Post By: Mark Thompson October 11 2023

Impact of Corporate Tax on Individual Salary in UAE

The United Arab Emirates (UAE), known for its favourable tax environment, made headlines with the introduction of a federal corporate tax (CT) on business profits.

This change was effective in the financial year beginning June 1, 2023, leading to questions and concerns among individuals, especially about the potential impact of CT on individual salaries in the country.

In this blog, we will understand the specifics of this new corporate tax regime and how it affects individuals earning income through various channels within the UAE.

Corporate Tax Exemptions in the UAE

Before delving into the implications of CT on individual salaries, it's crucial to understand the exemptions under the UAE's corporate tax regime. The bright side here is that individuals earning money in their capacity, such as through salaries and investment incomes, are exempt from corporate tax.

This exemption holds as long as the income-generating activity does not require a commercial license.

Here's a breakdown of what's exempt from corporate tax in UAE:

Salaries: The corporate tax does not apply to income earned through any kind of job, whether in the private or governmental sector. This signifies that your monthly salary remains untaxed under this new tax regime.
Interest and Savings: Corporate tax will not apply to interest or other income derived from bank accounts or savings programs. This is especially beneficial for individuals who rely on their savings and investments for additional income.
Investment Income: Income earned from sources like stock dividends, profits from selling assets, and interest received from the personal ownership of shares or other assets will likewise be exempt from the corporate tax in UAE.

Now that we understand the exemptions, let's explore the key points that will help you navigate the impact of corporate tax on your salary in the UAE:

Tax Threshold: The UAE government has set a tax threshold, which states that income up to AED 375,000 is exempt from taxation. This threshold provides tax relief to a vast majority of individuals who earn salaries in the country.

Tax Rate: For income that exceeds the AED 375,000 threshold, a flat tax rate of 9% applies. This rate is competitive and relatively low compared to many other jurisdictions.

You can also read: UAE Corporate Tax Exempted Parties and Excluded Incomes

Impact of the UAE Corporate Tax on Individuals Holding a Commercial License

As discussed above, individuals are exempt from paying the CT on their salaries unless a person's actions may be considered "commercial in nature". These individuals are subject to corporate tax if the person has (or is obliged to have) a commercial license/permit which is inclusive of a freelance license/permit.

Individuals who are looking to determine if they will be taxed under the CT Law need to check if they have the appropriate licenses and permits to engage in commercial activities in the United Arab Emirates.

For instance, a real estate agent in the UAE who is carrying out any of these economic activities - Leasing, selling, transferring, etc.—will be required to have a valid license, and therefore, they may be taxed under the UAE CT Law.

Scope of Wages and Employment

Considering that there is zero tax on an individual’s salary in the UAE, business owners may contemplate drawing salaries from their companies. The inherent objective behind this decision is to reduce the net taxable profits of their companies.

However, to do this, business owners must first evaluate if they have an employment contract with the company. If they do, the next step would require business owners to demonstrate that the wages are the remuneration for their work, not just the profit they make from the business.

This can be complex and may require a thorough economic analysis, which, if it is in the favour of the business owner, can lead to an exemption from CT on their salaries.

You can also read: Everything You Need to Know About Corporate Tax

Latest Clarification on the Impact of Corporate Tax on Individual’s Salary or Income

The new cabinet decision No. (49) of 2023 clarifies that the salary of an individual will not be affected by the corporate tax; hence, they are relieved from the corporate tax regime unless they indulge in any business activity. A business or businesses will be under the purview of corporate tax and other compliance requirements only if they have a combined turnover of AED 1 million in a calendar year.

For instance, if the business of an individual resident in UAE has a combined turnover of more than AED 1 million, then it will be subject to corporate tax, whereas if the individual earns a rental income as well, then it won’t be taxed under CT as its out of the scope of CT.

In Conclusion

Dubai puts all the effort into maintaining the attractiveness of the Emirate and welcomes foreign natural persons and legal entities to carry out their activities in a favourable tax-free environment.

Owing to its unique jurisdiction, it provides for the possibility of receiving a 100% tax-free salary and other tax-free personal income as long as the income-generating activity does not require a commercial license.

These exemptions provided for earnings such as salary, interest, savings, and investment income are designed to safeguard the financial well-being of individuals in the UAE.

Individuals can now be confident that their salaries and personal income streams will largely be unaffected by the CT Law as the tax authorities continue to clarify the various components of the corporate tax framework, enabling them to profit financially from working and investing in this vibrant and business-friendly nation.

How can CDA help?

CDA, being one of the leading accounting and auditing firms, has a team of well-equipped experts who have dynamic knowledge of all the tax regulations prevailing in UAE. Get your tax problems solved with innovative solutions and get in line with all the compliance requirements of the authority. Our team not only provides you with tax solutions but also enables you to devise a strict framework that can enable your business to prosper in the future without facing any further havoc. To know more about our varied services, feel free to contact us now.