The UAE has implemented a federal business tax for 2023, with specific exemptions and restrictions for revenue received by legal entities engaged in business, commercial, professional, or other economic activities requiring a business license or authorization.
Not all companies will be affected by the new tax, and some may be exempt from paying it. It’s important to learn more about the specifics of the new corporate tax in the UAE and how it may impact your business.
What Is UAE Corporate Tax 2023?
The United Arab Emirates (UAE) has a long history of being a business tax haven. This is about to change with the statement made by the Ministry of Finance (MOF) on January 31, 2022, that the UAE will implement a federal corporate income tax (CIT), which will take effect for financial periods beginning on or after June 1, 2023.
The corporate tax rate in the UAE will increase to 9% in 2023 for all companies that make more than 375,000 AED (about $100,000 USD) in profits (sales minus expenses). Businesses that generate less revenue than this amount continue to pay no taxes at all.
In accordance with the Global Minimum Corporate Tax Rate agreement, the UAE has also declared that major multinational corporations with income of more than EUR 750 million will be subject to a 15% tax in addition to the corporate tax.
Who May Be Taxed in UAE?
Tax will be imposed on legal entities having legal personalities, such as LLCs, PSCs, PJSCs, LLPs, and others. Additionally, any foreign legal entity that is a resident of another country and generates money in the UAE will be charged. Although free zones will pay 0% corporation taxes in exchange for adhering to all legal requirements, this also applies to free zone businesses that conduct business with the mainland. Corporate taxes regulations may also apply to UAE residents and non-residents.
Tax Rates in UAE
The recently announced UAE CIT regulation offers a three-tiered tariff structure:
- A business will pay no tax if its annual revenue is less than AED 375,000
- 9% of its annual revenue over AED 375,000 will be taxed
- Larger international corporations will also pay a varied tax rate due to their unique business circumstances
Who Is Exempted in UAE Corporate Tax?
The following income will generally not be subject to income tax:
- UAE company’s dividend income from its qualified shareholdings (to be defined in the law)
- Monetary gains
- Gains from group restructuring
- Intra-group transaction profits
- Governments and organizations under government control
- Organizations that provide public benefits
- Charities and non-profit institutions
- Social Security or pension funds
How to Calculate Taxable Income in UAE?
The tax rate and income are typically calculated using the account net profit or loss presented in the company’s financial statements. In the event of a business loss, the corporation may deduct up to 75% of the amount from its taxable income in subsequent fiscal years.
Tax Groups
If certain requirements are met, a parent entity of a group may submit an application to the FTA to establish a tax group with its UAE subsidiaries. There must be 95% ownership under these circumstances, and neither the parent nor the subsidiary may be an exempt person.
If other requirements are met, losses may also be transferred between businesses that are not part of a group where there is a 75% ownership relationship.
Foreign Tax Credits
In an effort to prevent double taxation, the system will permit credit for foreign tax paid in a foreign country against foreign tax income that has not been exempted.
Transfer Pricing Rules
The UAE will now be subject to the OECD Transfer Pricing Rules. The Transfer Pricing regulations and documentation requirements must be followed by all businesses. These transfer pricing regulations will now be required and might even apply to domestic transactions.
Even though intercompany sales and finance services are frequent among UAE organizations, compensation for these operations hasn’t historically been a top priority as the transactions would probably be removed via financial unification.
This changes everything since intercompany transactions would now have to be carried out at arm’s length and generally be supported by the necessary paperwork. Businesses would need to analyze their current setups and determine the impact on both domestic and international transactions.
Are Businesses Operating in Free Zones Subject to Taxation?
How the new corporation tax in the UAE will affect companies with offices in free zones is still unclear. According to the government declaration, enterprises operating in free zones will still be able to take use of the advantages offered by the pre-set incentives for their particular free zones. In the future, free zones might opt to alter the regulations and possibly enact the charge.
Companies in free zones that conduct business with those on the mainland typically have to pay corporate tax on the profits made from those relationships.
Despite not having to pay any tax, free zone businesses must nevertheless register and submit a corporation tax report.
Will There Be Taxes on Personal Income in Dubai?
No, neither Dubai nor the rest of the UAE has any present intentions to tax individuals’ personal income. The 5% VAT tax that everyone in Dubai must pay on goods and services for consumption serves as the only type of personal income tax.
CONCLUSION
Years of tax-free treatment for earnings made in the UAE, both in free zones and on the mainland, have been enjoyed by many UAE firms and branches. This is about to alter drastically as a result of recent developments. International companies with operations in the UAE are urged to take these changes into consideration even though the pertinent legislation has not yet been issued.
It would be wiser to speak with tax experts who are knowledgeable and skilled in issues relating to international taxation. They can assist you in navigating the new business tax laws in the UAE. Please don’t hesitate to contact Relin Consultants if you need any assistance with UAE corporate tax changes 2023.