What is Corporate Tax? Why was it introduced in the UAE? Who will be subject to corporate taxation? What will be the rate of these taxes? What will happen to the people in the free zone—will they be subject to Corporate Tax? What about losses and exempted income?
We are here to solve all your queries and assist you with all the information you
need regarding Corporate tax in the UAE. Keep reading for more, and visit us to
learn about our Tax Compliance services.
In January 2022, the Ministry of Finance officially announced the implementation
of Federal Corporate Tax all over the United Arab Emirates. The tax will become
applicable based on the financial year followed by the business, i.e., either on 1 July
2023 or on 1 January 2024. But what was the reason for introducing Corporate Tax?
Before proceeding, let’s first understand the concept of Corporate Tax.
What is Corporate Tax?
Corporate tax is a form of direct tax levied on the net income or profit of corporations and other entities from their business. Corporate tax is also referred to as "Corporate Income Tax" or "Business Profits tax" by various jurisdictions. Corporate Tax is levied on taxable income after expenses have been deducted. It is collected by the government as a source of their income.
Why is Corporate Tax being implemented in the UAE?
The UAE's commitment to and compliance with the Global Minimum Taxation Regime led to the introduction of the corporate tax in the UAE. The UAE has reiterated its commitment to maintaining international norms for tax transparency and avoiding unfair tax practises by introducing a Corporate Tax ("CT") system. The introduction of Corporate Tax in the UAE will.
- Avoid unfair tax practises.
- Maintain international norms for tax transparency.
- Cement UAE’s position as a leading global hub for business and investment
- Enhance the country's growth and transformation in order to meet its strategic goals.
Who will be subject to Corporate Tax?
The UAE's commitment to and compliance with the Global Minimum Taxation Regime led to the introduction of the corporate tax in the UAE. The UAE has reiterated its commitment to maintaining international norms for tax transparency and avoiding unfair tax practises by introducing a Corporate Tax ("CT") system. The introduction of Corporate Tax in the UAE will.
- All businesses and individuals conducting business activities under a commercial licence in the UAE
- Free zone businesses (The UAE CT regime will continue to honour the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business set up on the UAE’s mainland).
- Foreign entities and individuals may conduct trade or business in the UAE only if they do so in an ongoing or regular manner.
- Banking operations
- Businesses engaged in real estate management, construction, development, agency, and brokerage activities.
Which income will be exempt from Corporate Tax?
- Businesses engaged in the extraction of natural resources will be exempt from CT, as these businesses will remain subject to the current Emirate level of corporate taxation.
- Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from CT.
- Qualifying intra-group transactions and reorganizations will not be subject to CT, provided the necessary conditions are met.
What will happen to Corporate Tax
1) In Free zones?
- Businesses in the free zone will be subject to UAE CT.
- Holidays currently offered for CT incentives or taxes must continue if the
free zone businesses :
- meet all regulatory requirements and
- do not engage in business with the mainland UAE
- To register and file a CT return, free zone businesses are required.
- Businesses in the Financial Free Zone are treated the same as those in other free zones.
2) On Foreign Person?
Foreign businesses or non-resident individuals will be subject to UAE CT only if they engage in regular trade or commerce in the UAE. In general, UAE CT will not be imposed on a foreign investor's revenue from:
- interest,
- capital gains,
- dividends,
- royalties and
- other investment returns
What will be the Corporate Tax rate?
- 0% for taxable income up to AED 375,000
- 9% for taxable income above AED 375,000 and
- a different tax rate (not yet specified) for large multinationals that meet specific criteria set with reference to 'Pillar two' of the OECD Base Erosion and Profit Shifting Project.
What will happen to the carry forward and setoff of losses?
- Businesses can carry forward losses made during a financial year to offset taxable revenue in following financial years if certain requirements are met.
- From the effective date of UAE CT, the losses incurred can be used to offset future taxable income.
- Subject to certain requirements, a group business's tax losses can be used to offset the taxable income of another group company.
Administration and Compliance :
- The Federal Tax Authority ('FTA') will be in charge of administration, collection, and enforcement.
- The Ministry of Finance is the "Competent Authority" for bilateral/multilateral agreements and the international exchange of information for tax reasons.
- Registration: Businesses will need to register in order to participate in CT.
- Return Filing :
- CT returns are required to be filed once per fiscal period (year).
- There is no need to file an advance or provisional CT.
- CT returns will be filed digitally.
- Advance Tax : Advance payment of tax is not applicable.
- Penal Consequences : Noncompliance would lead to penalties, as it does with other taxes.
The final law on the subject hasn't yet been officially issued by the Ministry of Finance. The latest confirmation regarding the same is still awaited. FTA will soon provide more references and guides about corporate tax and information on how to register and file returns on its website. The above-mentioned information has been provided with reference to the Public Consultation Document on UAE CT.