Impact Of Corporate Tax In UAE
The United Arab Emirates, heaven for businesses and a hub for global commerce, has introduced a new corporate tax regime. As the country transitions from an oil-dominated economy to one that is more diverse, the UAE government has proposed a corporate tax to change its tax landscape and comply with international tax rules, making it the fourth GCC country to do so. It has been designed to enforce the image of the UAE as a global centre for business.
The Ministry of Finance, on January 31, 2022, announced the UAE corporate tax. A public consultation document for the same was launched by the Ministry of Finance on April 28, 2022. On December 9, 2022, the Federal Tax Authority issued the Corporate Decree-Law. Its implementation is expected to begin with the new fiscal year beginning in June 2023.
For many years, the UAE's economy has been fuelled by oil. The Gulf nation has been systematically working towards changing this image through massive investments in the fields of innovation and technology and tax reforms. This mission was kickstarted with the introduction of a 5% value-added tax in 2018. The corporate tax regime is meant to take this a step further and help the nation achieve its sustainable development and revenue diversification goals. The introduction of such a system of taxation can increase state revenue, and reduce dependency on the oil-based source of revenue.
The scope of such a system of taxation can be explained below:
The federal tax system applies to all businesses and commercial activities operating in the seven emirates, except
- Individuals earning income in their capacities (salaries, investment income) are not liable to pay corporate tax. This rule applies as long as their source of income does not require a commercial license.
- Businesses registered in the free zones need not comply with this system of taxation, given that they meet the regulatory requirements and do not conduct business in the mainland UAE.
- Businesses involved in the extraction of natural resources still come under the purview of respective Emirate-based taxations.
There are further exemptions within this tax regime, as mentioned below:
- Dividends earned from UAE companies.
- Dividends received from foreign companies and gains from the sale of shares of both domestic and foreign companies.
- Profits earned from intra-group transactions
- Profits earned from group re-organization
The proposed tax rates are as follows:
- A 0% tax rate applies to taxable income up to AED 3,75,000.
- A 9% tax rate applies to taxable income over AED 3,75,000.
- MNEs that fall under Pillar 2 of the BEPS 2.0 framework (global revenues over AED 3.15 billion) are subject to the OECD Base Erosion and Profit-Sharing Rules.
With the implementation of a corporate tax regime, the UAE is inching closer to having a diversified economy. Even though the positives exist, such a decision also comes with its own set of implications.
The impact of this can be summarised as follows:
Impact of Corporate Tax on UAE Free Zones
The UAE promises to honour its commitments to businesses registered in free zones that do not operate on the mainland, whether through exemptions or tax-based incentives. These companies are required to file an annual CIT return. For onshore generated revenues, excessive administrative necessities are likely to be implemented.
Impact of corporate tax on MNCs
The UAE is preparing to implement one of the world's lowest taxes, which is expected to attract more foreign investment and businesses. Such a competitive tax policy makes it a desirable location for businesses.
Impact of corporate tax on mergers and acquisitions
As dividends and capital gains from qualified ownership are tax-free, it is in the interest of investors. This makes for a positive change concerning mergers and acquisitions.
With the implementation of a federal taxation system, the UAE can pave its way towards being the centre of global business. As a result of this, entities may have to incur additional costs to understand and comply with the new tax regime.
Impact of corporate tax on FDI’s
As the government makes an effort to shift the UAE from an oil dependent country to a technological powerhouse, the introduction of federal taxes shows the nation’s rapid development in this regard. As per experts, the government will shift focus from the mainland to free zones, attracting more investment.
Impact of corporate taxes on consumers
It is likely that shareholders will try to maintain their share of profits and pass the tax burden to the end user, which can reduce the purchasing power of consumers.
Impact of corporate tax on the economy
While such a system of taxation can increase the state's revenue, due to the possibility of a reduction in the purchasing power of the consumer, the demand for goods may reduce, which in turn could affect production and sales, reducing growth in the short run.
How can CDA assist you in corporate tax implementation?
CDA has been providing all sorts of accounting, auditing, and tax consultation services to its clients for more than a decade in the most personalized manner. CDA has a well versed team of professionals who have experience with big 4s and are capable of providing custom tailored services to the clients. Corporate taxation is yet another revolutionary change that the UAE government plans to implement in 2023.In the wake of that, our experts have deeply studied its impacts and implementation on firms in UAE, which has made our team more well versed to help clients to accept the new tax without any complexities, to know more about our services feel free to contact us now.