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February 15, 2022
The ministry of finance (MOF) of the United Arab Emirates has recently announced the introduction of a federal corporate tax in the UAE (the 'UAE Corporate Tax'). 'Corporate Tax' can better be understood as a form of direct tax levied on the net income or profit of a corporation or business entity. It is commonly also referred to as ‘business profit tax’ or ‘corporate income tax’. The newly introduced UAE corporate tax will apply in the country starting from the financial year of Ist of June 2023. The corporate tax law in itself is awaited to be issued. However, the key inputs of the new corporate tax law as declared by the MOF will be detailed in this article.
How does the corporate tax apply?
The UAE corporate tax will apply to all business and commercial activities in the UAE, except for the commercial activity of extraction of natural resources, which would still be taxed as per emirate specific taxation. The corporate tax will apply to 'taxable income', which amounts to the accounting net profit of a given business after adjusting certain items (deductibles), as later specified under the UAE corporate tax law. Commercial activities including all nature of business activities carried out in the UAE, under a trade license or permit, including income earned under freelancer permits (provided taxable income exceeds Aed 375,000), shall be included within the scope of applicability of the UAE corporate tax regime,
Key parameters of the new UAE federal corporate law:
The corporate tax will be applicable on a taxable income above Aed 375,000. Thus, for a taxable income up to Aed 375,000, applicable corporate tax will be 0%.
The corporate tax rates applicable for income above AED 375,000, includes:
9% for taxable income above Aed 375,000; and
different tax rate for large multinational companies that meet certain specific criteria.
The new tax regime will apply for the first time for the financial year starting from 1 July 2023 and ending on 30 June 2024. However, for a business that as its financial year starting from 1 January 2023 and ending on 31 December 2023, will become subject to the UAE corporate tax starting from 1st January 2024.
The Federal Tax Authority (FTA) established in 2016, shall be the government entity responsible for the administration, collection and enforcement of the corporate tax regime in the UAE. Further, the Ministry of Finance will remain the competent authority for purposes of an international tax agreement, treaties etc, including the exchange of information for tax purposes.
Exemption provided under the UAE Corporate Tax regime:
Individual salaries and employment income are exempted from being taxed for both public and private sector employees.
Investments made by individuals in real estate or capital gains received from the personal investment made through shares or debentures, in the form of dividends, investment returns will not be taxed as long as it is in their personal capacity.
Businesses registered in the free zones in the UAE, will be included under the UAE corporate tax regime, however, only to the extent that they conduct their business within the UAE. For business activities outside the UAE, the corporate tax exemption granted to such business entities will continue to be honored under the new corporate tax regime as well.
By introducing the new corporate tax regime for the first time in the country, the UAE aims to implement international best practices in creating a leading global center for investment and businesses, while accelerating the country’s strategic objectives for further advancement. The new changes also reaffirm the country’s commitment in meeting international standards for tax transparency and in curbing negative tax practices.