The new UAE corporate tax plan will broaden the government’s income base but at the same time, it will influence the credit profiles of businesses working in the country. In the same vein, the government announced on Monday it would impose a federal tax on business profits starting from June 2023.
In this article, we will make sure you understand everything about this new regulation and how it will influence the economy. On the other hand, the country is seeking to shed its reputation as a tax paradise; bringing itself close to the changing global standards. Likewise, non-residents conducting businesses in the country are subject to corporate tax. Let’s observe:
- A shift from the tax-free policy
- Is it a practical decision?
- The lowest tax policies in the GCC
- Will this be a complication for start-ups?
- What the new UAE Corporate Law will consist of?
- Frequently Asked Questions about the new UAE Corporate Tax plan
- How can Connect Free Zone assist you with the new Corporate Tax Law in the UAE?
1. A shift from the tax-free policy
The country will introduce a federal corporate tax on business income for the first time in our history. That is to say, this regulation is a massive shift for the practice that attracted companies around the world thanks to its tax-free status. In addition, as we mentioned earlier, this will be effective starting on June 1st, 2023.
Similarly, the UAE mandatory tax rate was set at 9% for taxable profits exceeding 375,000 AED, and zero for taxable profit up to “support startups and small companies”; the ministry said. In addition, they added that “the corporate tax regime of the UAE will be one of the most competitive around the globe”.
On the other hand, individuals are not subject to income tax from real estate, equity investment, employment, or other personal profit non-related to a UAE business or trade; the ministry said. In the same vein, this new UAE corporate tax will not apply to foreign investors who do not conduct any type of business in the country.
And when it comes to profit, corporate tax will only apply to “the regulated accounting net income” of the organization.
Free zone companies, on the other hand, thousands of which exist in the UAE, will “continue to take advantage of corporate tax stimulus” as long as they keep “meeting all the requirements”. In addition, businesses within the UAE’s several free zones have enjoyed the policies of full foreign ownership and zero taxes, among many other benefits.
2. Is it a practical decision?
The new UAE corporate tax policy is designed to implement the best global practices in the country and minimize the compliance burden on companies. The new tax scheme is payable on the income of UAE organizations as reported in their financial statements.
Likewise, they will be prepared to comply with international accounting practices; with minimal adjustments and exceptions. In the same vein, the new UAE corporate tax will only apply to companies and commercial activities. However, this excepts the extraction of natural resources, which will remain subject to emirate amount corporate taxation.
The news made an impression after it was announced on Monday, many UAE businesses state that the shift will not come as a shock.
“This new announcement will not come as a surprise; UAE corporate tax has been in discussion for many years. Similarly, there is already a corporation tax practice in the Middle East, in Qatar and Saudi Arabia for example”, said Chris Payne; economist at Dubai Peninsula Real Estate.
In addition, the UAE, like many of its resource-rich neighbors, is diversifying its economy away from oil and gas revenue. Further, “it is important that the government grants sources of income not reliant on investment income; which is volatile”.
The announcement is giving companies in the UAE a year-and-a-half to prepare for the new corporate tax. However, reactions are mixed on whether the implementation will allow the country to retain its attraction to foreign businesses and investors.
Mark Hemmings, vice president of treasury and tax treasury at Dubai-based specialty services says “it is very interesting to see it detailed, but at a first look it seems like a logical and practical approach to ensure businesses in the UAE can comply with the new UAE corporate tax. Meanwhile, ensuring the country remains as an attractive business destination”.
3. The lowest tax policies in the GCC
Bahrain is the only GCC country that has not implemented corporate tax since Oman, Qatar, Kuwait, and Saudi Araba have already introduced corporate taxes. For instance, in Saudi Arabia, the corporate income tax is 20% of the net profit of the business; being the highest in the GCC region.
Foreign entities and Omani companies that have a solid establishment in Oman must pay a corporate tax of 15% on income. Meanwhile, Qatar and Kuwait implemented a flat rate of 10% and 15% respectively; but with certain exceptions.
Saad Maniar, a senior partner at Crowe International, says that the new UAE corporate tax to a modest 9% is a good step in the right direction for the sustainable future of the economy of the country.
“This practice is in order with the best practices regarding businesses worldwide. And with the implementation of corporate tax, the need to have improved corporate governance is also increased. Therefore, this will strengthen the overall economic growth in the future”.
However, the CT will apply to all companies and financial activities. This will mean confusion at first; just like what the country has when VAT was implemented.
4. Will this be a complication for start-ups?
The threshold for being subject to corporate tax (just over AED 375,000 of profit per year) is significantly low and will affect smaller companies with high business renewal costs and set-up; said Rupert Tait, co-founder of UAE-based construction tech start-up.
“My thought is that I want my company in a perfect environment that will grant is growth over the years”. In the same vein, he stated that he understands the need for a tax rate policy in the country, but they are being indirectly taxed in the free zone.
In addition, he stated that his company in the commodities center free zone is currently paying AED 20,000 yearly, which is paid regardless of profit.
The new UAE corporate tax will cause small- and mid-sized organizations to reevaluate if they want to set their activities in the country for long-term periods due to high upfront fees and taxes. However, the new corporate tax law remains low if we compare it to other business hubs around the globe.
Gibraltar and Montenegro, have tax rates of 10% and 9% respectively. On the other hand, Lichtenstein and Ireland both offer a 12.5% of CT rate. In the same vein, Hong Kong has a corporate rate ranging from 8.5% to 16.5%; while San Marino and Singapore both offer tax rates of 17%. Similarly, we have to wait and see what services and goods will the government provide in exchange for the new tax rates.
Similarly, the implementation “moves the UAE in the same line with other competitive pro-business companies around the globe”, said Taufiq Rahim.
“(…) And the tax rate, it is new for the private sector of the country; but it is still lower than other business destinations like Hong Kong and Singapore”.
5. What the new UAE corporate law will consist of?
- 9% for taxable earnings above AED 375,000.
- 0% on taxable income of up to AED 375,000.
- Similarly, it is a different profit tax for certain multinationals (having special worldwide revenues in surplus of 750 million euros, or AED 3.10 billion; while meeting certain conditions.
6. Frequently Asked Questions about the new UAE Corporate Tax plan
6.1 Apart from the licensed tasks, my business earns some from non-regular income. Will this income attract corporate tax (CT)?
All activities managed by a legal company are deemed as “business activities”. Therefore, any income of this kind will involve corporate tax. But capital gains and dividends received by a UAE company from its shareholdings are exempt from CT.
6.2 Has the Federal Tax Authority (FTA) announced any rates based on income? Will the FTA tax profit in the future?
Right now, excepting large businesses, all other corporates will attract a unified rate of taxes of 0% applicable on taxable profits up to AED 375,000 and 9% above AED 375,000 in a financial year. In other words, certain sectors like extraction of resources (gas and oil), are still subject to Emirate level corporate taxes.
6.3 The ministry announces a corporate tax financial year starting on June 1st, 2023, but my corporate financial year is as per the calendar year. Should I modify my financial year to align it with the tax regime?
Certainly, there is no prescribed requirement to change the financial year to the June – May tax year. However, many businesses will change their FY to align with the new fiscal tax year.
6.4 We are a free zone business, but a small part of our company is with the UAE mainland entity. Are we still exempt from CT?
Free zone companies are subject to CT in the UAE, but the new UAE corporate tax regime will continue honoring the incentives currently offered to the different free zone businesses complying with all compulsory requirements and that do not conduct business in mainland UAE.
6.5 If we are a group; transactions between involved parties within our group are frequent on mutually agreed terms. Do I need to take precautions against RP transactions?
Transactions between involved parties within the same group are exempt provided they meet specific criteria. Similarly, organizations must consider transfer pricing and transaction since these are likely to be among the criteria.
6.6 Will the Federal Tax Authority (FTA) allow all types of business expenditures as deductible or there is special criteria for these deductions?
The taxable profit is the accounting net income/profit of a company after making the necessary adjustments for certain items to be specified later under the new UAE corporate law. Similarly, it is likely that certain expenditures like allowances, amortization, depreciation, etc, have an established threshold.
6.7 Can the corporate carry out losses? If yes, for how many years?
The new corporate tax scheme allows companies to use losses incurred to offset taxable profit in the next financial periods. In the same vein, excess tax losses are carried forward and used against tax on profit in the next years; while some conditions are met.
7. How can Connect Free Zone assist you with the new Corporate Tax Law in the UAE?
We understand that this new tax implementation may seem complicated at first. However, in Connect Free Zone we provide you with the best tools to take care of it easily and hassle-free. On the other hand, we offer you the best pricing, packages, and discounts if you want to start your company in any UAE Free Zone or Setting up Business in Dubai Mainland.
Further, we also offer sponsorship for your business so you can establish quickly in Mainland Dubai.
When we work side-by-side with your organization you will be free to focus only on important business activities; we take care of dealing with the authorities and the tedious paperwork. Similarly, we have more than 21 years working with all-sized businesses across all industries in the seven emirates.
With us, you will find the best destinations for your business. In other words, we will ensure you receive all the benefits each jurisdiction will offer you. Thus, we compare free zones, their rules, locations, and regulations.
Would you like Connect Free Zone to assist you with the new UAE corporate tax law in the UAE?
If you want us to start assisting you to establish your business in this country, to take care of the new tax law, or if you have additional inquiries; you can contact us via +97143316688. Or if you want, you can always email us at firstname.lastname@example.org.
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