In January 2022, The Ministry of Finance announced that the UAE government will be implementing Federal Corporate Tax (CT) on the net profit of businesses. The Corporate Tax in UAE will be effective from the 1st of June 2023. Corporate Tax or Corporate Income Tax or Business Profits Tax will be applicable on or after the 1st of June 2023 depending on the financial year followed by the businesses, and from there on, all over the country, every business apart from the exempted group will be subjected to CT. Corporate tax is a type of direct tax imposed on net income. At present, the UAE has recorded the lowest tax rate of 9%compared to other GCC countries. On recalling the G7 countries' meeting in 2021, the Gulf countries entered into an agreement where a global minimum corporate tax return of 15% was introduced. The United Arab Emirates chose 9% over 15% to reduce its direct impact on entrepreneurs. Business entities are the ones subjected to this direct tax, while individuals' earning income in their personal capacity, which does not require a commercial license, is not taxable.
In the United Arab Emirates, corporate tax is applied as follows:
Corporate tax in UAE primarily aims at helping countries build a sustainable economy to enhance corporate governance and thus strengthen the economy of the nation. Through the introduction of corporate tax in the UAE, the government aims to strengthen the country's position as a leading global hub for businesses and investments. The corporate tax can accelerate the country's development and transformation in attaining its strategic objectives. The ultimate aim and the uttermost importance of the corporate tax in UAE is that through the implementation of this direct tax, the country reaffirms its commitment to meeting international standards for tax transparency and preventing injurious tax practices.
It is evident that even after the implementation of corporate tax, the UAE can easily retain its position in the global market as a competitive market to conduct business in. If we look into the corporate tax rates of other competitive countries, the UAE has the lowest corporate tax rates. For example, France has a tax rate of 26.5%, the United States of America has 21%, and India has 25% for a gross turnover up to 400cr and 30% above 400cr. The Gulf Cooperation Council countries have always attracted foreign investment due to their geographical locations and their favourable tax rates. We can also conclude that the United Arab Emirates is a better place for global investments as it has the lowest corporate income tax rate compared to other competitive countries and GCC countries.
Scope of UAE Corporate Tax
Corporate tax in UAE will apply to:
The UAE Corporate taxes are exempt for the following entities:
In the dynamic business landscape of the United Arab Emirates (UAE), understanding the nuances of taxable income and corporate taxation is crucial for businesses operating within the Emirates. That is where CDA services can help you with expert guidance on UAE tax regulations, ensuring businesses comply with the laws while optimizing their tax liabilities effectively. The UAE taxation system imposes corporate taxes on certain entities, and it is vital for businesses to comprehend the regulations to ensure compliance while optimizing their tax liabilities.
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In January 2022, the UAE Ministry of Finance announced that Corporate Tax in UAE would be implemented at a standard rate of 9%. The tax is segmented as follows:
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Under the UAE Corporate Tax (CT) law, income can be categorized as UAE-sourced income based on different criteria. In the second category, income derived from a non-resident person that is connected to or attributable to a Permanent Establishment (PE) in the UAE is considered UAE-sourced income. For example, if a UK-based company has a branch in the UAE and an Italian supplier provides services to that branch, the income derived by the supplier will be taxable in the UAE. The third category includes income generated from activities, contracts, or assets located in the UAE. Services provided or utilized in the UAE, interest secured against UAE property, and insurance premiums related to assets or residents in the UAE also fall under UAE-sourced income. Residents are taxed on their worldwide income, including UAE-sourced income, while non-residents are only taxed on their UAE-sourced income and income related to their UAE PE or nexus.
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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:
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.
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Corporate income tax is collected when a company's revenue exceeds its expenses. However, companies may experience losses, especially during challenging times like the current coronavirus pandemic. Despite losses, businesses are still obligated to pay overhead expenses. The tax treatment of corporate losses is crucial for fairness in the tax system. Each country has limitations on the number of years for offsetting losses. Tax losses are valued in acquisitions, but specific rules prevent misuse. Ultimately, tax losses can be used to offset past and future income, providing financial advantages for companies.
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The corporate tax (CT) rates in the UAE vary depending on the type of taxpayer. For individuals and juridical persons, the applicable tax rate is 0% for taxable income up to AED 375,000 and 9% for taxable income exceeding AED 375,000. Qualifying Free Zone Persons have a 0% tax rate on qualifying income and a 9% tax rate on taxable income that is not qualifying income.
The CT law applies to businesses with tax periods on or after June 1, 2023. The law covers both resident and non-resident taxable persons. Resident taxable persons include legal persons incorporated or established in the UAE, natural persons conducting business in the UAE, and foreign entities effectively managed and controlled in the UAE. Non-resident taxable persons are those who have a permanent establishment in the UAE, generate state-sourced income, or have a connection to the UAE.
Taxable persons in the UAE are taxed on their worldwide income, while non-residents are taxed on the income attributable to their activities in the UAE or state-sourced income not attributable to a permanent establishment. Certain entities and activities are exempt from corporate tax, such as UAE government entities, certain government-owned companies, businesses engaged in the extraction of UAE natural resources, and investment funds meeting prescribed conditions. Unlock the potential of your tax losses and understand their implications with the expertise of CDA services.
The CT regime also applies to companies and branches registered in free zones. Qualifying free zone persons can enjoy a 0% tax rate on income that qualifies and meets specific criteria. For taxable income that falls outside the qualifying income definition, a 9% tax rate will be applicable. Qualifying free zone persons must maintain adequate substance in the UAE, derive qualifying income, not elect to be subject to corporate tax, and comply with transfer pricing provisions and documentation.
The calculation of taxable income involves adjusting the accounting net profit or loss as per standalone financial statements. Exempt income and deductions are taken into account, including dividends and other profit distributions received from domestic and foreign companies, capital gains from participating interest, and non-deductible expenditures such as fines and penalties.
Losses incurred can be set off against taxable income in subsequent financial periods, subject to certain limitations. Transfer of losses and regrouping relief provisions are available for eligible entities.
The CT regime includes transfer pricing rules applicable to transactions between related parties and connected persons. Businesses must comply with transfer pricing rules based on the arm's length principle as set out in the OECD Transfer Pricing Guidelines.
Related parties include individuals related up to the fourth degree of kinship or affiliation, individuals related to legal persons with at least 50% ownership or control, and legal entities related through ownership or control. Connected persons are also subject to transfer pricing rules.
Transfer pricing documentation must be maintained, including a local file with detailed information on relevant intercompany transactions and a master file with global information about multinational groups. The General Anti-Abuse Rules (GAAR) may apply to counteract or adjust transactions or arrangements that lack valid commercial or non-fiscal reasons or have the main purpose of obtaining a corporate tax advantage.
It's important to keep these points in mind when calculating corporate tax in the UAE to ensure compliance with the applicable regulations and provisions.
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Income Exempted from UAE Corporate Tax
The following entities are eligible for exemptions as per UAE regulations:
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CDA, Accounting services in dubai, has a team of experts in international tax standards who can provide the best tax guidance and activities related to corporate tax. Our in-depth understanding of tax laws applicable to every industrial sector helps in achieving the best tax resolutions. We make use of our experts’ knowledge of international and local tax laws to draw the best tax solutions. We perform with a vibrant approach, supporting our clients to plan and execute their tax procedures in a systematic and organized manner to achieve compliance with the applicable tax rules and regulations. If you are looking for the best corporate tax consultants in UAE, CDA will be the right choice for you. We provide you with excellent corporate tax services in UAE.
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The Federal Tax Authority (FTA) will be responsible for the administration, collection, and enforcement of the corporate tax.
The Ministry of Finance will remain the ‘Competent Authority’ for the purposes of bilateral and multilateral agreements and international exchange of information for tax purposes.
UAE Corporate tax will apply to every UAE business and Commercial Activity except for the businesses engaged in the extraction of Natural Resources.
OECD Base Erosion and Profit Shifting Project's Pillar Two's proposed worldwide minimum effective tax rate defines Large as a multinational firm with consolidated global revenues of more than EUR 750m. (c. AED 3.15 bn).
The investment in Real Estate by individuals in their personal capacity should not be subjected to CT provided that it is not required to obtain a commercial licence or permit to carry out such activity.
Businesses engaged in the extraction of natural resources will remain subject to Emirate Level Corporate Taxation and outside the scope of UAE CT
A company may use losses incurred (as of the UAE CT effective date) to reduce taxable income in succeeding financial quarters under the UAE CT regime.
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