it is confirmed that the organizations that exceeded the profit thresholds have to get registered for Corporate Tax in Federal Tax Authority and have to follow the Corporate Tax Filing as per the law. 

Read More: What is Corporate Tax in UAE

A corporation is a legal entity created by individuals, stockholders, or shareholders with the purpose of functioning for profit. So in other terms, Corporate Tax is initially borne by the Shareholders but over time, it can also be a chain reaction where it can be shared among other stockholders. Seeing through the shareholder perspective, corporate tax can create a shift in the mentality of moving the shares from the corporates to a much safer place to save the tax burden. But recent studies on corporate tax have shown that companies that pay a larger tax provide the shareholders with a better return on their investments, which have been made by the company in terms of capital as well as dividends.

Corporate Taxes are mostly subjected to business entities registered on the mainland of the United Arab Emirates. The businesses registered under Free zone areas should follow the requirements which are regulated by the Free zone authorities but they have to get registered and file corporate tax returns and they will also get Corporate Tax incentives. An FZE or FZC is a limited-liability company that operates under the rules and regulations of the Free Zone in which it is located. The Commercial Companies Law (CCL) of the UAE does not apply. Hence we can conclude that corporate income tax does not have much effect on the Free zone companies as it follows a special regime that is set under the legal framework of the designated or relevant Free zones. But that does not mean the corporate tax will not be applicable to the multinational businesses which are located in the Free zones if their net profit exceeds AED 3,75,000. 

Tax planning is a crucial policy for an effective budget needed for an organization. Planning ahead makes the firm more efficient and helps to reduce tax liability. Other than the reduction in tax liability, it also helps in increasing productivity, minimizing litigation, and also in maintaining economic stability. 

Some of the precautions that can be taken by business entities to save from tax burdens are as mentioned below.
  • Accelerating depreciation charges for the assets in the firm.
  • Investing in tax-efficient assets such as corporate bonds and diversifying the contribution towards tax efficient account types for the reduction of tax burdens. Inflation-protected bonds, zero-coupon bonds, tax-efficient mutual funds, and other tax-efficient investments are available.
  • Investing in long-term assets.
  • Expenses incurred by the company entity are claimed.
  • Introducing various incentives such as awarding stock options to the employees, benefits for the dependents of the employees, and so on can reduce the tax liability and also increase the return as well as the morale of the employees towards the firm.
Some major points that should be considered before tax filing are as follows:
  • The firm should provide correct and relevant information before tax filing to the authorities for documentation purposes. 
  • The firm should be well-versed in the implementation of tax legislation as well as court rulings on the subject.
  • The tax planning should be done under the formulated law that has been stated by the ministry of finance of the United Arab Emirates.
  • The tax planning should consider the business objectives and the flexibility of the future incorporations and changes that will be conducted in the firm for tax benefits and future implications. 
  • Proper tax planning should be done before tax filing because poor planning will lead the firm to probably pay more than the actual taxable amount. 

The Gulf Cooperation Council countries (GCC) remain attractive for foreign investments due to their favorable tax rates and also their geographical location, which in turn attracts global investments. Before the implementation of corporate tax, there was a  wide range of government fees and levies imposed for the revenue of the country throughout the Gulf Cooperation Council Nations. Business entities that have been related to the extraction of natural resources are exempted from corporate tax but it is subject to other taxes. For example, enterprises involved in the extraction of natural resources such as oil and gas are free from corporate taxation in the United Arab Emirates, but are subject to Emirate-level corporate taxation of up to 55 percent. We can say that the United Arab Emirates is a better place to attract global investments as it has the lowest corporate income tax rate compared to other Gulf Cooperation Council countries. 

A sustainable economy helps the countries in building the strongest corporate governance with the best global practices. The United Arab Emirates too is aiming for the same through the introduction of this direct tax. Calling on to the new investments by providing the best infrastructure, best global practices, best global markets, and so on can be more satisfying than keeping the funds in some safe heaven where there is no return for their investments. 

Through a strengthened economy, the UAE is also ensuring a high standard of living by delivering the best and best for its citizens, residents, and everyone who wishes to come to the UAE. 

Read More: Corporate income tax and other GCC nations

We can conclude that with the introduction of Corporate Tax, the country should not limit the investments because the country has the lowest corporate tax rate compared to the other countries so far. And in return, the UAE is offering you a wide spectrum of opportunities with a high standard of living, futuristic infrastructure, and attractive geographical locations. So, don’t you think that businesses should not limit their investment in a country where they offer the opportunities on a golden platter? Once again the corporate Tax is a direct tax levied upon the profit earned by the corporates. In the UAE, corporations are charged Corporate Tax if their profit exceeds AED 375, 000. The tax law is implemented from June 2023 all over the United Arab Emirates.

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