UAE Corporate Tax Explained: Everything You Need to Know

On 31^st January 2022, the UAE has introduced a new corporate tax, signaling a significant change in its taxation landscape. Historically, the United Arab Emirates was known for not imposing taxes on corporate profits, except for a few industries. However, starting from the financial year that began on June 1, 2023, many companies operating in the UAE will be subject to a new 9% corporate tax rate. In this article, we'll break down the details of UAE's corporate tax in simple terms, keeping you informed about this crucial development in the world of business setup in Dubai.

 

The Change in UAE's Taxation

Before we dive into the specifics of UAE's corporate tax, it's essential to note that this change is a shift from the UAE's historical tax policy. The country introduced a Value Added Tax (VAT) of 5% in 2018, on all consumer purchases.

 

Then in January 2022, the government announced the introduction of a 9% corporate tax, which became effective the following year.

 

It is important to note that most other advanced economies around the world impose taxes on business profits, and the 9% tax on UAE companies is still significantly lower than the most of the other developed countries (which is usually around 20%).

 

What is UAE Corporate Tax?

The UAE's corporate tax for 2023 is set at 9% on the profits (which is the revenue minus expenses) of businesses generating over 375,000 AED (approximately USD $100,000). Companies with annual earnings below this threshold will continue to enjoy a 0% tax rate.

 

Multinational Companies and the Global Minimum Corporate Tax Rate

In addition to the standard corporate tax, the UAE has also aligned with international tax norms by implementing a 15% tax for large multinational firms with profits exceeding EUR 750 million. This move is in compliance with the Global Minimum Corporate Tax Rate agreement.

 

Effective Date

The new corporate tax policy came into effect for the tax year starting on June 1, 2023. Companies with financial year beginning in January will not be required to pay tax on revenues generated prior to January 1, 2024.

 

Key Features of UAE's Corporate Tax

Let's take a closer look at the essential aspects of the corporate tax in the UAE:

Businesses earning income up to AED 375,000 will face a 0% tax rate, while those earning above this threshold will be subject to a 9% tax rate. Different tax rates may apply to larger multinational companies based on specific business conditions.

 

Eligible Businesses

Legal entities with significant legal personalities, such as Limited Liability Companies (LLCs), Private Shareholding Companies (PSCs), Public Joint Stock Companies (PJSCs), Limited Liability Partnerships (LLPs), and others, will be subject to this tax. Additionally, any foreign legal entity earning income in the UAE and being a tax resident will be taxed. Both UAE residents and non-residents may be subjected to corporate tax policies.

 

Exempted Businesses

The corporate tax law includes a participation exemption from corporate tax for businesses receiving dividends or selling shares of a subsidiary company. Charities, public benefit organizations, investment funds, businesses involved in the extraction of oil and resources, and wholly government-owned companies are excluded from corporate taxes.

 

Taxable Income Calculation

Generally, a company's net profit or loss as shown in its financial statements will determine its tax percentage and taxable income. In cases of company losses, the business can offset this value against taxable income in future financial years, up to 75%.

 

Taxation of Free Zone Companies

The application of the new UAE corporate tax to free zone companies remains somewhat uncertain. According to the government, free zone companies can still enjoy their specific free zone's pre-agreed incentives. However, free zones may decide to modify their rules and potentially introduce taxation. In cases where free zone companies conduct business with mainland companies, they may be required to pay corporate tax on revenues generated through these transactions.

It is important to remember that Free zone companies are also obligated to register and file a corporate tax return, even if they are not required to pay any tax.

 

Taxation on Personal Income

Corporate tax does not apply to salaries or other personal income from employment in the government, semi-governmental, or private sector. Individual business owners in the UAE may be subject to a 9% corporate tax if their total turnover from business activities exceeds 1 million UAE dirham (AED).

As per UAE Law, individuals enjoy exemptions from corporate tax in specific situations according to the law. This includes:

1. Income gained from bank deposits or saving schemes.

2. Returns on investments made by foreign investors, such as dividends, capital gains, interest, royalties, and other investment incomes.

3. Personal investments in real estate by individuals.

4. Income generated by individuals from owning shares or other securities in their personal capacity, including dividends and capital gains.

 

These exemptions are in line with UAE regulations, promoting a favorable environment for individual financial activities.

 

Conclusion

As the UAE introduces corporate taxation, it's essential for businesses to understand the implications and adapt to the changing landscape. Whether you're considering business setup in Dubai's mainland or a free zone, staying informed about these tax changes is crucial. If you have questions or need guidance on navigating the corporate tax landscape, don't hesitate to consult with experienced business setup consultants in Dubai like WESETUPBUSINESS who can provide valuable insights and assistance tailored to your specific needs.