WHAT IS CORPORATE TAX IN UAE?
The United Arab Emirates (UAE) will implement a federal Corporate Tax (CT) on business profits beginning with the fiscal year beginning on or after 1 June 2023. The announcement of the Corporate Tax was made on January 31, 2022. The UAE CT regime has been created to include guiding principles from around the world and lessen the burden of compliance on UAE corporations.
WHAT IS THE VISION BEHIND INTRODUCING THE CORPORATE TAX IN UAE?
The establishment of a federal CT regime aims to support the UAE’s strategic goals and encourage enterprises to start up and grow operations there. The UAE will maintain its position as the top investment destination in the world all due to the certainty of a challenging market and its broad network of double taxation agreements.
WHAT IS THE CORPORATE TAX RATE TO BE IMPOSED IN UAE?
Every kind of tax has a defined rate by the Federal Taxation Authority which has to be complied by the parties who are subject to the proposed regulation practice. There are three circumstances that define the corporate tax rate in UAE. These circumstances are:
- Having a taxable income of up to AED 375,000
For businesses having a taxable income up to AED 375,000, the rate for the Corporate Tax is 0%.
- Having a taxable income above AED 375,000
For businesses and corporations that earn more than AED 375,000 as taxable income are liable to pay a rate of 9% as the Corporate Tax in UAE.
- Large multinationals in UAE
For major corporations that fulfill specified requirements outlined with reference to “Pillar Two” of the OECD Base Erosion and Profit Shifting initiative, a different tax rate is recommended.
WHO ARE REFERRED AS INDIVIDUALS IN THE CORPORATE TAX REGIME UAE?
The UAE Corporate Tax regime is said to be implemented on the income of individuals as well other than just businesses. The corporate tax will be imposed without any other kind of tax for them.
HOW INDIVIDUALS WILL BE SUBJECT TO CORPORATE TAX IN UAE?
For individuals, there are certain circumstances that have been released by the Federal Taxation Authority in UAE which explain how can individuals be subject to corporate tax. These are:
- The wages and other work income of an individual are exempt from UAE Corporate Tax (whether received from the public or private sector)
- Any person operating a business in the UAE with a commercial license is subject to UAE CT, and so is any revenue generated by such enterprise.
- If a person is not obliged to seek a commercial license or permit to engage in such activity in the UAE, they should not be subject to UAE CT when investing in real estate in their individual capacity.
- Individuals’ dividends, capital gains, and other income from holding shares or other securities in their individual capacity will not be subject to UAE CT.
- Although no CT will be paid unless the freelance professional’s yearly net income reaches AED 375,000, UAE CT will often apply to revenue derived from activities performed under a freelancing license or permit.
- UAE CT will not apply to interest and other income derived by a person from bank accounts or savings plans.
Rather of proposing novel ideas that would need to be assessed by investors, the new UAE Corporate Tax regime will build on best practices from throughout the world and incorporate principles that are widely recognized and approved. However, there are still a lot of unanswered questions.
- The current tax rate for international bank branches operating in the UAE is 20%. Whether the new UAE Corporate Tax tariff will take its place has not yet been determined.
- Although we anticipate that partnerships would be recognized as transparent for UAE Corporate Tax purposes in accordance with worldwide best practice, it is ambiguous how the new framework will apply to entities like limited liability partnerships.
- On the reporting currency of financial statements to be utilized for CT purposes, there is no guidance given. Taxable earnings must be calculated taking into account exchange rate variations if the reporting currency for CT purposes differs from the entity’s functioning currency.
The implementation of UAE Corporate Tax will have an influence on planning, operations, and reporting systems whether or not UAE enterprises would face a sizable Corporate Tax liability under the new regime, thus it makes sense to plan ahead.
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