UAE has just announced that a corporate tax of 9% will be implemented from 1st June 2023. Implementation of corporate taxation in the UAE is something we had mentioned in the past as well. Now we have some more information that we can discuss further about the corporate tax in UAE and our thoughts about the same.
This is the first time a direct tax is being introduced for businesses in the UAE. This means that it will directly impact the profitability of the company. It is important to stay updated to make sure the business is ready.
Like the other recent changes in the laws, UAE plans on improving the business in UAE to international standards. Bringing in taxation allows for improved global transparency and prevents harmful tax practices.
The Tax Rate
For companies with taxable income of less than AED 375,000 will have 0% tax rate and for companies above this threshold will have a 9% tax rate. This is the same as the mandatory threshold for VAT registration in the UAE. An exception for the taxes is the extraction of natural resources, this will continue to be taxed at the emirate leve.
The tax rate of 9% in UAE is very low as compared to global standards. Considering a global minimum tax of 15% to be implemented soon this is a much better rate.
The taxation will be applicable on the adjusted profit of the company. This means that the tax profits calculated will be different from the accounting profits. Leading to deferred tax assets and liabilities being created.
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Some Key Features
1) Individuals are not subject to taxes. What this means is that personal income tax is not going to be implemented. Income on salary, real estate, investment in shares, and other personal income that do not relate to UAE trade or business will not be taxed.
Individuals do not need to be concerned with the new taxation system being implemented as long as the income is not earned from trade or business in the UAE.
2) No corporate tax in UAE for certain types of transactions.
- One of the announcements was that corporate taxes will not be applicable for foreign investors who do not carry out businesses in the UAE. Some more clarity is needed on this point, on what business outside the UAE include, however it is safe to say that investors who stay in UAE but conduct business outside will not be taxed in the UAE.
- Another area where corporate tax will not be applicable on capital gains and dividends received by UAE businesses on its shareholding. This means that most income that is earned by the holding companies will not be taxed.
- Intra group projects and restructuring is not included for corporate taxes. It is very common in the UAE to have intercompany transactions to fund projects.
- Certain transactions by freezone companies will not be taxed, as long as they meet certain criteria. It is not clear what these criteria are, however, it may be similar to what is out of scope of VAT.
3) If a company is taxed in a foreign jurisdiction, the tax paid can be deducted towards the tax owed within the UAE.
4) Another key feature of the corporate tax in UAE is that there will be some generous loss transfer and utilization rules. This will be especially beneficial for start-up businesses whose first few years may be under a loss.
5) Withholding taxes are not currently planned to be implemented. Withholding transactions mainly impacts transactions where suppliers outside UAE invoice companies in the UAE.
Implementation of corporate taxation in UAE, will bring some more structure to the businesses in the UAE. We will have to wait for the FTA to give more information on the new tax system to better plan ahead and make sure the companies are ready for the implementation. Stay tuned to our insights to be updated on the latest news.
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