UAE corporate tax will be effective for financial years starting on or after 1 June 2023, implying that a business having a (calendar year) financial year starting on 1 January 2023, and ending on 31 December 2023, will be liable for corporate tax from 1 January 2024.
What is Corporate Tax in Dubai, UAE?
On 31 January this year, the UAE announced to meet international standards in transparency and address challenges arising from the digitalization of the global economy, deploying a federal corporate income tax for businesses starting from 1 June 2023. This new liable tax is levied on the profits of corporations and other individual entities profiting from their businesses likewise.
The Corporate Tax Rate
In International comparison, the UAE corporate tax rules are set quite relatively low at a meager rate of only 9 percent yet. Supporting small businesses and start-ups, no corporate tax will have to be paid for profits up to a threshold of AED 375,000, however any income exceeding this amount will be fully taxable.
The tax rate will apply to all categories of profits and other net incomes reported in the annual financial statements and must be prepared in line with internationally accepted accounting standards. The income tax regime may provide for some expense deductions prior to calculating the gross tax payable. Helping to minimize the financial burden on taxpayers.
As per the Federal Tax Authority or FTA – UAE different tax rates will apply for large MNCs that meet specific criteria set with reference to “Pillar Two” of the OECD Base Erosion and Profit Shifting project.
What is the new UAE corporate tax applicability?
The new corporate in Dubai tax will equally apply to businesses across Emirates, with an exception to the extraction of natural resources, which will remain subject to Emirate-level corporate taxation. All foreign entities and individuals will be subject to corporate tax only if they conduct a trade or business in the UAE in an ongoing or regular manner.
The FTA had announced that all activities undertaken by a legal entity will be deemed as “business activities” and thus fall under the scope of the corporate tax.
Consequently, companies having a permanent establishment in the UAE will be deemed liable for corporate tax as they are legally established on UAE soil.
Individuals on the other hand will be considered to have a functional “business” if liable for corporate tax, the individual must (or is required to obtain) a business license or legal permit to carry out the relevant commercial-, industrial- and/or professional services-based activity in the UAE.
Income tax in UAE as of June 2023?
Fortunately, much of the UAE’s tax-free regime still remains. Individuals’ salaries and other employment incomes, as well as incomes from private real estate and other investments, will not fall under the scope of the new corporate tax regime, as long as the individual has these activities enlisted as personal income and is not legally required to obtain a commercial license or permit in order to do so.
Corporate tax will also however apply to free zone businesses, which will be required MANDATORILY to register and file a corporate tax return.
However, the new corporate tax regime will continue to provide consistent tax incentives that are currently offered to free zone businesses to the extent that they do not conduct business with the UAE mainland.
The free zone companies that will benefit from earlier incentives may not be still determinable at this stage. Tax Legislation will provide further guidance in regard to that.
Exemptions from the UAE corporate tax
The FTA announced dividends and capital gains earned by UAE businesses from qualifying shareholdings will be exempted from corporate tax.
‘Qualifying’ shareholding refers to an ownership interest in a UAE or International company meeting certain criteria further specified in the upcoming UAE Corporate Tax Law.
Similarly, qualifying intra-group transactions and reorganizations might not be subject to corporate tax.
The new tax regime so far…
The Federal Tax Authority (FTA- UAE) has provided some information on the overall scope and functioning of the new corporate tax regime in the UAE, which will briefly be reviewed in the following year.
The new UAE corporate tax will become effective for financial years starting on or after 1 June 2023, meaning that a business having a (calendar year) financial year starting on 1 January 2023, and ending on 31 December 2023, is liable for corporate tax from 1 January 2024.
An Inside Look into The UAE’s New Corporate Tax – Starting 1 June 2023
The corporate tax regime still allows businesses to use losses incurred (from the corporate tax effective date) to offset taxable income in their financials, and the excess corporate tax losses withheld might be carried forward and balanced against taxable income in future years in certain conditions. Foreign corporate tax paid on UAE taxable income is allowed as tax credits against the UAE corporate tax liabilities.
Furthermore, there are transfer pricing rules in place to monitor transactions between related parties (e.g., between two subsidiaries within the same enterprise) in accordance with the OECD Transfer Pricing Guidelines.
Corporate tax returns are to be filed electronically.
More information on UAE corporate tax registration and compliance obligations will be released further. Similar to other taxes, businesses will be subject to penalizations for non-compliance with corporate tax legislation.
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