The recent announcement by the UAE government regarding the introduction of corporate tax marks a significant shift in the tax landscape of the country. Importance of comprehending the implications of this development and providing businesses with the necessary guidance to navigate the forthcoming corporate tax regime. In this blog post, we delve into the essential aspects of the UAE's new corporate tax framework, offering valuable insights to help businesses effectively adapt to these changes.
UAE's Corporate Tax History
Renowned for its low-tax environment, the United Arab Emirates has traditionally refrained from imposing corporate income tax on most businesses. However, in line with its objectives to diversify the economy and align with global standards, the UAE government has made the decision to implement a corporate tax regime. This decision follows the successful implementation of the Value Added Tax (VAT) system in 2018.
Features of the UAE Corporate Tax
Commencing from the financial year starting on June 1, 2023, the UAE's corporate tax will be levied at a fixed rate of 9% on the profits (revenue minus expenses) earned by businesses surpassing the threshold of 375,000 AED (approximately USD $100,000). It is crucial to note that companies generating revenue below this threshold will continue to be exempt from corporate tax obligations. Additionally, large multinational firms with profits exceeding EUR 750 million will be subject to a 15% tax rate, aligning with the Global Minimum Corporate Tax Rate agreement.
Exemptions and Inclusions
While the new corporate tax will be applicable to a majority of businesses, specific entities will be exempt from its scope. Charitable organizations, public benefit entities, investment funds, businesses engaged in oil and resource extraction activities, and wholly government-owned companies will not be subjected to corporate tax obligations. However, it is vital to conduct a meticulous analysis of each business's circumstances to accurately ascertain its tax liabilities.
Calculation of Taxable Income and Tax Credits
The determination of taxable income for businesses will be based on the net profit or loss disclosed in their financial statements. The corporate tax framework allows for the offsetting of losses against future taxable income, up to 75% of the total value. Furthermore, provisions for tax credits have been established to avoid double taxation, enabling businesses to claim credits for foreign taxes paid in other jurisdictions.
Implications for Personal Income and Capital Gains
Presently, there are no plans to introduce taxes on personal income or institute a capital gains tax on dividends in the UAE. Individuals and business owners will continue to be subject solely to the 5% VAT levied on consumer goods and services.
Conclusion
The introduction of corporate tax in the UAE heralds a significant transformation in the taxation landscape, necessitating careful attention from businesses operating within the country. As consultants, our role is to proactively assist clients in comprehending their new tax obligations and implementing requisite measures for compliance. Staying abreast of the latest developments and seeking professional advice will be instrumental in facilitating a seamless transition to the new corporate tax regime. Our responsibility lies in guiding and supporting businesses through these changes, helping them navigate the intricacies of the new corporate tax framework and ensuring adherence to evolving regulations. By remaining well-informed, proactive, and seeking professional advice, businesses can effectively adapt to the corporate tax landscape in the UAE and continue their growth trajectory with confidence."