UAE’s Corporate Income Tax
The UAE Ministry of Finance has announced that it will introduce a federal corporate tax on business profits effective for financial years starting on or after 1st June 2023.
Unlike the VAT which has no or limited impact on business profits, the new corporate tax will have a direct impact on the profitability of businesses and shareholders, and implications on companies structure and operations.
What is corporate tax?
UAE’s Corporate Income Tax or Business Profits Tax is a federal direct tax levied on profits of corporations,
Corporate tax will be chargeable on taxable income, which is the profit reported in businesses financial statements after some exceptions and adjustments.
UAE’s Corporate tax rates will be:
- 0% on taxable profits up to AED 375,000
- 9% on taxable profits greater than AED 375,000
- A different tax rate for large multinationals that meet specific criteria set of the Organization for Economic Co-operation and Development (OECD).The rate is expected to be 15% for multinational companies with a consolidated revenue grater than EUR 750m (AED 3.12B)
A business with a taxable income (net profit after adjustments) of AED 500,000 will calculate the corporate tax as follows:
- Taxable income of AED 0 – AED 375,000 at 0% = AED 0
- Portion of taxable income exceeding AED 375,000 (500,000 – 375,000 = 125,000) at 9% = AED 11,250
The UAE Corporate tax liability = AED 11,250
The UAE corporate tax regime will become effective for financial years starting on or after 1 June 2023. Businesses with financial year from January to December will become subject to corporate tax starting 01/01/2024.
Corporate income tax return shall be submitted annually, with no requirements for advance tax payment or provisional tax returns.
Scope and exemptions
Corporate tax applies to all business activities except for extraction of natural resources which will be determined by each Emirate tax regulation.
The following incomes will not be subject to UAE corporate tax:
- Dividends and capital gains earned by a UAE business from its qualifying shareholdings.
- Qualifying intra-group transactions and reorganizations provided that the necessary conditions are met.
The following personal incomes will not be subject to UAE corporate tax:
- Individual’s salary and other employment income
- The investment in real estate by individuals in their personal capacity
- Dividends, capital gains and other income earned by an individual from owning shares or other securities in their personal capacity.
- Interest on bank deposits and saving accounts
UAE corporate tax will not be applicable on foreign investor’s income from dividends, capital gains, interest, royalties and other investment returns.
Foreign entities and individuals will be subject to UAE Corporate tax only if they conduct a regular, ongoing, trade or business in the UAE.
Foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against the UAE corporate tax liability.
Free zone businesses will be subject to UAE corporate tax, and are required to register and file returns, however, the UAE corporate tax regime will keep any tax incentives currently being offered to free zone companies provided that they do not conduct business with mainland entities.
Withholding tax is a tax collected at source by the payer on behalf of the recipient of the income. For example, tax on royalties paid by a UAE company to a foreign entity.
The UAE corporate tax regime does not include withholding tax. No withholding taxes will be imposed on local or cross border payments.
Transfer pricing requirements will apply to UAE businesses with reference to the OECD Transfer Pricing Guidelines. Those are rules that ensures transactions between related parties are carried out on arm’s length terms (as if it carried out between independent parties).
Competitive tax regime
MOF insured that the UAE corporate tax regime will be very competitive, mentioning the following advantages:
- The UAE corporate tax regime will have generous loss utilization rules
- UAE groups of companies can be taxed as a single entity or can apply group relief in respect of losses and intra-group transactions and restructurings.
- No tax on dividends, capital gains, personal income, real estate and other investment
- No withholding tax (tax on cross border payments)
- No advance tax payment or provisional tax return requirements
- Very low tax rate of 9% on net taxable profit.
- 0% tax on taxable profit up to AED 375k.
- Foreign tax will be allowed to be credited against UAE corporate tax payable.
We highly recommend all business to assess the impact of the introduction of corporate tax early and proactively plan a successful implementation.
- Clearly identify all tax implications on your business.
- Establish mitigation strategies to reduce compliance cost, and achieve high tax efficiency.
- Identify the needs to change your corporate restructure, operating model, tax function, and accounting system.
How can Audiix help?
We would be happy to assess your tax position and provide guidance and recommend the necessary actions that will help you achieve compliance and tax efficiency.
For a detailed discussion on various aspects of corporate income tax, please contact us.