The United Arab Emirates (UAE) has long been known as a zero tax jurisdiction but this image is set to change with a recent announcement. Dubai has been working for years and helped the country to position itself as a modern state by getting massive investments in innovation and technology sectors.
On 31st January 2022, the UAE’s Ministry of Finance (MoF) announced to impose a Federal Corporate Tax (CT) in the UAE that will be effective for the financial years starting from June 1, 2023.
As per initial information, the UAE Corporate Tax is designed per international best practices with a low / minimal compliance burden on businesses. Let’s delve into the details to see how the tax will be imposed, who will be levied, and what will be the tax rate.
What is the Corporate Tax plan?
The UAE Corporate Tax will be applicable across all Emirates and will apply to all businesses and commercial activities in the country. However, the exception is the extraction of natural resources, which will be subject to Emirate level taxation.
The tax will be imposed on all profits, the company will earn and record in its annual financial statements. The Federal Tax Authority (FTA) will be regulating the companies in regards to corporate tax payments.
Note: The financial statements must be prepared according to the internationally accepted accounting standards – subject to minimal exceptions and adjustments. Tax losses incurred from the Corporate Tax effective date can be carried forward to offset taxable income in future financial periods.
What will be the tax rate?
The UAE Corporate Tax is set at a rate of 9%. The Ministry of Finance (MoF) has exempted small businesses and start-ups to pay corporate tax for profits up to a threshold of AED375,000 and any income exceeding this amount will be taxed at a given rate. The taxable income and applicable tax rate are:
| Taxable income | Corporate Tax Rate |
| Up to AED375,000 | 0% |
| Above AED375,000 | 9% |
Another exemption will be on the Free zone businesses, as these companies will continue to benefit from CT holidays (0% taxation) only if they comply with all regulatory requirements and do not conduct business in mainland UAE, but they will also be required to register and file a Corporate Tax return.
According to the Federal Tax Authority, a different tax rate will be applicable to large multinationals that meet the criteria under “Pillar Two” of the Organization for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting project.
Who will be subject to corporate tax?
The new Corporate Tax will apply to businesses across all Emirates but foreign companies and individuals will be subject to corporate tax only if they conduct business in the UAE in a regular manner. Domestic and cross border payments of interest, royalties, and other payments will not be subject to withholding tax in the UAE and foreign investors who carry on business in the country will be subject to tax.
The Federal Tax Authority has also announced that all activities undertaken by a legal entity will be considered “business activities” and thus fall within the scope of the corporate tax. It means the companies with a permanent establishment in the UAE will only be subject to corporate tax, due to their legal presence in the country.
The UAE Corporate Tax will not apply to:
- Employment income, income from real estate, investment returns, income from savings, and other incomes from personal capacity that is not attributable to the UAE trade or business.
- Dividends, capital gains and investment returns earned by foreign investors.
This is what we know about Corporate Tax introduced by the UAE Ministry of Finance (MoF) but let’s delve into it to know more detail about this tax.
Frequently Asked Questions (FAQs)
Q: What is Corporate Tax?
A- Corporate Tax is a new tax levied on the net income or profit margin of companies operating in the UAE.
Q: Is the UAE the first country to introduce Corporate Tax?
A- Many countries have a comprehensive Corporate Tax regime in the world.
Q: How the companies will file for Corporate Tax?
A- The UAE Corporate Tax will be filed electronically once for each financial period without a requirement for advance payment.
Q: When will the UAE Corporate Tax become effective?
A- The UAE Corporate Tax regime will become effective for the financial year starting on or after June 1, 2023.
Q: What will be the role of the Federal Tax Authority?
A- The Federal Tax Authority will be responsible for the administration, collection, and enforcement of the Corporate Tax in the UAE.
Q: How the UAE group companies can file tax returns?
A- The UAE group companies can form a tax group to file a single tax return for the entire group, and also transfer tax losses to other members of the group.
