In June 2023, the UAE introduced new tax laws. Five years on 1st January 2018, UAE introduced value-added tax. Now UAE implements a corporate income tax. Initially, it might appear unexpected for a business-friendly jurisdiction like the UAE to levy taxes. However, this decision aligns with global trends in tax reform. There is pressure for countries to move away from low or no tax systems which has culminated in the Country/Organisation for Economic Co-operation and Development (OECD) Pillar One and Two Projects.
Pillar Two Project
Pillar Two encourages countries to implement a minimum 15% corporate income tax. If a company operates in a nation with a lower tax rate, the holding company’s jurisdiction may impose a top-up tax. Despite the UAE proposing a 9% tax rate, its introduction must be understood within this global context.
UAE Corporate Tax Implication
Corporate tax in UAE implies businesses, including Islamic ones with a December year-end, will need to enroll and pay taxes for the year 2024. Typically, the initial reference for calculating taxable profits will be the entity’s financial statements, while specific guidelines will dictate the tax-deductible nature of various items. Several aspects of international tax systems have been incorporated, allowing the formation of tax groups, and requiring businesses to comply with transfer pricing rules.
These obligations require connected parties’ arrangements to adhere to the ‘arm’s length principle,’ broadly the same agreement applied between third parties. Additionally, detailed regulations govern tax relief concerning interest and the utilization of tax losses. Furthermore, there are provisions for holding companies, potentially exempting dividends and share participation.
UAE Corporate Tax Law
The corporate tax introduced in the UAE for 2023 stands at 9% of profits, calculated as revenue minus expenses, for all businesses generating over 375,000 AED. Companies generating below this threshold will remain subject to a 0% tax rate. Alongside the corporate tax, the UAE has revealed that sizable multinational corporations earning over EUR 750 million will face a 15% tax obligation. This aligns with the agreement on the Global Minimum Corporate Tax Rate.
The newly implemented corporate tax in UAE takes effect from the start of the tax year on June 1st, 2023. Consequently, most companies need to begin allocating funds for tax payments starting from that date. However, businesses with a tax year starting in January, won’t be liable to pay taxes on revenues earned before January 1st, 2024.
Characteristics of Corporate Tax System
Dubai’s corporate tax structure includes a range of policies, from tax-free zones to corporate taxes, VAT systems, and the absence of federal income tax. Here are some notable attributes of this tax system.
Who Is Subject To Taxation?
Taxation applies to various legal entities with distinct legal personalities such as LLCs, PSCs, PJSCs, LLPs, and others. Additionally, foreign legal entities generating income in the UAE and qualifying as tax residents will incur charges. While free zones typically face a 0% corporate tax rate upon fulfilling regulatory obligations, this extends to free zone companies involved in trade activities with the mainland. Both residents and non-residents of the UAE may also fall under corporate taxation policies.
Corporate Tax Rates
Businesses earning income up to AED 375,000 will be subject to a 0% tax rate, while those exceeding this threshold will be subject to a 9% tax on the excess. Larger multinational companies operating under distinct business conditions will be liable for a different tax rate. There is also some relief for small businesses in the UAE.
Who Qualifies For Exemptions?
The corporate tax laws provide a participation exemption from corporate tax when receiving dividends or selling shares of a subsidiary company. Additionally, charities, public benefit organizations, investment funds, businesses involved in oil and resource extraction, and wholly government-owned companies are excluded from corporation taxes.
Calculating Taxable Income
Typically, the company’s net profit or loss outlined in its financial statements serves as the basis for calculating the tax rate and income. If a company faces a loss, it can offset this value against taxable income in upcoming financial years, by up to 75%.
Groups
A group of companies may be able to form a tax group in which they would be capable of being treated as a sole taxable entity. To do so, a company or subsidiary needs to refrain from being an exempted party or being registered in a free zone.
Tax credits
To avoid double taxation, the system will permit a credit against foreign tax paid in another jurisdiction on foreign income that hasn’t been exempted.
Free Zone Taxes
The exemption within the free zone is limited to ‘qualifying income,’. Consequently, it’s possible that businesses, both conventional and Islamic, might be liable to pay tax on income that falls beyond this exemption.
It is possible for businesses to elect out of the free zone exemption so that it is taxpaying. While this might appear counterintuitive, for an international group facing potential top-up tax regulations, this choice might be more practical.