In a recent announcement, the government revealed that a new corporate tax will be imposed from the financial year that begins on 1st June 2023. In line with global best practices, the tax regime has been designed to minimize compliance burdens for businesses. Find out what the end of the “no corporate tax policy” means for companies operating in the UAE.
What to expect from the UAE’s corporate tax?
The application of corporate tax in the UAE had been discussed in financial circles for some time, so the announcement came as no surprise. Businesses and commercial activities will be taxed starting on 1st June 2023. The tax will be imposed on all profits the company earns and reports in its financial statements. Statements must be prepared according to the internationally accepted accounting standards, subject to minimal exceptions or adjustments. Companies will be regulated by the Federal Tax Authority (FTA) with regard to corporate tax payments.
Profits will be taxed at a standard rate of 9%. For taxable profits up to AED 375,000, however, there will be no tax. This is intended to encourage startups and small businesses.
The slab rates have not yet been defined. However, this could change in the future. As a result, the UAE corporate tax rate will start as one of the most competitive in the world.
Businesses involved in the extraction of natural resources are exempt. Such companies will continue to be taxed at the Emirate level.
Furthermore, UAE businesses will be exempt from paying taxes on dividends and capital gains from their qualifying holdings. Foreign taxes will be credited against UAE corporate tax payable, meaning that a company making profits outside the UAE and paying taxes in that country will not be required to pay corporate tax on those profits in the UAE.
In the UAE, the end of the no corporate tax policy does not mean that individuals will be taxed. Corporate tax does not apply to personal income from employment, real estate, equity, or investments.
As long as businesses comply with all the regulatory requirements, the UAE corporate tax regime will continue to honor incentives offered to free zone businesses.
UAE is an international business hub, so no withholding tax will be applied on domestic and cross-border payments. Only foreign investors who carry on business in the country will be taxed.
UAE corporate tax law will have generous loss utilization provisions. UAE companies will be able to be taxed as a single entity as a result. When there is a loss or an intragroup transaction, they can apply for relief collectively (as units).
Details regarding penalties and other related aspects, such as a tax on minor separate mainland income of free zone companies, filing deadlines, and the carrying forward of losses, are likely to be announced in the coming months. The new rules will give companies ample time to adjust their policies.