What exactly is a corporate tax?
A corporate tax is defined as a type of direct tax levied on the net profit of corporations or other entities from their business. Corporate Tax is sometimes also referred to as “Corporate Income Tax (CIT)” or “Business Profits Tax” in other jurisdictions. Business owners, subjected to the tax, would pay taxes on production, people, property, and environmental impact, as well as the firm's income.
Corporate taxes in the UAE:
On 31st Jan 2022, the Federal Tax Authority (FTA) of the United Arab Emirates announced the imposition of Corporate taxes on businesses from the year 2023.
Corporate tax must be paid by:
A business earning taxable income of more than AED 375,000 (US$ 102,000), doesn't come under free zone jurisdiction and takes tax holiday benefits.
An individual with net profits above AED 375,000 from activities that require a commercial licence.
The UAE corporate tax will be applicable across all Emirates and will apply to all business and commercial activities, except for: the extraction of natural resources, which will continue to be subject to Emirates level taxation.
Taxes for Free zones:
Free zone businesses are required to register and file a corporate tax return, but will still enjoy the benefits from Corporate tax holidays / 0% taxation if they comply with all regulatory requirements and do not conduct business within mainland UAE.
Corporate taxes will not be applicable to:
Income from real estate, income from savings, Employment income, investment returns, and other income earned by individuals in their personal capacity that is not attributable to a UAE trade or business; Dividends, capital gains, and investment returns earned by foreign investors.
UAE companies can form a tax group and file a single tax return for the entire group, transferring tax losses to other members of the group.
The Federal Tax Authority will be responsible for the administration, collection, and enforcement of corporate taxes.
Impact on businesses:
When corporate taxes are imposed, it will be important to examine any transaction or book entry from the point of view of corporate taxes.
This would impact the general finance functions, supply chain functions, IT functions, and legal functions. It will have an impact on the company’s business decisions as well.
The corporate tax will be applicable on net profits at the rate of 0-9%. But the best part is that UAE will still remain a haven for tax exiles and attract foreign investors because 9% corporate tax is still a low rate as per global standards.
How are corporate taxes calculated?
Corporate taxes are calculated based on accounting net incomes.
This includes considering the income from all revenue streams and expenses incurred to earn such revenue(operating expenses, interest on loan, depreciation, amortisation expenses)
Who is exempted from corporate taxes in UAE?
Individuals making money in the UAE:
- Income from employment
- Income from freelancing or from being engaged in business/commercial/professional or any other economic activities that are permitted only with a business licence/permit
- Income from real estate investments, as long as such investments are made in a personal capacity and not as a business that needs a commercial licence
- Income from any business or commercial activity for which the UAE law doesn’t demand licence or permitted by law
- Income, capital gains, and dividends from personal investments in shares and securities
- Income and interest earned from savings and deposit accounts
For businesses registered in the UAE
- Large-scale multinational companies meeting specific conditions may have to pay slightly higher corporate tax which has not been communicated yet.
- Small and medium enterprises with registered income of not more than AED 375,000 are subject to 0% corporate tax
- Free zone registered companies that comply with all regulations and do not do business with mainland UAE companies will still benefit from free zone incentives including exemption from income and corporate tax
Consequences of Non-Compliance Under the Corporate Tax
Similar to other taxes in the UAE such as the Value Added Tax (VAT), non-compliance will be met with penalties and other forms of punishments. Further information on the UAE corporate tax penalties will be released by the government in due course.