All You Need to Know About UAE’s Corporate Tax

UAE Free Zone and Offshore Companies to be exempt from Corporate Tax.

The UAE Finance Ministry recently announced the introduction of corporate tax on business profits. The proposed corporate tax is subject to be levied for financial years starting on or after June 1, 2023. The announcement comes as the latest major change to the UAE’s tax regime since the imposition of VAT in 2018. The initiative which aims towards economic diversification has made the UAE drift further away from the ‘tax-free’ tag associated with it.

What is Corporate Tax?

Also referred to as the “Business Profits Tax”, corporate tax would be levied on profits arising from businesses in the UAE. The tax would be applied at a rate of 9% for business profits exceeding the annual threshold of AED 375,000. As part of the change, businesses in the UAE will now have to electronically file corporate tax returns every financial year starting on or after June 1, 2023. The corporate tax will be directly applied to the company’s taxable income which also includes the income generated from non-regular sources. The UAE’s Federal Tax Authority (FTA) shall oversee all affairs related to corporate tax.

Which Income is Exempt from UAE’s Corporate Tax?

Much to the relief of small and medium-sized businesses, annual profits lesser than the threshold of AED 375,000 would not be liable for corporate tax. Investments in real estate, income of salaried individuals, or any other income not generated from a business, would be exempt from corporate tax. Moreover, corporate tax will not be applicable on capital gains and dividends, as well as on transactions and restructurings within the same group of companies. Additionally, profits of oil and gas production businesses will be exempt from this tax since they are already liable for taxes at the emirate level.

What is the Tax-status for Free Zones and Offshores?

Tax incentives offered by free zones have played a major role in attracting businesses to the UAE. Acknowledging the contribution of free zone tax benefits to UAE’s economic growth, businesses in free zones are exempted from paying corporate tax and will continue to leverage the tax benefits. However, there are certain regulations that free zones must adhere to so as to not fall under the ambit of corporate tax. Additionally, free zones must not conduct business with UAE mainland to remain compliant for corporate tax exemption. Profits generated from businesses with UAE mainland will be liable for corporate tax. It must be noted that companies based in free zones would still fall within the scope of corporate tax and are required to file returns for the same.

Offshore companies would also remain outside the corporate tax regime and will continue to benefit from tax exemption. Thanks to the UAE’s double taxation treaties with a multitude of countries, foreign investors would not have to worry about paying dual taxes on income arising from their offshore ventures.

Reasons Behind Introduction of Corporate Tax

The major impetus behind the introduction of corporate tax introduction appears to stem from the UAE’s intent to eradicate harmful tax practices, and thus align with the global standards of transparency in taxation. Furthermore, the decision also seems to be made in response to the landmark deal announced by the Organisation for Economic Co-operation and Development (OECD) in October 2021. The deal which was signed by 136 nations was a move to make it challenging for MNCs to avoid taxation and pay a tax at a minimum rate of 15% by 2023. Besides the need to meet international norms, another apparent reason behind imposing corporate tax in the UAE is to do away with tax avoidance loopholes.

Potential Benefits of Corporate Tax

UAE’s corporate tax is bound to further drive UAE’s growth and secure its status as a globally leading business and investment centre. The newly introduced tax will generate a substantial revenue projected to be in billions of dollars and will bring in new infrastructural developments thereby significantly enhancing the standard of living for the country’s residents. From a tax transparency point of view, the UAE will benefit immensely since implementing OECD guidelines will ensure companies operate within a globally recognized tax framework.

The corporate tax structure will be lenient to company groups with respect to losses. Groups of companies can file tax returns as a single tax group besides transferring losses to other members. Moreover, enough thought has been put into reducing the compliance burden for companies. This can be seen in the fact that the corporate tax return must be filed only once for every financial year

Where UAE’s Corporate Tax Rate Stands When Compared to Other Countries?

When compared to other countries, it can be safe to describe UAE’s corporate tax rate as one of the lowest in the world. Among the nations that are a part of the Gulf Cooperation Council (GCC), UAE’s tax rate stands the lowest at 9 per cent. While Saudi Arabia charges a 20 per cent tax rate, Oman, and Kuwait levy tax at 15 per cent of business profits. Qatar imposes a modest 10 per cent rate while Bahrain remains the only GCC member to not levy corporate tax as of now. The average corporate tax rate among the European Union hovers around 21.3 per cent with countries like Ireland, France, and Germany imposing corporate tax at rates of 12.5 per cent, 28 per cent, and 15 per cent respectively.

Though corporate taxes will have ample benefits for UAE’s economic growth, their imposition may deter aspiring entrepreneurs from setting up their businesses in the UAE. However, companies in free zones and offshore jurisdictions as mentioned above will remain unaffected by this tax imposition. If you are looking to set up an offshore or free zone company, a corporate service provider like InZone can help you with end-to-end company formation services.

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