UAE Corporate Tax Explained: What You Need to Know

Starting June 1, 2023, the UAE’s Federal Tax Authority (FTA) will be implementing a new law that introduces corporate tax in the country. The introduction of corporate tax is part of the UAE’s efforts to build a more stable and diverse economy. Under the new law, businesses will be subject to a 9% corporate tax from their first fiscal year commencing on or after June 1, 2023. 

The implementation of corporate tax is a significant change for the UAE, which has long been known for its tax-free business environment. However, it is expected to bring in new revenue streams for the government and contribute to the long-term economic sustainability of the country.

Understanding corporate tax in the UAE is important for businesses operating in the country as it can have a significant impact on their profitability and financial performance. 

What is Corporate Tax?

Corporate tax is a tax levied on the profits earned by a company or corporation. It is calculated based on the company’s net income, which is the revenue earned minus allowable deductions and expenses.

Corporate tax is an important source of revenue for governments and is used to fund various public services such as infrastructure, education, and healthcare. It is also used to regulate and incentivise certain business activities, such as encouraging investment in specific industries or regions.

What Is Corporate Tax in the UAE?

Corporate tax is a mandatory tax that businesses must pay on their profits, and failure to comply with the tax regulations can lead to penalties and legal consequences. 

Therefore, businesses need to have a clear understanding of the UAE’s corporate tax system to ensure that they comply with the regulations and optimise their tax liabilities. 

Moreover, understanding corporate tax can help businesses make informed decisions about their investments and expansion plans in the UAE.

How Does Corporate Tax Work?

In general, companies are required to file a tax return that provides detailed information about their revenue, expenses, and deductions. This return is used by the tax authorities to calculate the company’s tax liability. Once the tax liability is calculated, the company is required to pay the tax owed to the government.

Corporate tax is a significant factor for businesses to consider when making financial decisions as it can have a significant impact on their profitability and competitiveness. Understanding the corporate tax system in the UAE is therefore essential for businesses to optimise their tax liability and comply with tax regulations.

When Will Corporate Tax Be Effective In UAE?

The UAE Corporate Tax Law is set to be implemented for fiscal years after June 2023, with taxable profits above AED 375,000 being subject to a standard rate of 9%, and profits up to that amount being taxed at 0%.

Free zone businesses will also be affected by the corporate tax, but those adhering to regulatory requirements and not conducting business in the mainland UAE can still enjoy corporate tax benefits. 

How Will Corporate Tax Impact Businesses In UAE?

The introduction of corporate tax in the UAE is a significant step towards achieving the country’s economic goals and maintaining its position as a global hub for business and investment.

The impact of corporate tax on UAE businesses is expected to be significant. Companies must take necessary steps to ensure compliance with the new tax regime, which includes identifying the tax implications of their operations and restructuring their corporate structures, operating models, finance and tax operations, reporting systems, legal agreements, and transfer pricing policies, where necessary.

Additionally, companies must prepare for the additional costs associated with compliance, such as hiring tax professionals or consultants and implementing tax software and other tools to manage the tax reporting process.

However, the introduction of corporate tax is also expected to have positive impacts on the UAE economy in the long run. It can lead to improved governance and transparency, a level playing field for businesses, and help attract foreign investment by aligning with international tax standards.

Small and medium-sized enterprises (SMEs) and start-ups that are exempt from corporate tax may also benefit from the introduction of the tax, as it can help level the playing field with larger corporations.

What Are The Proposed Corporate Tax Rates in UAE? 

Businesses will be subject to different tax rates depending on their taxable income and other factors. 

• For taxable income up to AED 375,000, a 0% corporate tax rate applies. 
• For taxable income above AED 375,000, the corporate tax rate is set at 9%. 
• Multinational corporations that are subject to OECD Base Erosion and Profit-Sharing laws and fall within Pillar 2 of the BEPS 2.0 framework will be subject to a 15% corporate tax rate, provided their combined worldwide revenues exceed AED 3.15 billion. 

What Are Corporate Tax Rates in UAE for Free Zone Companies?

Free Zone companies in the UAE will be subject to corporate tax at different rates depending on the type of income earned. 

• If a company earns “Qualifying Income,” which includes income from local UAE sources, it will be subject to a 0% tax rate. 
• If a company earns taxable income that is not considered “Qualifying Income,” it will be subject to the standard corporate tax rate of 9%. 

It is important for Free Zone companies to understand the distinction between “Qualifying Income” and other taxable income and to comply with tax regulations accordingly to avoid penalties and legal consequences.

Which Entities are not Subject to UAE Corporate Tax?

The entities exempted from UAE corporate tax include:

• Companies engaged in the exploration and production of oil and gas.
• Companies registered in free zones.
• Companies registered in special economic zones.
• Companies with at least 51% ownership by the federal or local government.
• Companies with at least 51% ownership by UAE nationals.

FAQs – Corporate Tax In UAE

1. What is the rate of corporate tax in the UAE?

The rate of corporate tax in the UAE is 9%, which was introduced in January 2022 and will be implemented by June 2023.

2. Which businesses are exempt from corporate tax in the UAE?

Certain businesses may be exempt from corporate tax in the UAE if they meet certain conditions, such as being owned by the federal or local government, being located in a free zone, or operating in the oil and gas sector.

3. How will corporate tax affect businesses in the UAE?

Corporate tax will require businesses in the UAE to comply with a new tax regime, which may involve making changes to their corporate structure, operating model, finance and tax operations, reporting systems, legal agreements, and transfer pricing policies if necessary. It may also increase tax and compliance costs for some businesses.

4. What should businesses do to prepare for corporate tax in the UAE?

Businesses in the UAE should prepare for corporate tax by accurately identifying their tax implications and making any necessary changes to their operations and compliance procedures. They may also want to consult with tax experts and advisors to ensure that they are fully prepared for the new tax regime.

5. When will corporate tax be implemented in the UAE?

Corporate tax will be implemented in the UAE by June 2023, giving businesses ample time to prepare and make any necessary changes before the new tax regime takes effect.

In Conclusion 

It’s worth noting that certain businesses are exempt from the corporate tax, provided they meet certain conditions. It’s important to review the exemptions carefully before implementing the corporate tax to determine whether your business is eligible for tax exemption. 

The UAE government has provided ample time for businesses to prepare for the implementation of the corporate tax, with the official launch in January 2022 and the implementation deadline set for June 2023. Therefore, it’s important for businesses to take advantage of this time to fully understand the new tax regime and its implications, and make any necessary changes to ensure compliance.

In order to comply with the new tax regime, businesses will need to accurately identify the tax implications and make any necessary adjustments to their corporate structure, operating model(s), finance/tax operations, reporting systems, legal agreements, and transfer pricing policies. 

This can be a complex and time-consuming process, but rest assured because our team of tax experts have got your back! If your company requires assistance with the implementation of Corporate Tax in UAE, our team of experienced Management and Financial Consultants in Abu-Dhabi  at Trust Accounts Management can guide you through the process. Our team is dedicated to providing support and advice to ensure that your company is fully compliant with the new tax regulations. 

At Trust Accounts Management, we offer a range of financial services, including bookkeeping, financial reporting, tax preparation, and consulting. Our team of experts stays up-to-date with the latest accounting regulations and trends to provide our clients with the best possible advice and support.

We can assist you with all aspects of corporate tax, from planning and budgeting to filing tax returns and complying with tax regulations. Contact us today to learn more about how we can support you during the implementation of Corporate Tax in the UAE.