CT Law : Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses
Introduction
The United Arab Emirates (UAE) has recently announced a new corporate tax policy that will be effective from financial year starting on or after June 01, 2023. Under this new policy, Businesses / Taxable Person operating within the UAE will be subject to a flat tax rate of 9%.
Corporate Tax is a form of direct tax levied on the net income of corporations and other businesses. Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions.
Despite the introduction of corporate tax, there are certain exemptions and applicability criteria that businesses need to be aware of. In this article, we will explore these exemptions and applicability criteria in detail.
Exempt Businesses and Exempt Incomes
The UAE government has outlined several exemptions from the new corporate tax policy. Businesses and Incomes that fall into the following categories will be exempt from paying corporate tax:
- Businesses engaged in the extraction of natural resources.
- Qualifying Free Zone Person.
- Entities that are wholly-owned or controlled by the federal or local government.
- Individuals earning income in their personal capacity (i.e. salary, investment income etc.)
- Capital gains received by UAE businesses from its qualifying shareholdings are exempt from corporate tax.
- Qualifying intragroup transactions.
- Dividend income earned by UAE company from its qualifying shareholdings.
Also Read about the Documents required for Corporate Tax Registration
Additionally, small and medium-sized enterprises (SMEs) will also be eligible for tax exemptions. However, SMEs are not automatically exempt from Corporate Tax. But the Business having Taxable income less than or equal to AED 375,000 will be charged to corporate tax at 0%. Only, Business which has taxable income above AED 375,000 are required to pay Corporate Tax at 9% on Taxable Income above AED 375,000.
Applicability of Corporate Tax in UAE
All companies that do not fall under the exempted categories will be subject to the new corporate tax policy. This includes both foreign and domestic companies operating within the UAE. The tax will be levied on the company’s profits, which includes all revenue earned within the UAE and abroad. Revenue considered will depend on Person, whether it is Resident or Non-Resident.
For businesses that do fall under the tax bracket, the 9% rate is significantly lower than what is typically charged in other countries. For example, the corporate income tax rate in the United States is 21% (Combined – Federal & State). In comparison, the 9% rate in the UAE is quite competitive, and may encourage more businesses to set up operations in the country.
For example:
Let’s say a Business named “Company A” based in the UAE has a Taxable Income of AED 500,000 in a financial year after deducting all eligible expenses. Such Business is required to pay Corporate Tax on Taxable Income above AED 375,000. Which can be calculated as follows:
Corporate Tax to be paid by Company A = 500,000 – 375,000 = 125,000 x 9% = AED 11,250
It’s important to note that companies will be required to file their tax returns on an annual basis. Additionally, the tax authorities will have the power to audit and investigate companies to ensure compliance with the new corporate tax policy. Also, the net profit refers to accounting profit subject to certain adjustments, of a corporation derived in relevant tax period.
Implications of the New Corporate Tax Policy
The introduction of corporate tax in the UAE has several implications for businesses operating within the country. Firstly, it will require companies to re-evaluate their tax planning strategies and factor in the cost of corporate tax into their financial projections. This may result in a revision of prices, profit margins, and business models.
On the other hand, the new corporate tax policy is expected to boost the UAE’s economy by increasing government revenues, which will be used to fund development projects. This, in turn, is expected to create new business opportunities and stimulate economic growth.
