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 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.
What are the businesses or incomes that are not subject to corporate tax?
Given the profit threshold of 3,75,000 AED, any businesses that exceed it must pay corporation tax. Certain types of business or income, however, are exempt from corporate tax.
The following companies or their income are exempt from corporate tax:
- Individuals will be exempt from corporate taxes. As a result, any income derived from employment, real estate, share investments, or other personal income unrelated to a trade or enterprise in the UAE will be free from corporate tax.
- Foreign investors who do not conduct business in the UAE are exempt.
- The present corporate tax advantages available to free zone businesses that meet all regulatory conditions would be continued.
- Capital gains and dividends received by UAE businesses from qualifying shareholdings are tax-free.
- This exemption does not apply to eligible intragroup transactions and restructurings.
Who should pay corporate tax in the UAE?
All businesses with a taxable profit (net) of more than 375,000 AED are subject to corporate tax and must pay a set proportion of their net profit as corporate tax. UAE companies that are incorporated or managed and controlled in the UAE, as well as some entities in a free zone, fall under this category. To help small firms and start-ups, the corporate tax rate will be 0% if the net profit is less than 3,75,000 AED.
Along with the inclusion, there are certain categories that are exempted from Corporate Tax, mentioned below the exempted categories.
- Natural resource extraction enterprises are excluded from CT because they will continue to be subject to the present Emirate level corporate taxation.
- CT will not apply to dividends and capital gains made by a UAE company from its qualifying shareholdings.
- Providing the necessary conditions are met, qualifying intra-group transactions and reorganizations will not be subject to CT.
- Salary and other employment income received by an individual, whether from public or private sources.
- Individuals' interest and other income from bank accounts or savings plans
- A foreign investor's income from dividends, capital gains, interest, royalties, and other investments.
- Individuals investing in real estate on their own behalf.
- Individuals who own shares or other securities in their own capacity get dividends, capital gains, and other income.
Expenses that can be deducted while calculating the corporate tax
In corporate tax, certain expenses which fall under general accounting rules may not be subjected to the tax deduction. These are added back to accounting income for determining the Taxable income. A few of them are as follows
- Depreciation or amortization expenses for Capital Assets.
- Business setup, license renewal, and other government fees and charges that are paid entirely or primarily in the course of business.
- A value-added tax that is not recoverable under VAT legislation.
- 50% of the client's leisure costs.
- Interest costs on debt funding up to 30%.
- Loans to related parties are deductible only if they serve a legitimate business purpose.
- Payments made to a mainland branch of the Free Zone entity may be deductible.
Expenses that cannot be deducted while calculating the corporate tax
Many accounting principles will control the calculation of taxable income. However, in some instances, the UAE Corporate Tax regime will prohibit or limit the deduction of specific expenses. The goal is to avoid situations of abuse or excessive deductions by ensuring that only expenditures required to generate taxable income are eligible for relief.
The following expenses cannot be deducted from a taxable person's taxable income accrued during a taxable period:
- Any expense that was not paid in the course of the taxable person's business.
- Any expense incurred in order to receive exempt income
- Losses not incurred as a consequence of or related to the taxable person's business
- Any extra spending authorized by a Cabinet decision in response to a minister's recommendation
As per the Ministry of Finance, Corporate Tax rates are as mentioned
- 0% for taxable income up to AED 375,000
- 9% for taxable income above AED 375,000 and
- 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.
Corporate Tax Calculation and Filing in the UAE
Corporate Tax is generally imposed on an annual basis and is calculated by the taxable person on a self-assessment basis. The calculation and payment of Corporate Tax is done through the filing of a Corporate Tax Return with the Federal Tax Authority.
The starting point for calculating taxable income is the taxable person's accounting income (i.e., net profit or loss before tax) as per their financial statements. The taxable person will need to make certain adjustments to determine their taxable income, such as adjusting for income that is exempt from Corporate Tax and for expenditure that is wholly or partially non-deductible for Corporate Tax purposes.
Corporate tax in the UAE is determined at 9% of the net profit recorded in the financial accounts of the company. Only if the tup to 3,75,000 AED in net profit is taxed at 0%.
For example, if the net profit is 5,75,000 AED, the corporate tax is 18,000 AED (5,75,000 – 3,75,000 X 9/100).taxable net profit reaches 375,000 AED, and the 9% corporate tax is assessed. In other words,
The calculation and payment of Corporate Tax in the UAE is a self-assessment process that requires taxable persons to file a Corporate Tax Return with the Federal Tax Authority. It is essential for taxable persons to understand the various adjustments that need to be made to their accounting income to determine their taxable income accurately.
Financial records required for Corporate Tax
Businesses in the UAE should ensure corporate tax compliance by keeping financial and other records that explain the information outlined in the corporate tax return. Such papers should also be submitted to the Federal Tax Authority. (FTA). Entities exempt from UAE corporate tax will be expected to keep records in order for the FTA to determine their exempt status.
Businesses must be prepared to present the necessary documents in order to register for Corporate Tax in the UAE. The registration and payment of business taxes will be done online. The documents listed below may also be needed for Corporate Tax Registration in the UAE.
- Trade License Copies (must not be expired).
- Passport photocopy of the license's owner/partners (must not be expired).
- License's owner/partners Emirates ID (must not be expired).
- Power of Attorney (or Memorandum of Association) (POA)
- Contact information (Mobile Number and Email).
- Company contact information (complete address and P.O. Box).
- Report on the Annual Financial Audit.
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 returns needs to be filed electronically and does not require any advance UAE Corporate Tax payments.
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.
Read More: What is Corporate Tax in UAE
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.
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.
What are free zones, and how are they tax-free?
The Corporate Tax Law introduces the notion of a "Qualifying Free Zone Person" (QFZP), which is broadly defined as a free zone firm or branch that:
- Maintains sufficient substance in the UAE
- obtains eligible income (as determined by a Ministerial Decision).
- Meets transfer pricing requirements.
- Meets any other conditions imposed by a ministerial decision.
A QFZP will still be subject to CT, but its qualifying income may be taxed at 0%. A QFZP may choose to forego this advantageous regime and pay the ordinary CT rate.
How can businesses file for corporate taxes in the UAE?
The Corporate Tax Law requires UAE businesses to keep transfer pricing paperwork (i.e., the master file and local file), subject to specific restrictions specified in a Ministerial Decision. Within 30 days of receiving a request, TP paperwork must be sent to the FTA.
Additionally, taxpayers may be required to submit a TP disclosure form in addition to the Corporate tax return.
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.
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.
How can CDA help?
CDA is a well-known audit firm in Dubai that prides itself on offering individual services to its clients. CDA offers high-quality accounting, auditing, and assurance services, as well as VAT, business, accounting software, and payroll services. It is constantly ready to help clients with their financial concerns, such as compliance requirements, auditing requirements, bookkeeping, and so on. So, if you want to learn more about CDA, contact us.