The UAE is a place that has tax-friendly policies. Therefore, taxes in the UAE were always a great incentive for foreign investors that wanted to start a company with a business setup in Dubai. Nevertheless, the country has announced the new UAE corporate tax rate which has left many wondering how this will be done.
In this article, we will explain in further detail the corporate tax UAE. Also, you will be clear about the corporate tax rate UAE and who has to consider it or not. Let’s observe;
- Understanding the new corporate tax in UAE
- Learn why the UAE decided to establish the UAE corporate tax
- We explain who can be taxed with the federal corporate tax UAE
- See the criteria for tax rate in the new federal corporate tax
- Get to know who is exempted from the corporate income tax UAE
- Here are the provisions for tax grouping and group relief
- What about the corporate tax for Free Zone Businesses?
1. Understanding the new corporate tax in UAE
The corporate tax in UAE, also known as the corporate income tax, or the business profits tax, is the new form of direct tax that was announced by the UAE Government.
The ministry of finance introduced the Federal Decree-Law of the corporate tax in UAE in December 2022. And, it will be effective starting on the financial year of 1 June 2023.
Basically, the UAE corporate taxes are on the profits of a corporation. Thus, those that carry out any of the DED trade license activities, meaning they hold a commercial license or conduct business activities, are subject to the corporate tax in UAE.
1.1 Tax reforms on a previously tax-free environment
The UAE has been a very low-tax jurisdiction among other countries in the Middle East. Most companies operating within the country have never had to consider any form of corporate tax. Thus, this way the main reason for many to start a business in the UAE.
Although investors faced challenges of globalization when they needed to expand to the UAE, they did not have to consider taxes. Therefore, the UAE was the main choice as a commercial hub in the Middle East.
However, the UAE started to make some tax reforms in the past few years. First, the ministry of finance UAE introduced VAT Registration in Dubai in 2018, which had a 5% rate on all consumer purchases.
After that, it announced the corporate tax on January 2022, which would start the following year. Therefore, private sector companies in the UAE now have to consider this tax in their operations.
Nevertheless, it is worth mentioning that most advanced economies apply this type of tax on business profits. So, the 9% rate of corporate tax in the UAE is still lower than in most countries, which tends to be 20%.
Thus, the UAE keeps being a marvellous place for developing your best business ideas in Dubai. You can still establish your company and enjoy several advantages because the tax rate is not so high.
1.2 When will this tax start in the UAE?
In this regard, the effective date of this new UAE corporate tax 2023 will be as follows:
- Companies that adopt a fiscal year June 2023-May 2024 will be subject to the corporate tax from 1 June 2023.
- Companies that adopt a calendar year (January 2023-December 2023) will be subject to corporate tax from 1 January 2024.
2. Learn why the UAE decided to establish the UAE corporate tax
Investors, entrepreneurs, and individuals looking to apply for a freelance visa in Dubai saw the UAE as the perfect destination for their business. Given the country offers several benefits, it started to host many enterprises from across several industries.
This led many business owners to set up a foreign entities in Dubai, and the market grew exponentially. Thus, many growing corporations did not pay any taxes. The only businesses subject to taxes were those in fossil fuel extraction, foreign banks, and some hotels and restaurants.
Therefore, the UAE was obtaining less revenue from fossil fuels, and at the same time, it was experiencing a fast-growing economy. Thus, the Government considered establishing the UAE income tax as a mean to enhance investment that could be directed to education, infrastructure, and healthcare.
Moreover, the UAE is looking to accelerate its development by achieving strategic objectives with its competitive corporate tax regime.
3. We explain who can be taxed with the federal corporate tax UAE
Generally, all businesses that engage in commercial activities are subject to Corporate Tax in UAE.
However, here we have the list of taxable persons that are subject to the tax according to the mof.gov.ae:
- Legal entities, juridical persons, and UAE companies incorporated in the country and controlled in the UAE.
- Natural persons who carry out business activities in the UAE
- Foreign legal entities with a permanent establishment in the UAE
3.1 Are freelancers subject to the UAE federal corporate tax?
One of the most common doubts many individuals with a freelance visa in Dubai have is whether they are subject to this tax.
According to MOF, individuals do not have to consider filing corporate tax. Nevertheless, it is important to consider if the UAE Government will see freelancers as individuals or business entities.
In this regard, an individual with a freelance visa also must have a professional license for being able to work independently and legally in the UAE. But, this only applies if the person earns more than AED 375,000. Thus, in this case, the freelancer will be subject to the tax regime.
Then again, it is important to mention that an individual with a freelancer visa or talent pass license in Dubai that does not have an income over AED 375,000 it is not subject to the tax.
So, whether you have a fitness freelance visa in Dubai or you are considering choosing between freelancing vs. a full-time job, you need to evaluate the fact that depending on your income, you may be subject to this tax rate.
4. See the criteria for tax rate in the new federal corporate tax
The Corporate tax in UAE has the following tax rates established, depending on the income of the corporation:
- Zero per cent (0%) rate: businesses whose taxable income does not exceed AED 375,000 will enjoy a 0% corporate tax rate.
- Nine per cent (9%) rate: Businesses whose taxable income exceeds AED 375,000 are subject to a 9% corporate tax rate.
Lastly, there is a category for large multinational businesses that fall under specific criteria and have different business conditions. In this regard, the tax rate will vary depending on the classification.
5. Get to know who is exempted from the corporate income tax UAE
Another important aspect of Corporate Tax in UAE is the exemptions. As a corporation or startup, you may be eager to know the conditions you have to meet to be exempted from the corporation tax.
Here we have all the details about corporations exempted from the corporate UAE tax:
- Government and public entities.
- Businesses engaged in the extraction of natural resources. This is because they file the Emirate-level taxation.
- Organizations working with social causes or with charities. But, these organizations must be duly registered with the MOF as social or charity organizations and apply for formal clearance.
- Public or private entities that handle pension, retirement planning or deal with social benefit funds like those mentioned.
- Real estate and other regulated investment funds. They also have to apply to MOF to obtain exemption approval.
- UAE Companies owned by the UAE government.
5.1 Exemption and deductions of the corporate tax
In addition to this list, there are also exemptions and deductions:
- Dividends and capital gains: companies qualify for tax exemption and deduction if they have earnings from dividend payments or capital gains from the selling of shares that result from a subsidiary company under their ownership.
- Foreign branches: companies with foreign branches in the UAE may claim a foreign tax credit for the tax paid in the country where they are located or apply for an exemption, which is based on the profit made by foreign branches located outside the UAE
- Deductions on financing costs: companies can report interest and financing costs as tax-deductible income. However, they have to follow the conditions established by the Authorities.
5.2 Are individuals subject to corporate tax?
Many people in the UAE have concerns about this new tax reform. However, most taxes rules will remain the same.
Therefore, it is important to point out that the new tax only affects the business sector in the UAE. Thus, only corporations that fall under the conditions established by the UAE Authorities are subject to this new tax rate.
In this regard, individuals do not have to pay personal income taxes, and the CT will not apply to the following:
- Individuals that earn employment income such as salary or others.
- Interest and income earned by bank deposits or saving schemes.
- Investment in real estate by individuals.
- Individuals that earn dividends, capital gains, and other income from other securities in their capacity.
6. Here are the provisions for tax grouping and group relief
Taxable persons can enjoy group relief for tax purposes regarding this new tax in UAE. According to the ministry of finance Dubai, a tax group is when two or more taxable persons apply to be treated as a single Taxable Person for Corporate Tax purposes.
Therefore, given the provisions of the UAE ministry of finance, a group of companies can form a tax group.
For example, a parent company can form a group with its subsidiaries. But, as long as they comply with the conditions:
- They have to be resident juridical persons.
- Must have the same financial year.
- Prepare financial standards under the same accounting standards.
Additionally, the parent company must:
- Own at least 95% of the subsidiary’s share capital.
- Hold a minimum of 95% of voting rights in the subsidiary.
- Be entitled to a minimum of 95% of the net assets and profits of the subsidiary.
Once they apply for a Tax Group, they will be treated as a sole taxable entity. This grants many benefits, and this is why a company should consider group relief provisions.
7. What about the corporate tax for Free Zone Businesses?
Free Zones in the UAE are highly sought-after by investors. Some of the most popular ones are the Dubai Airport Free Zone, DMCC, Meydan Free Zone, and others.
In the UAE, there are more than 50 economic free zones, and they offer several great benefits for investors. Nevertheless, Free Zone Companies are wondering if they are subject to corporate tax in UAE.
This is because, some free zones offer zero tax regimes and profit repatriation, so this new decision by the mof UAE may affect the income of FZE and FZCO.
But, the UAE aims to hold its commitment to free zone businesses concerning the tax in UAE. In this regard, the Free Zones will remain tax-free. But, Free Zone Companies will have to file a proper taxation report to stay in compliance with the standards of taxes in UAE.
This report has to be with 0% corporate tax, but only for those free zone businesses that comply with governmental policies.
However, those Free Zone Companies that engage in business activities in the Mainland, will be subject to corporate tax.
In this regard, investors that still want to benefit from a tax-free environment can consider a Free Zone. This way they will not have to worry about the new UAE corporate tax rate. But, this is as long as they do not engage in trading with the Mainland.
Learning about taxes on business profits in UAE can be overwhelming. This is why, we invite you to visit our blog, where we have plenty of information about the matter. Also, we have great guides on businesses for you to follow such as minimum wage in the UAE and TRN Verification in Dubai. As a result, you will be ready for the new UAE corporate tax rate.