In January 2022, the United Arab Emirates Government announced the introduction of the UAE Corporate Tax or the UAE CT. The Ministry of Finance published the Federal Decree-Law No. 47 of 2022, revealing the details and the legislative framework of the corporate tax.
Continue reading below to know all the relevant details of the new law.
Corporate Tax for Companies in UAE
What is the current tax?
Corporate taxes in the UAE apply only to the financial sector at present. Banks and insurance companies are taxed at 20%. At the emirate level, corporate taxes are levied on companies involved in oil and gas exploration and production. The applicable tax is 55%.
Additionally, income tax for individuals is 0% currently, though, in 2018, the government rolled out the VAT of 5%.
What is the new corporate tax structure?
As per the new CT structure, starting 1st June 2023, a 9% corporate tax will be charged on profits for businesses that earn a net annual profit of AED 375,00 and more. On the other hand, companies earning less than AED 375,000 net annual profit will be charged 0% corporate tax. Notably, profits will be taxable, not the turnover.
As per Decree, the taxable income falling under the purview of the new tax rate will be:
- 9% of the Taxable Income exceeding the specific amount and as decided by the cabinet for juridical persons and individuals.
- For Qualifying Free Zone Persons, the applicable rate will be 9% of the Taxable Income, failing to meet the qualifying income definition.
The applicability criteria for the new Taxation Laws are as follows:
- UAE-incorporated juridical persons.
- Expat juridical persons with permanent establishments within the United Arab Emirates.
- Legal entities managed and controlled within the UAE.
- Individuals engaged in commercial activities in the United Arab Emirates, operating their businesses as sole proprietors or through unincorporated partnerships.
- Freelancers working under the self-sponsorship model with a freelance permit and earning more than the threshold amount will be taxed as per the UAE CT.
Other applicable conditions for the UAE CT regime:
- Businesses are not required to make advance tax payments or provisional tax returns. However, commercial entities must file a single corporate tax return each financial year.
- For transfer pricing by businesses and related documentation in the country, the applicable guidelines of OECD Transfer Pricing will apply. It is mandatory that the determination of Taxable Income between Related Parties, including transactions and arrangements, meet the arm’s length standard. This means that payments made to connected persons like owners, directors, and others need to be deducted from the revenue as an expense when made on an arm’s length basis. Any excess payment/benefit will be taxable as per the new Decree.
- Businesses must prepare their financial statements per the accounting standards accepted in the UAE.
- All tax-paying entities must prepare their financial statements based on the accrual method. Only those entities permitted to prepare their financial statements on the cash method of accounting can continue to do so.
- The UAE CT regime will also have ‘generous’ loss utilization rules. In such cases, multi-organizational groups will be permitted to be taxed as one entity as a Tax Group. Or, in case of losses, these groups can apply for group relief.
- All taxable persons are required to mandatorily maintain their financial records and documents for 7 years on the completion of the tax period.
- The annual corporate tax returns need to be filed by the taxable entities within 9 months from the close of the relevant tax period.
When will the new Decree come into effect?
The UAE CT structure will come into effect from the next financial year. The 9% corporate tax will be effective starting 1st June 2023.
What is the minimum threshold?
The Ministry of Finance has set a minimum threshold of AED 375,000 for profits. The new CT structure will also ensure that the compliance burden for regular businesses with the preparation and maintenance of financial statements is minimal.
The purpose of setting the minimum threshold is to help support mini, small, and medium businesses as well as startups in the region.
Who is exempted?
The following entities are exempted from the new UAE CT structure:
- Personal income of individuals generated from non-business or non-commercial activities like employment, bank deposits, investment in real estate, or any other form of investments or income earned from savings programs, FOREX gains, or dividends. In the context of real estate income, if the earning is related to commercial activity like sale, transfer, lease, etc., then it will be taxed as per the UAE CT regime.
- UAE businesses earning dividends and capital gains from qualifying shareholdings are exempted.
- In the case of a qualifying free-zone entity, it is mandatory to fulfill all the relevant conditions of the Executive Regulation of the UAE CT Law to get an exemption.
- Entities involved in natural resource extraction activities are exempted from the new UAE CT regime, but they will be taxed under the existing taxation rules of individual emirates.
- Government entities involved in non-commercial activities, like public benefit organizations, investment and pension funds, etc., are also exempted.
Will NRIs be taxed?
Exemption in case of NRIs:
- Income generated from operating ships on international water and aircraft will be exempted.
- Income earned on real estate investment or any other investment done through an investment manager is also exempted.
Conditions where NRIs will be subject to UAE CT structure:
- NRIs with a permanent commercial establishment in the UAE.
- NRIs having a state-sourced income, for example, earnings from the sale of goods, etc.
Four years after the introduction of VAT, the government has decided to bring in the corporate tax Decree. It shows the shift from a non-tax ecosystem to a taxable environment in the region. It is a natural progression, in sync with the Global Minimum Corporate Tax Rate Agreement.
Contact us to learn more about the new UAE Corporate Tax Laws and rules, as we are UAE’s leading experts on corporate laws. Since it is a new taxation regime with many specific compliance-related matters, it is best to have corporate law specialists like us resolve your queries and guide you on the way forward.