CORPORATE TAX

Corporate tax is a direct tax levied on a company’s net income or profit. In some countries, the corporate tax is also known as business profit tax or corporate income tax.

WHY IS THE UAE INTRODUCING CT ?

• Accelerates the UAE’s prosperity towards the next 50 years.
• Establishing a more sustainable and progressive future with a stable revenue stream which can be reinvested into strategic public initiatives in the future.
• Achieving the UAE’s strategic goals by accelerating its development and transformation.
• Reaffirms the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices.

WILL BE IMPLEMENTED ALL OVER UAE

• UAE CT will apply to all UAE businesses and commercial activities alike, except for the extraction of natural resources which will remain subject to emirate level corporate taxation.
• All activities undertaken by a legal entity will be deemed “business activities” and hence be within the scope of UAE CT
• The CT rate are :
  • 0% for taxable income up to AED 375000
  • 9% for taxable income above 375000; and
  • A different tax rate for large multinationals that meet specific criteria set with reference to ‘pillar two’ of the OECD Base Erosion and Profit Shifting Project.
• Foreign entities and individuals will be subject to UAE CT only if they conduct a trade or business in the UAE in an ongoing or regular manner.

Facts

• UAE groups of companies can elect to form a tax group and be treated as a single taxable person , provided certain conditions are met.
• Only one CT return will need to be filled per financial period. No provisional or advanced CT filling will be required.
• A financial period is generally a year.
• The CT return will need to be filled electronically.
• UAE business will not be required to make advance UAE CT payments.

Application of Corporate Tax in UAE

All business and commercial activities carried out within the seven emirates of the UAE are subject to UAE Corporation Tax. However, there are some exceptions:

• Businesses involved in mining or exploitation of natural resources.
• Individuals receiving any income/ gain in a personal capacity will not be subject to corporate tax, as it is not considered a business/commercial activity.
• Companies registered in a free trade zone must comply with all legal requirements and. Can apply 0% Corporate tax rate for income earned with business income from outside of UAE or within the same or similar free zones.
• Govt and govt owned Entities are exempt from corporate tax
• Charities and Public Benefit Organizations (upon approval and discretion of the Ministry) will also be exempt
• Regulated investment funds and Real Estate Investment Trusts can apply to the Federal Tax Authority (FTA) to be exempt from UAE CT subject to meeting certain requirements.

The impact of corporate tax on the Emirate’s banking tax decree will be revealed in the coming months. As a result, the law will have an impact not just on overseas bank branches but also on domestic banks, which will also be subject to corporation tax.

Furthermore, the UAE corporate tax law will now apply to the international banking industry, which has been subject to an emirate-level bank tax decree. The Goals of the New Corporate Tax in UAE

• Establishing the UAE as a world-class investment and business destination.
• Keeping taxes transparent and avoiding unfavorable tax consequences.
• Achieving the UAE’s strategic goals by accelerating its development and transformation.
• Encouraging Accountability and achieving enforcing best tax practices.

Enforcement Date of Corporate Tax in UAE

Corporate Tax will become effective in fiscal years beginning on or after June 1, 2023. Businesses adopting a fiscal year ending May 31, 2024, will be subject to corporate tax. The first tax returns will be filed in 2024. Corporations with fiscal years starting on January 1, 2023, and ending on December 31, 2023, will not be subject to corporate tax.

Table: Illustrative Timetable for CT Filing and Payment Deadlines

Rate of Corporate Taxation

For corporations, the following rates will apply:

• A 0% tax rate applies to taxable income up to AED 375,000 (about USD 102,095).
• Tax rate of 9% on taxable income over AED 375,000 (about USD 102,095).
• A Global Anti-Base Erosion Model Rules (Pillar Two) of the OECD’s Base Erosion and Profit Shifting project dictate a tax rate for major multinational corporations that meet specific conditions.

CALCULATION

The CT liability will be calculated as follows.

• Taxable income of AED 0- AED 375000 at 0% = AED 0
• Portion of taxable income exceeding AED 375000( ie AED 400000 – AED 375000 = AED 25000) AT 9%.
• The UAE CT liability for the year will be AED 0 + AED 2250 = AED 2250.

Untaxed Income

Corporate tax will not apply to the following:

• An employee’s salary or income will not have to comply with the new Corporate Tax. The individual, however, will be liable for company tax if the payment is derived from activities performed under a freelancing license or permission.
• Owning shares or other assets results in dividends, capital gains, and other income earned in a personal capacity.
• Investing in real estate is legal in the UAE, as long as the investor holds no business license.
• Individuals can earn interest and other revenue through bank accounts or savings plans through bank accounts or savings plans.
• Qualifying intra-group transactions and reorganizations will not be subject to UAE CT provided the necessary conditions are met
• UAE CT will generally not be levied on a foreign investor’s income from dividends, capital gains, interest, royalties, and other investment returns, unless the income is generated through a business/commercial activity.

Free Trade Zone

For now, the UAE government plans to maintain its commitment to enterprises registered in Free Trade Zones by providing exemplary tax benefits if they meet the conditions levied. Further, a Corporate Tax return must also be submitted by each free zone annually. Further business units headquartered in a free zone with mainland operations will be subject to corporate tax In some instances, free zone enterprises will be liable to UAE corporate tax.

All businesses in the UAE are now subject to corporate tax. However, personal income is still not going to be taxed in the UAE. Free Zone Businesses can avail of tax benefits by carrying on their business activities within the Free zone or outside of UAE. However, if they carry on activity within the UAE mainland, the standard tax treatment will be applied to income from such activities.

Registration and deregistration

• The FTA requires that all businesses subject to CT register with the FTA within the prescribed period and obtain a Tax Registration Number. In addition, if the company does not voluntarily register for CT purposes, the FTA can automatically do so.
• The FTA must be notified within three months of the cessation of a business’ CT registration (e.g., due to liquidation).
• For FTA to deregister an individual, the individual must have filed CT returns and paid all CT obligations and penalties until discontinuation.
• The application for deregistration is not made within the deadlines, and the payment and filing requirements are not met.

Filing, payment, and refund

• Businesses will only need to prepare one tax return and other related supporting schedules with the FTA for each tax period. A company will not have to file a provisional CT return or pay the CT in advance.
• The FTA must receive each tax return and related supporting schedule within nine months of each tax period’s end.
• CT payments for a Tax Period must be made within nine months after the Tax Period. The taxpayer can request a CT refund from the FTA if they can demonstrate that such a refund is due.

Documentation requirements

• Businesses will be required to maintain financial and other records to comply with the CT return and other documents submitted to the FTA. Additionally, specific exempted individuals will also be required to keep records to allow the FTA to verify their exemption status.
• It will be determined by applicable laws and regulations whether the financial statements need to be independently audited by an accredited firm. However, Free Zone Persons must have audited financial statements to qualify for the UAE CT regime.