The implication of Corporate Tax in the UAE.

October 26, 2022 | | Uncategorized |

Source: – Public Consultation Document issued by Ministry of Finance, UAE.

On January 31, 2022, the ministry of finance of UAE announced the introduction of corporate tax. So before we start we should understand what corporate tax in detail is.

Corporate Tax will be implemented in UAE from 01st June 2023. However, for the companies whose financial year is the same as a calendar year, the Corporate Tax will be applicable to those companies from 01st January 2024.

Let us understand what is corporate tax in simple terms, corporate tax is nothing but a direct tax on the income earned or taxable profit of the business. It is also known as Corporate Income Tax.

What is the objective of Corporate Tax?

  • Enhance the position of UAE worldwide.
  • To attract more investors
  • One of the cheapest rates of tax compared to the global average

What are the rates applicable for Corporate Tax?

Corporate tax rates are the standard rate at 0% and 9 %

  • When 0% will be applicable if the annual taxable profit earned is below AED 375,000/-
  • 9% will be applicable on the annual taxable profile of more than AED 3750,00/-
  • A different tax rate (not yet specified) for large multinationals maybe 15%  as per OECD guidelines

Corporate tax impact on Free zone:

Companies formed in Free Zones may get a 0% Corporate Tax benefit in case if the business model is as below:-

  • Income through trade within the free zone.
  • Income through trade with companies is another free zone.
  • Income through trade with international clients.

In order to avail of the 0% Corporate Tax benefit, the Free Zone company must follow the below conditions:-

  • There should not be any mainland-sourced income other than specified.
  • The company must demonstrate adequate substance in UAE
  • The books of accounts of the company must be audited.

Who will entitle to corporate tax?

  • All business and commercial activities within UAE.
  • Income earned by an individual who has a business license.
  • Businesses that are established in free zones and operate within the state.
  • Businesses established in Mainland.

Is it mandatory for businesses to register for corporate tax?

A business must register for corporate tax.

And it is mandatory to file a tax return for each financial year.

Who is exempt from corporate tax?

  • The individual’s salary or other income earned from the job.
  • Investment in real estate by individuals in their personal capacity.
  • Individuals’ income earned from the investment is taxable to the individual.
  • Interest and other types of income from bank deposits or savings
  • Dividends and capital gains earned by an individual will be exempt from corporate tax.

Conclusion

The introduction of corporate tax in the UAE particularly in light of discussions globally will be the minimum tax rate proposed by Pillar II. The corporate rate of 9% still remains highly competitive and would attract more investors from all over the world who would be able to save the tax as compared with any other country. As discussed earlier companies formed in the Free zone will be entitled to 0% corporate tax if they follow the guidelines which were discussed earlier. The main feature of corporate tax would be still at a 0 % rate for small businesses and startups. Individuals’ salaries will be exempted from corporate tax, and any income earned from interest or maybe from savings would be exempted. Also, we are waiting for the complete guidelines which will provide us the information regarding if the business is to register for corporate tax, and other guidelines regarding the corporate tax implications.

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