In January 2022, the Ministry of Finance in the UAE made a significant announcement regarding the implementation of Federal Corporate Tax (CT) on the net profits of businesses. This Corporate Tax in the UAE is set to take effect from the 1st of June 2023. The imposition of Corporate Tax, also known as Corporate Income Tax or Business Profits Tax, will depend on the financial year followed by businesses. Following this implementation date, all businesses across the country, except those falling within the exempted group, will be subject to CT. Corporate tax is categorized as a direct tax and is levied on the net income of businesses.
As of now, the UAE boasts the lowest recorded tax rate of 9% when compared to other Gulf Cooperation Council (GCC) countries. In a noteworthy move, during the G7 countries’ meeting in 2021, Gulf countries collectively entered into an agreement introducing a global minimum corporate tax rate of 15%. However, the United Arab Emirates opted for a 9% tax rate over the agreed-upon 15%, a decision aimed at mitigating the direct impact on entrepreneurs.
Corporate Tax Services UAE
It’s essential to highlight that this corporate tax primarily applies to business entities, with individuals earning income in their personal capacity, which does not require a commercial license, remaining exempt from taxation. This strategic approach aligns with the UAE’s commitment to fostering a business-friendly environment while also complying with global economic standards.
In the United Arab Emirates, corporate tax is structured as follows:
Tax-Free Threshold: Net profits up to AED 375,000 are exempt from corporate tax.
Tax Rate: A 9% tax is applicable on net profits exceeding AED 375,000.
Multinational Corporations: Multinational corporations follow different tax slabs in alignment with OECD Pillar 2’s base erosion and profit shifting principles.
Significance of Corporate Tax in UAE: The introduction of corporate tax in the UAE serves several key purposes:
Sustainable Economy: Corporate tax contributes to building a sustainable economy, fostering economic stability, and enhancing corporate governance practices.
Global Business Hub: The implementation of corporate tax aims to strengthen the UAE’s position as a leading global hub for businesses and investments, attracting international enterprises.
Economic Development: Corporate tax plays a pivotal role in accelerating the country’s development and transformation, helping achieve strategic objectives.
Commitment to International Standards: By imposing corporate tax, the UAE underscores its commitment to meeting international standards for tax transparency. This helps prevent harmful tax practices and ensures compliance with global norms.
The implementation of corporate tax in the UAE reflects a strategic approach to align with international expectations, fostering economic growth, and ensuring that the nation remains a favorable destination for businesses and investments. It not only contributes to the country’s economic development but also reinforces its dedication to global standards of tax governance and transparency.
Scope of UAE Corporate Tax:
Corporate tax in the UAE is applicable to the following entities and activities:
Business Activities: Every business and individual conducting business activities under a commercial license in the UAE.
Free Zone Businesses: Free zone businesses will be subject to corporate tax, with the regime maintaining incentives for those adhering to legal requirements and not having offices on the country’s mainland.
Foreign Entities and Individuals: Foreign entities and individuals are subject to corporate tax only if they conduct trade or business in the UAE regularly or in an ongoing manner.
Banking Operations: Corporate tax applies to banking operations within the UAE.
Real Estate Activities: Companies involved in real estate management, construction, development, agency, and brokerage are subject to corporate tax.
Exemptions from Corporate Tax in UAE
The following entities are exempt from corporate taxes in the UAE:
Natural Resource Extraction: Businesses engaged in the extraction of natural resources remain subject to Emirate-level Corporate Taxation.
Dividends and Capital Gains: Dividends and capital gains earned by a UAE business from its qualifying shareholdings are exempt from corporate taxes.
Intra-Group Transactions: Qualifying intra-group transactions and reorganizations are not subjected to corporate tax, provided that the necessary conditions are met.
Individual’s Earnings: Earnings, salary, and other employment income of individuals, whether received from the public or private sector, are exempt from corporate tax.
Bank Income: Interest and other income earned by an individual from bank deposits or saving schemes are not subject to corporate tax.
Foreign Investor Income: Income earned by a foreign investor from dividends, capital gains, interest, royalties, and other investment returns is exempt.
These exemptions provide a nuanced and targeted approach, ensuring that certain industries and income sources remain unaffected by corporate taxes, contributing to the overall economic stability and attractiveness of the UAE as a business destination.