The United Arab Emirates, one of the most business-friendly free zones, will incorporate a corporate tax on business profits. Ultimately, with this decision, the government is aiming to diversify the region’s income. This new change was announced this Monday, January 31st, representing a significant economic shift for this area.
In this article, we will explain the details of the government’s decision of applying a corporate tax on business profits. Also, we will see how it affects small and big industries as well as individuals. Subsequently, obtaining every piece of information released up to date. Let us take a look:
- What does this newly inducted tax mean?
- Does it apply to small businesses?
- What are the objectives of the corporate tax on business profits?
- Are there other types of taxes in the UAE?
- How can Connect Resources help you?
1. What does this newly inducted tax mean?
The UAE Ministry of Finance will induct a corporate tax on business profits starting on June 1st, 2023. In this way, after this date, the company’s profits will be taxed at a rate of 9%. This new regulation comes after the region’s desire to support international cooperation on minimizing tax evasion.
Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting Project are the organizations motivating this new alteration. This sudden tax change’s main objective is to derive the economy away from oil and other natural resources. Nevertheless, the government maintains its hopes of attracting foreigners to the region.
This new year is already bringing many changes to the United Arab Emirates. Besides this new tax regulation, the region shifted its workweek from Sunday-Thursday to Monday-Friday recently. Subsequently, to attain some similarities with the global markets.
Up until now, banks and insurance companies were the only ones with a 20% tax fee in their income. And also, other Emirates normally apply a 55% tax to corporations involved in the exploration and manufacture of oil and gas.
This new corporate tax on business profits is a natural evolution to leading economies of the world looking to apply a small tax on organizations. It is necessary to stop big corporations from conducting skeletal operations in a reduced tax region. Subsequently, paying a small amount on their income in their home countries.
The government is slowly adding significant reforms to the system to reduce dependency on popular sources of proceeds in the region. Nevertheless, the Gulf Cooperation Council is still an attractive place for foreigners to invest, even when some regions are adding a corporate tax on business profits.
2. Does it apply to small businesses?
To help small businesses stay afloat, there will not be a corporate tax on business profits less than AED 375.000. According to the Ministry of Finance, the decision to not tax small companies is to keep attracting foreigners to work as independent contractors.
Also, according to the ministry’s statement, there are no plans yet to induct personal income tax or capital gains tax from investments. Therefore, individuals will not be under corporate tax on income not related to a UAE business or trade.
Additionally, corporate tax on business profits will not apply to international investors who do not conduct business in the UAE. On the other hand, this tax will apply to the total net profit of the business. Nevertheless, corporations located within the Free Zones will remain exempt from this new regulation.
3. What are the objectives of this corporate tax on business profits?
The Ministry of Finances assure that this new corporate tax on business profits will be one of the most competitive in the market. The main objective for this change is to establish the region’s position as the worldwide leader epicenter for investment and business. While shifting their economy to new areas.
In the same way, United Arab Emirates wants to meet international principles for preventing negative tax practices. With this change, the administrative difficulty of filing corporate tax returns will be minimal compared with past practices. Ultimately, following the steps of other Gulf Cooperation Council regions, remaining compliant with international laws.
It is important to note that, according to the Ministry of Finance announcement, businesses in the region will only have to file one tax return per financial year. Besides, they will not need to do any advance tax payments. The UAE Federal Tax Authority will be the one managing this whole process.
Ultimately, the United Arab Emirates’ government is navigating the process of development and transformation. Hoping that industries will take into consideration other industries to make their investments. Therefore, providing locals with more opportunities to have decent jobs and other benefits. The ministry also stated that they will announce further information on these changes later in the year.
4. Are there other types of taxes in the UAE?
Even when individuals do not have to pay taxes, the United Arab Emirates has other types of taxes. This way, with these new changes in the taxing regulations, it is important to know what other types of tolls are in the region:
4.1 Valued Added Tax
Also known as VAT, this type of tax is usually present in the consumption or utilization of goods and services. It is valid in the UAE since January 1st, 2018. The general rate is 5% and generally applies to most effects and services.
According to the Ministry of Finances, the retail industry will carry the densest tax burden. Because they will have to add the corporate tax on business profits on top of the VAT. Nevertheless, these regulations will help develop the government’s wishes to minimize dependence on oil and other natural resources.
4.2 Excise Tax
It was introduced across the region in 2017. Excise tax generally applies to specific goods that are harmful to the environment and human health. The main objective of this tax is to minimize the ingest of harmful and unhealthy products. While raising proceeds that will benefit public services.
The excise tax applies to the following products:
- Energy Drinks: beverages that contain stimulating substances for the brain or the body, such as caffeine, ginseng, taurine, and others. Also, the use of any powders, extracts, concentrations, or gels that could be turned into an energy incrementing drink. A 100% rate applies to these products.
- Carbonated Drinks: these include aerated drinks except unflavored aerated water. Similar to energy drinks, it includes extracts, gels, concentrations, or powders for aerated drinks preparation. A 50% tax attains to these goods.
- Tobacco: in the same way, this product or any derivation of it falls under excise tax regulations. 100% rate subjects to these goods.
4.3 Tourist Tax
Restaurants, resorts, and hotels in the United Arab Emirates apply this tax. These tourist accommodations may levy one or more of these taxes in the region:
- 6% tourism fee.
- 10% room rate.
- 10% municipality fees.
- 6% to 10% city tax.
- 10% service charge.
Furthermore, the Tourism Dirham Fee was inducted in 2014 and it applies to any tourist facility such as hotels, guest houses, and holiday homes in the UAE. This fee charges from AED 7 to AED 20, per night per room, depending on the quality of the hotel.
On the other hand, in Abu Dhabi, the tourism fee applies for a 3.5% rate. Therefore, the municipality fee levies at 2%. Additionally, there is an AED 10 per room per night, a daily charge for municipality room fees.
5. How can Connect Resources help you?
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If your business is going through any staffing difficulties, you can request our HR management services. Furthermore, we are qualified to help you outsource your payroll when necessary. Our agents provide support to innovative ideas, quality to preserve your high standards, and the expertise to help you succeed.
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We have an unmatched industry understanding accompanied by a state-of-the-art consultative approach for associates and employment inquirers alike. With our combination of qualified team, tools, and technology, we will meet any expectations you may have. Do not be afraid of leaving your burdens in our capable hands.
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