Corporate Tax in the UAE
The UAE is one of the Top International Destinations for Corporates, Enterprises and Businesses. Thanks to the vision and unrelenting zeal of the Government, the region has been able to transform itself into an oasis of business opportunities.
All of this has of course come at a cost. As thousands of new businesses flock to avail the desert kingdom’s abundant bounty, the Government has had to work tirelessly to structure and restructure protocols and policies to streamline the existing corporate infrastructure with international standards. The foremost amongst these have been policies surrounding Taxation.
The last decade has seen unparalleled changes in the world of business worldwide, with the explosion of the Online Business world. Geographical boundaries no longer hold the same meaning that they did just 10 years ago. This is also why a certain amount of Standardization is important, especially when it comes to issues like Taxation.
The UAE Government has of course been consistently working on this and January 2018, saw the implementation of VAT (Value Added Tax), while April 2019 saw the introduction of ESR (Economic Substance Rules) as well as CbCR (Country-by-Country Reporting) regulations. All of these Tax Reforms are aimed at aligning the UAE with International Markets.
The most recent of these regulations is the Corporate Tax announced at the start of 2022 and scheduled to apply to Financial Years starting on or after June 2023. The new law will levy corporate income tax on business profits made by UAE businesses, over the course of a tax accounting period.
So, for instance, if a UAE company adopts a Fiscal Year starting on the 1st of June 2023 through till 31st of May 2024, it will be immediately subject to corporate tax starting from the same period. Such an entity will have to file its first Tax Returns towards the end of 2024. However, if a Company uses a Fiscal Cycle starting 1 January 2013 (ending 31 Dec 2023), it will come under the purview of CT starting 1st of January 2024, with a filing date of mid-2025.
Extremely Competitive Rates:
The UAE Government is offering one of the most competitive Tax Rates in the entire MENA region. The rates are as follows:
– 0% Tax for Taxable Income not exceeding AED 375,000
– 9% Tax for Taxable Income exceeding AED 375,000
What kind of business entities does the Corporate Tax Cover?
The new Corporate Tax will cover within its purview, both Natural Persons, including Sole Establishments, Proprietorships and Individual Partners in an Unincorporated Partnership – that carries out any form of commercial activity in the UAE and Legal Persons, including Companies registered in the UAE, any other Legal Person incorporated in the UAE, Foreign Legal Persons that either have a permanent establishment in the UAE or that earn income/revenue in the UAE.
Will the Corporate Tax also apply to Free Zone Companies?
Companies registered in any of the UAE Free Zones will also fall under the scope of the Corporate Tax, and as such will be required to file Tax Returns in the UAE.
However, Free Zone Companies and Business Owners must be aware of the following 5 regulations and the impacts that the upcoming Corporate Tax will have on their businesses.
1. A Free Zone Business can benefit from a 0% Tax Rate on any income that it earns from transactions with businesses located outside the UAE.
This is particularly important for existing Free Zone Companies looking to expand their operations into overseas markets. In such a scenario, it would be most prudent for such an entity to consult with experts in the field to understand and account for the impacts that the Corporate Tax will have on their expansion plans. Likewise, a Free Zone business can also benefit from the 0% Tax bracket on income earned trading with businesses operating either in the same or any other UAE Free Zone.
2. A Free Zone Business that has a Mainland Branch will fall under the purview of the 9% Tax Slab for its income sourced through the mainland
However, The Free Zone Entity can continue to enjoy its 0% Corporate Tax Rate for income earned through its other transactions. Likewise, any income earned through transactions between Free Zone Persons and their Group Companies located in Mainland UAE will be subject to the 0% Tax slab, while any payments made by the Mainland Group Company to the Free Zone Person, will not be considered Tax Deductible.
3. A Free Zone Person without a Mainland Branch might just as often earn income through business activities with the UAE Mainland
The Corporate Tax norms state that in such cases, the Free Zone Entity can continue to benefit from the 0% Tax rates as its Mainland-sourced income will be classified as ‘Passive Income’.
4. Free Zone Person operating in a UAE VAT Designated Zone
In such a scenario, the Free Zone Person is entitled to a Corporate Tax Rate of 0% on all income earned from the sale of goods or commodities to a UAE Mainland Business that is the Importer of Record of those goods.
5. Free Zone Entities might want to restructure their businesses as soon as possible
With proper counsel and suitable Corporate Restructuring, a Free Zone person can maintain a 0% Corporate Tax Rate. However, it is highly recommended that this restructuring be begun immediately, as depending on the complexity and scale of the business, the restructuring might take extensive planning and preparation. This will be particularly important for Free Zone entities that also have an associated Mainland Entity.
How Standard Auditing can help
Whether you have been doing business in the UAE for years or are just setting up your business, Corporate Tax Regulations and Tax Compliance can seem extremely challenging. Fortunately, Standard Auditing boasts some of Dubai’s best and most qualified Tax Consultants.
We can help you with understanding the Tax Implications for your company, Company Restructuring in cases of Group Companies or Foreign Subsidiaries as well as the best ways of availing Tax benefits for your company.
Reach out to us @ firstname.lastname@example.org or call us on +97143795200