From 1st June 2023, a Corporate Tax of 9% will be applicable on all profits above AED 375,000 in the United Arab Emirates
From 1stJune 2023, a Corporate Tax of 9% will be applicable on all profits above AED375,000 in the United Arab Emirates. This has been announced by the Ministry of Finance following an agreement signed between the United Arab Emirates and the Organisation for Economic Cooperation and Development.
The new UAE corporate tax regime is one of the most competitive in the world and the introduction of corporate tax in the United Arab Emirates is expected to strengthen the country as a preferred destination for trade and investment.
What is Corporate Tax?
Corporate Tax, which may otherwise be known as Corporate Income Tax or Business Profits Tax in some jurisdictions, is a direct tax that is levied on the profits or the net income that is derived after deducting operating expenses and sales taxes as applicable, of businesses and/or corporations.
Why is the United Arab Emirates introducing Corporate Tax?
The introduction of Corporate Tax in the United Arab Emirates is in line with international best practices in the interests of tax transparency. It is believed that the move will reaffirm the United Arab Emirates as a global hub for trade and commerce, attracting both businesses and investments.
Is the United Arab Emirates the first country in the world to introduce Corporate Tax?
No. The concept of Corporate Tax exists in 180 jurisdictions the world over, and globally, the average is 25.34%
Comoros levies the highest Corporate Tax rate of 50%. In second place are Puerto Ricoand Suriname, with Corporate Tax rates of 37.5% and 36% respectively.
What is the rate of Corporate Tax in the United Arab Emirates?
The rate of Corporate Tax in the United Arab Emirates is 9%, which is one of the lowest in the world. It is applicable only on profits above AED 375,000
There is no Corporate Tax applicable on profits less than AED 375,000
How is Corporate Tax calculated in the United Arab Emirates?
Let us consider the example of a company that makes an annual profit of AED 400,000
There is no Corporate Tax applicable on profits up to AED 375,000
So for the part between AED 0 and AED 375,000 there is no Corporate Tax applicable.
Corporate Tax applicable on profits above AED 375,000
So for the part between AED 375,000 and AED 400,000 there is a Corporate Tax of 9%applicable.
9% of AED25,000 (which is the part between AED 375,000 and AED 400,000) is AED 2250
So the Corporate Tax liability of a company that makes AED 400,000 in annual profits would be AED 2250
When will the levy of Corporate Tax come into effect in the United Arab Emirates?
Corporate Tax will come into effect in the United Arab Emirates from 1st June 2023onwards.
For the purpose of tax calculation, Corporate Tax will be applicable from the first financial year that begins on or after this date.
If a business has a financial year that begins on 1st July 2023 and ends on 30thJune 2024, then Corporate Tax will be applicable on the profits of the company from 1st July 2023 onwards.
If a business has a financial year that begins on 1st January 2023 and ends on 31stDecember 2023, then Corporate Tax will be applicable on the profits of the company from 1st July 2024 onwards.
Which businesses are subject to Corporate Tax?
All licensed business activities that are undertaken by a registered company will be subject to Corporate Tax, with the exception of extraction of natural resources[subject to Emirate-level taxation].
For companies that form part of a Group of Companies, the Group shall be considered as a single taxable entity for the purposes of tax calculation. Its profits are arrived at after the calculation of all losses across the various companies that form part of the Group.
This will lighten the tax burden on profit-making companies that form part of the Group. The calculation of Corporate Tax is also expected to be easier in view of transactions between companies that are part of the same Group.
How often will businesses in the United Arab Emirates need to file Corporate Tax returns?
Only one return is required to be filed for every financial year. It is to be noted that Corporate Tax returns do not need to be filed in advance. A Group of Companies that is taxed as a single taxable entity need file only Corporate Tax return for the entire Group.
Will businesses in the United Arab Emirates need to pay Corporate Tax in advance?
No advance Corporate Tax is payable for businesses in the United Arab Emirates.
If an international company has already paid Corporate Tax, will it still be required to pay Corporate Tax in the United Arab Emirates?
If Corporate Tax has been paid overseas on profits earned in the United Arab Emirates, this will be recognised and adjusted as a tax credit against the company’s Corporate Tax liability in the United Arab Emirates.
Is a foreign company / individual subject to Corporate Tax in the United Arab Emirates?
Yes, but only if they conduct trade with the United Arab Emirates in a regular, on going manner.
Is income earned by a foreign investor subject to Corporate Tax?
Income from dividends, capital gains, interest, royalties and other returns on investment are not subject to Corporate Tax for a foreign investor.
Are businesses located in free zones subject to Corporate Tax?
Companies located in free zones are indeed subject to Corporate Tax. However, the United Arab Emirates will honour its commitments and tax only business conducted with the mainland.
In other words, profits earned from doing business with companies in the same free zone or other free zones are not subject to Corporate Tax, but profits from business done with the mainland will be taxed. So companies in free zones have to file their Corporate Tax returns accordingly, if applicable.
Is salary subject to Corporate Tax?
An individual’s earnings from employment are not subject to Corporate Tax in the United Arab Emirates, be he/she employed in the private sector or the public sector.
Is investment in real estate subject to Corporate Tax?
Investment in real estate is not subject to Corporate Tax, provided the investor is not required by law to obtain a business license or commercial permit to carry out his/her investment activity in the United Arab Emirates.
Are returns from investment subject to Corporate Tax?
For individual investors, returns from dividends, capital gains, and other income earned from owning shares or securities in their individual capacity are not subject to Corporate Tax in the United Arab Emirates.
Is the income of a freelance professional subject to Corporate Tax?
Yes, Corporate Tax is applicable on the annual income of a freelance professional earned from business activities carried out under a freelance license or permit, provided it exceeds AED 375,000
Is income earned from bank deposits subject to Corporate Tax?
Income earned from bank deposits and savings schemes by an individual is not subject to Corporate Tax in the United Arab Emirates.
What kind of income is exempt from Corporate Tax for businesses?
The dividends and capital gains that are earned by a company registered in the United Arab Emirates from its qualifying shareholdings are exempt from the purview of Corporate Tax. A qualifying shareholding is defined as an ownership interest in a company registered in the United Arab Emirates – or a foreign company that meets certain criteria as specified in the law.
EXAMPLE: Company A, which is based in the United Arab Emirates, owns shares of Company B, which is also based in the United Arab Emirates. Company A earns dividends from the shares of Company B. These dividends are not subject to Corporate Tax in the United Arab Emirates.
Are transactions between companies in a Group of Companies subject to Corporate Tax?
No, transactions between companies that belong to the same Group of Companies(which is recognised by the Federal Tax Authority as a single taxable entity)are not subject to Corporate Tax in the United Arab Emirates.
Is there any penalty for non-compliance with respect to the Corporate Tax regime?
Yes, there will be penalties levied for non-compliance with the Corporate Tax regulations.
New Horizons Business Consultants is provider of corporate services based in Dubai, United Arab Emirates. It is headed by Francesca Bouwman, who has years of experience in International Business Advisory and fluently speaks several European languages. For more details, call +971 58 500 8643 or email [email protected]