Know About Corporate Tax In UAE
UAE is a no-tax commercial hub. ‘UAE income tax’ is not a commonly used term either. Only municipal and custom taxes are applicable. An emirate-level tax is paid by some services, like taxing large Oil and Gas Corporation and Foreign banks operating in the emirate. It also has large areas designated as free economic zones, where full foreign ownership businesses operate without having to pay any taxes.
On the personal front, there are no personal taxes paid on the income from employment since it has no income tax statute. Hence, UAE is very unlike other countries with its ‘No-taxes’ systems. This has been a strong economic incentive for global industries and businesses to set up operations and engage in high-volume trading activities.
However, there are strong winds of change sweeping across the UAE. The need to realign its taxing policies with global taxing systems has become inevitable.
With the UAE being a key member of the OECD, the pressure to arrive at a minimum effective tax in the UAE has led to the imposition of the corporate tax in the UAE.
Start of New taxation policy
The Ministry of Finance has published the latest UAE tax changes in its Consultation Document, explaining the circumstances of the new taxation changes.
The government ascertains that the new method of taxation is a small part of the bigger UAE journey to align with Pillar II Global Minimum Effective Tax Rate Concept proposed by the OECD Base Erosion and Profit Shifting project (“OECD BEPS”).
What is the new Corporate tax in the UAE?
The new corporate tax shall be levied on ‘profitable businesses,’ every year, if the earnings are higher than its taxable earnings. For multinationals, a separate statutory quota based on specific ‘criteria’ defined by the OECD BEPS shall be used.
Where businesses file revenues of 375,000 UAE Dirhams ($102,000) and above, effective June 1, 2023, they will be taxed under ‘federal corporate tax’ law in a new category called ‘profitable businesses.’ The just announced taxation system shall be regulated by a Federal Tax Authority (“FTA”).
How much is the taxable income under Corporate Tax?
Profitable businesses will be taxed a Statutory 9-percent on taxable income, if it is in excess of $102,000 (UAE 375,000 Dirhams)
Who will not be taxed?
No tax or Zero-percent UAE taxes are applicable on startups and small businesses, which also generate similar revenue of $102,000 (UAE 375,000 Dirhams).
Individual or Personal income from being employed, real estate, and income from licensed-businesses outside the UAE will not be taxed.
What will the new taxing system achieve?
The new taxation system will transition the UAE into a very competitive market ecosystem. This will allow it to attract more businesses when the global minimum taxation system falls into place.
According to the Ministry of Finance, the reason for new corporate tax in the UAE “is the certainty of a competitive and best in class Corporate Tax regime, together with the UAE’s extensive double tax treaty network, which will cement the UAE’s position as a world-leading hub for business and investment.”
Therefore, the new taxes will diversify the nation’s revenue earning avenues. Besides, the new CT will give the UAE government a new revenue source which is not dependent on hydrocarbon industry.
How should you as a ‘profitable business’ prepare for the new policy?
To give you a head-start on the new taxation regime, here are some FAQs that Sarah Ferguson Tax Consultancy helps you address. According to these experts, the ‘profit’ factor for taxing purposes is defined as the “adjusted accounting net profits.”
The new rules expect corporation tax to be payable on profits earned in the UAE and as per financial statements submitted in accordance to global accounting standards. There should be no exceptions and adjustments acceptable.
Do you worry about how this tax will impact your business?
According to the above tax consultants, the leading point for the 9% tax that these experts highlight is the ‘uniformity’ of taxing. They share that all businesses and commercial activities are treated alike and hence 9% tax give an even playing ground for all businesses to operate in this system.
While the tax-slab is applicable in all cases, a single exception is the natural resources extraction businesses. The latter will be subject to tax-laws defined by the emirate’s corporate taxation system. Hence, there shall be no direct-impact on individual businesses, per se.
Secondly, the proposed UAE tax rates appear to be a practical approach to becoming part of the global minimum corporation tax systems. This system was already in practice in bits and parts via corporation tax in neighboring states like Saudi and in Qatar. Hence, this category of taxing had to become part of the UAE region sooner or later!
Thirdly, as the experts share, the wisdom in the new method of corporate tax helps in diversifying the regular taxation systems. While there is no income tax in Dubai on personal income, the traditional source is the “corporate dividends” of oil and energy companies. These investment-based incomes are often very volatile and impact governments in many ways.
Fourthly, experts in global corporate taxation do not believe that the new move will take away much of the shine from the no-taxes attraction of the region. The no-tax zones will continue to be an incentive, since the 9% is a minimum tax-band in comparison to global taxes.
For example, in low-tax hubs like Montenegro or Gibraltar the tax slabs are – 9% to 10%. In Ireland and Lichtenstein, the corporate tax is 12.5%. San Marino is 17%. Hong Kong taxes are between 8.5% and 16.5% depending on the industry.
Hence, whether it is the lure of Dubai corporate tax backed by the region’s geolocation, the new tax system will have long-term benefits for the UAE to emerge as a top-destination to work and live.
Conclusion: How to approach the new taxing process for your business?
We know the proposed UAE Corporate Tax will change the ways of corporate structures like yours, in the days to come. As a seasoned tax consultancy, led by expert accountancy practitioners, we would be able to assist you in making the transition to a responsible Federal Corporate Tax payer. We focus on minimizing your exposure to risks and concomitant of the new taxing legislation.