In December 2022, the United Arab Emirates made a Federal Decree-Law regarding corporate taxation with a rate of 9 percent applicable for taxable business profits that exceed AED 375,000. The legislation will become effective from the financial year beginning June 1, 2023.
To support small enterprises, the UAE has waived taxation on earnings up to a certain amount. Consequently, the legal advisors are advising businesses to ensure they are ready for the cut-off date.
Following the issuing of the new corporate tax law, UAE businesses need to assess the implications of this law on their operations and make the necessary arrangements to meet compliance standards.
Corporate Tax Rates
No taxes will be collected on the Taxable Income up to AED 375,000. On Taxable Income that surpasses AED 375,000, nine percent will be imposed.
Corporate Tax Exemptions
• Government entities are exempted from paying corporate tax.
• Government-controlled entities are exempted from paying corporate tax.
• Individuals engaged in extractive businesses are exempted.
• Individuals engaged in non-extractive natural resource businesses.
• Entities qualifying for public benefit.
• Qualifying investment funds.
- Public Pensions and social security benefits are monitored by a government agency in charge of regulation.
- A state-regulated private pension fund or social security system is subject to the supervision of the appropriate government agency.
- A juridical entity, incorporated within the State and owned solely by an Exempt Person devoted to one or more of the following tasks:
– Assuming a portion or all of the operations of the Exempt Person
– Exclusively investing resources or holdings for the Exempt Person
– Engaging in activities only accessory to those conducted by the Exempt Person.
The Cabinet, upon the suggestion of the Minister, will make the final decision on any other individual to be involved.
Corporate Taxable Persons
- Companies and other legal entities registered or operated within the United Arab Emirates (UAE) are eligible for consideration.
- Individuals operating any Business or Business Activity in the UAE as defined by a forthcoming Cabinet Decision must comply.
- Non-resident legal entities established outside of the UAE, which have a Permanent Establishment within the country as stated in Section 8, are liable to tax.
- Entities set up in a UAE Free Zone are liable to pay Corporate Tax, as “Taxable Persons”, and thus need to meet the conditions of the Corporate Tax Law. A Free Zone Person may gain the advantage of a 0% Corporate Tax rate on their qualified income given that they meet the necessary criteria considered as a “Qualifying Free Zone Person”.
- Non-residents who lack a Permanent Establishment in the UAE or generate income sourced from the UAE not connected to the Establishment may be liable for Withholding Tax charged at a rate of zero percent.
Calculate Taxable Income
For calculating the Taxable Income of a Tax Group, the parent company must make a compilation of financial records concerning all the subsidiaries included in the Tax Group for the pertinent Tax Period.
To accurately determine the Taxable Income of the Tax Group, any exchanges between a parent company, members of the group, and dealings between group members themselves will not be included.
Corporate Tax Deadlines
Taxpayers have been given a sizable amount of time to prepare for filing and payment, with the government allotting up to 21 months from the start of their financial year as a deadline for compliance.
Companies with a financial year commencing on June 1, 2023, and concluding on May 31, 2024, will have from June 1, 2024, to February 28, 2025, to submit their corporate tax returns and remit the due payments, according to the specified deadline.
For businesses beginning their first fiscal year on January 1, 2024, and concluding on December 31, 2024, their tax return must be filed and payment made by September 30, 2025.
Individuals will not face the new corporate tax, especially on salary and other earnings from employment, interest from bank deposits or savings plans, or real estate investments made on a personal level.
Owing to their critical role and value to the Emirates, some organizations, such as governmental organizations, pension funds, investment funds, and public benefits associations, are provided exemptions.
Conclusion
The UAE Ministry of Finance has announced that the alteration of the corporate tax structure will have an immense influence on local businesses. This reformative step is deemed vital in aiding the UAE’s strategic objectives and upholding global competitiveness, granting the nation the capability to operate according to the financial principles of its international partners.
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