Impact of UAE Corporate Tax on Businesses : A Comprehensive Overview

UAE Corporate Tax

Table of Contents

In today ever-changing global economy, it is more important than ever for businesses to understand the complexity of UAE corporate tax to survive, succeed, and grow. Although the United Arab Emirates (UAE) has a reputation for being business-friendly, the country tax regulations are frequently changing.

The UAE is a renowned commercial hub and global financial centre that offers incentives to attract international investment. As of 2023, local and foreign businesses must keep abreast of UAE corporate tax 2023 developments. However, beginning on June 1, 2023, many local companies will be subject to a new UAE corporate tax rate of 9%. 

The UAE company Tax Law, effective June 1, 2023, will facilitate strategic objectives, accelerate growth and evolution, and enhance company competitiveness. Here, you’ll find a comprehensive breakdown of the United Arab Emirates corporation tax for 2023, including all relevant rates, exemptions, and commercial considerations.

Who Will Be Subject to UAE Corporate Tax?

UAE business taxes emphasize free zones and worldwide competitiveness, making it distinctive. Despite its reputation as a commercial haven, recent reforms have extended corporation taxes to several industries. In 2023, a corporation tax rate of 9% will be imposed on firms operating in the oil, banking, and telecommunications industries among others. However, this does not apply to some sectors.

Legal persons like LLCs, PSCs, PJSCs, and LLPs will be taxed. Additionally, any foreign legal entity that produces money in the UAE and is a tax resident will be assessed. Free zone enterprises that deal with the mainland pay 0% corporation taxes if they meet all regulatory conditions.

The UAE Ministry of Finance (MOF) has announced that beginning June 1, 2023 all UAE-based businesses must comply with the new tax regime. Companies will have different periods for which to pay taxes depending on how they track their financial year.

  • On July 1, 2023, businesses with July 1 financial years will commence tax calculation.
  • Taxes for companies with fiscal years beginning in January will be calculated on January 1, 2024.
  • All businesses operating inside the United Arab Emirates (UAE) with rare exceptions must register and pay corporation tax.

Tax Exemptions

The United Arab Emirates (UAE) still provides lucrative tax breaks to companies despite having a corporation tax in place. Businesses of varying structures, such as partnerships and sole traders, are still free from some taxes, creating an enabling atmosphere for startups and independent ventures.

The withholding tax (WHT) rate in the United Arab Emirates is 0% for non-residents who do not have a (Permanent establishment) PE in the country and for those whose UAE-sourced income is not connected to their PE. That means only non-residents with a PE in the UAE will be subject to UAE taxation.

An additional benefit of not having a WHT is that a non-resident who receives just income from the state will not be subject to UAE taxation. However, WHT rates are projected to increase from 0%, making WHT the potential ultimate responsibility for non-residents.

Those who fall within the following categories are excluded from registering under company tax law:

  • Public administration
  • Extractive businessperson
  • A government-run organization
  • Someone in a non-extractive natural resource business.

Corporation taxes do not apply to charities, public benefit groups, investment funds, oil and mineral extraction corporations, or government-owned companies.

How Much Is the Corporate Tax UAE?

An affordable tax rate shows the country dedication to economic progress and sustainability. The Ministry of Finance (MOF) of the United Arab Emirates (UAE) has established a three-tier tax system, which consists of:

  • Companies whose annual net profit doesn’t exceed AED 375,000 To be taxed at 0%
  • For companies having an annual net profit of more than AED 375,000, A tax of 9% will be applied.
  • Big international corporations: OECD Base Erosion and Profit Shifting Initiative Pillar Two involves a distinct tax strategy. Companies with total worldwide sales of more than 750 million Euros, equivalent to 3.15 billion Emirati Dirhams, will fall into this category.

Corporate Tax for Free Zone companies

The United Arab Emirates (UAE) has built its prosperous economy on the foundation of its free zones. These special economic zones have historically functioned as tax havens to entice foreign investment and encourage business. These zones encourage economic activity and foreign investment by offering complete ownership, profit repatriation, and customs duty exemption. All business transactions outside the free zones may be subject to corporation tax.

The United Arab Emirates (UAE) has built more than 50 industrial-free zones over the past few years to attract companies and investors worldwide. Due to the low corporate tax, 100% ownership and generous profit repatriation regulations, many foreign investors have set up businesses in free zones. The government of the United Arab Emirates (UAE) has provided a special provision for corporations based in free zones, reducing their corporate tax rate.

The United Arab Emirates (UAE) free zones will continue tax-free under this provision. Free zone businesses must file a complete and accurate tax return while paying no corporate tax to comply with government regulations. Companies operating in a free zone that abide by all other laws will be exempt from paying corporate income tax.

Tax Exemption and Deductions for Dividends and Capital Gains

MOF has additionally declared that firms may be eligible for a tax discount and exemptions in two further situations.

  • Profits received as dividends.
  • Profits from selling shares/stock in a wholly owned subsidiary.

The foreign subsidiary company must have at least a 5% stake in the UAE parent business for the UAE firm to be eligible for this tax break. Additionally, several countries have varying ownership requirements. The UAE shareholder firm must hold at least 10% of the ordinary share of the UK company for ten consecutive months to deduct earnings from the UAE.

Tax Deduction for Companies with Foreign Branches

The UAE government will additionally provide the following choices for international firm branches:

  • A company can get a credit for taxes paid in another country if it has a branch or office abroad.
  • Companies can also seek exemptions based on earnings from overseas offices in countries other than the United Arab Emirates.

UAE Corporate Tax Registration Requirements

Businesses who want to apply for UAE Corporate Tax 2023 must be prepared to submit the necessary paperwork. Companies may now register for tax purposes entirely online. Companies operating in the specified industries must take the critical step of registering for corporation tax. Financial statements and reports must be accurate to comply with tax laws. All the following are necessary for UAE corporate tax registration company purposes.

  • The corporate tax periods.
  • A copy of your valid business license.
  • Mobile number and email of the concerned individual.
  • The license’s owners must provide a valid Emirates ID.
  • Address: The mailing address (with zip code) for the business.
  • Copies of valid passports for all partners/owners of the license.
  • Power of Attorney (or MOA) or Memorandum of Association (MOA)

The Federal Tax Authority (FTA) has launched early UAE corporate tax 2023 registration through the EmaraTax platform for digital tax services. The FTA will allow firms enough time to register and comply with laws. Registration will prioritize firms with a financial year commencing on June 1 2023. The FTA has issued new penalties and fines for UAE company tax payments. Tax registration delays can result in a penalty of AED 10,000.

FAQs

1. Is Corporate Tax the Same as VAT?

No, VAT and business taxes are separate systems. Value-added tax, or VAT, is a consumption tax calculated based on the total value contributed during the manufacturing and distribution processes. In contrast, business tax is calculated as a percentage of net revenue in Dubai.

2. How to File a Corporate Tax and Financial Report?

For each fiscal year, companies shall file a single UAE corporate tax return and any necessary auxiliary schedules with the Federal Tax Authority (FTA). Businesses in the UAE are not required to file a provisional corporate tax return or place pre-payments on corporate taxes.

Summary

The United Arab Emirates (UAE) is committed to fiscal sustainability and economic diversification, and this commitment is reflected in significant changes to the corporation tax environment in 2023. UAE Corporate Tax may cause certain issues but will lead to greater financial security and environmental consciousness. Business owners better position their companies for success in today dynamic economic climate if they have a firm grasp on corporation tax rules, credits, and deductions.

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