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Tax Consultants & Bookkeepers in the UAE

        

Introduction of Corporate Tax

The UAE Ministry of Finance on Monday, 31st January 2022, announced the introduction of federal corporate tax on business profits. The laws will be introduced in due course.

Corporate Tax Overview

The Governing Authority will be the Federal Tax Authority. As per the UAE Federal Tax Authority:
 
Key highlights
  • Qualifying intra-group transactions and reorganizations will not be subject to UAE Corporate Tax provided the necessary conditions are met
  • UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines
  • UAE Corporate Tax will apply to ALL UAE businesses, except for the extraction of natural resources, which will remain subject to Emirate level corporate taxation.
  • UAE Corporate Tax will apply equally to all categories of profits and other (net) income reported in the financial statements prepared in accordance with internationally acceptable accounting standards.
  • A business established in a Free zone will be required to register and file a Corporate Tax return.
  • UAE Corporate Tax will generally apply to income earned from activities carried out under a Freelance license / permit.
  • Foreign entities and individuals will be subject to Corporate Tax only if they conduct a trade or business in the UAE in an ongoing or regular manner.
  • The final amount of UAE Corporate Tax payable will be reduced by any foreign taxes incurred on the relevant income.
  • UAE withholding tax will not be applicable on domestic and cross-border payments of any nature under the UAE Corporate Tax regime
  • UAE Corporate Tax will not apply on an individual’s salary and other employment income (whether received from the public or private sector)
  • UAE businesses will not be required to make advance UAE Corporate Tax payments
  • The UAE CT regime will allow a business to use losses incurred (as from the UAE Corporate Tax effective date) to offset taxable income in subsequent financial periods
  • A UAE group of companies can elect to form a Tax group and be treated as a single taxable person, provided certain conditions are met
  • As per the current VAT Laws, all businesses in the UAE are required to record their financial transactions and ensure that their financial records are accurate and up to date. The final responsibility and accountability to comply with the UAE laws is on the business.

Effective Date

The UAE Corporate Tax (CT) regime will become effective for financial years starting on or after 1 June 2023.
Examples:
1) Financial year starting on 1 July 2023 and ending on 30 June 2024
 
The business will become subject to UAE CT from 1 July 2023 (which is the beginning of the first financial year that starts on or after 1 June 2023)
 
2) Financial year is a calendar year starting on 1 January 2023 and ending on 31 December 2023
 
The business will become subject to UAE CT from 1 January 2024 (which is the beginning of the first financial year that starts on or after 1 June 2023)
 
Scope 
  • All activities undertaken by a legal entity that has a commercial license to carry out business in the UAE will be deemed “business activities” and hence be within the scope of UAE CT
  • The taxable income will be the accounting net profit of a business, after making adjustments for certain items to be specified under the UAE CT law
  • The accounting net profit of a business is the amount reported in the financial statements prepared in accordance with internationally acceptable accounting standards

Corporate Tax Rates

The CT rates will be:
  • Income upto AED 375,000 - 0%; 
  • Taxable income above AED 375,000 - 9%; and
  • A different tax rate will be applicable to large multinationals that meet specific criteria set with reference to 'Pillar Two' of the OECD Base Erosion and Profit Shifting project.

Example of how to calculate Corporate Tax Liability:

Business has earned a taxable income of AED 400,000 in a given financial year.
 
In this case the Tax liability will be calculated as follows: 

  • Income of AED 0 upto AED 375,000 @ 0% = Tax of AED 0
  • Income Above AED 375,000 @ 9% = Tax of AED 2,250 as per below
  • AED 25,000 being the portion of taxable income exceeding AED 375,000 (i.e. AED 400,000 less AED 375,000 = AED 25,000) multiplied by 9%

The UAE CT liability for the year will be AED 0 + AED 2,250 = AED 2,250

The final amount of UAE CT payable will be reduced by any foreign taxes incurred on the relevant income.

Corporate Tax Exemptions:

  • Businesses engaged in the extraction of natural resources will remain subject to Emirate level corporate taxation and be outside the scope of UAE CT
  • UAE CT will not apply on an individual’s salary and other employment income (whether received from the public or private sector)
  • The investment in real estate by individuals in their personal capacity should not be subject to UAE CT provided the individual is not required to obtain a commercial license or permit to carry out such activity in the UAE
  • Individuals will not be subject to UAE CT on dividends, capital gains and other income earned from owning shares or other securities in their personal capacity
  • Interest and other income earned by an individual from bank deposits or saving schemes will not be subject to UAE CT
  • Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from UAE CT
  • Qualifying intra-group transactions and reorganizations will not be subject to UAE CT provided the necessary conditions are met

Free zones

  • Free zone businesses will be subject to UAE CT, but the UAE CT regime will continue to honour the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE
  • A business established in a free zone will be required to register and file a CT return
  • The UAE CT treatment that will apply to businesses in free zones will be the same across all free zones

Adjustment of Losses

  • The UAE CT regime will allow a business to use losses incurred (as from the UAE CT effective date) to offset taxable income in subsequent financial periods
  • Excess tax losses may be carried forward and used against taxable income in future years, provided certain conditions are met
  • Tax losses from one group company may be used to offset taxable income of another group company, provided certain conditions are met

Tax group

  • A UAE group of companies can elect to form a tax group and be treated as a single taxable person, provided certain conditions are met
  • A UAE tax group will only be required to file a single tax return for the entire group

Withholding tax

UAE withholding tax will not be applicable on domestic and cross-border payments of any nature under the UAE CT regime

Tax credits

Foreign CT paid on UAE taxable income will be allowed as a tax credit against the UAE CT liability

Transfer pricing

UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines

Administration

  • All businesses will be required to register for UAE CT purposes
  • Only one CT return will need to be filed per financial period. No provisional or advance CT filings will be required
  • A financial period is generally a year
  • The CT return will need to be filed electronically.
  • UAE businesses will not be required to make advance UAE CT payments
  • Similar to other taxes in the UAE (e.g. VAT), businesses will be subject to penalties for non-compliance with the CT regime
  • All businesses in the UAE need to record their financial transactions and ensure that their financial records are accurate and up to date. The final responsibility and accountability to comply with VAT and CT is on the business.