VAT ESR EXCISE ADVISOR CONSULTANT UAE DUBAI ABUDHABI

UAE Corporate Tax – Key Highlights

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Introduction:

On 9th December 2022, the UAE introduced the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses, commonly known as the Corporate Tax UAE. This significant development will come into effect for financial years starting on or after 1st June 2023. The Corporate Tax UAE Law builds upon the earlier public consultation document released by the Ministry of Finance on 28th April 2022, incorporating key provisions while aiming to align with international best practices. This new regime prioritizes minimizing compliance burdens for businesses compared to other global tax frameworks. While certain aspects, such as definitions of Exempt Persons and Qualifying Income, are expected to be further clarified through subsequent Cabinet and Ministerial decisions, the introduction of the Corporate Tax UAE Law marks a significant milestone in the UAE’s corporate tax landscape.

Key Highlights:

  • To Whom It is Applicable: The Corporate Tax UAE applies to all business and commercial activities across all Emirates, except for the extraction of natural resources, which is subject to Emirate-level taxation.
 
  • What is the Rate of Tax: The Corporate Tax UAE rates are as follows: taxable income not exceeding AED 375,000 and qualifying income of a qualifying Free Zone Person are taxed at 0%, while taxable income exceeding AED 375,000 and non-qualifying income of a qualifying Free Zone Person are taxed at 9%.
Example 1: Mainland company taxability

ABC Trading Co. is a mainland company operating in the UAE engaged in import-export activities. Let’s assume that for the financial year 2022, ABC Trading Co. reports a taxable income of AED 300,000.

  1. Taxable income not exceeding AED 375,000 (taxed at 0%): Since the taxable income of ABC Trading Co. falls within this threshold, it is subject to a 0% tax rate. As a result, the company’s taxable income of AED 300,000 is not subject to any corporate tax, and it does not owe any tax liability for this portion of its income.

  2. Taxable income exceeding AED 375,000 (taxed at 9%): Now, let’s consider that ABC Trading Co. generated additional income from its operations, resulting in a total taxable income of AED 500,000 for the financial year 2022.

For the portion of taxable income exceeding AED 375,000, which is AED 125,000 (AED 500,000 – AED 375,000), the 9% corporate tax rate applies. Therefore, ABC Trading Co. will be liable to pay corporate tax on this portion at a rate of 9%.

To calculate the corporate tax liability: Taxable income exceeding AED 375,000: AED 125,000 Tax rate: 9% Corporate tax liability: AED 125,000 x 9% = AED 11,250

In this example, ABC Trading Co. would owe a corporate tax liability of AED 11,250 for the taxable income exceeding AED 375,000, while the portion of taxable income not exceeding AED 375,000 is taxed at 0% and does not incur any tax liability.

This illustrates how the Corporate Tax UAE system applies different tax rates based on specific income thresholds, providing a mix of 0% and 9% tax rates for taxable income in mainland companies.

 

Example: 2 Free zone company

ABC Manufacturing FZCO operates in a UAE Free Zone and is engaged in manufacturing activities. During the financial year 2023, ABC Manufacturing FZCO generates a total income of AED 500,000 from its manufacturing operations within the Free Zone.

Since the income generated from the manufacturing activities is directly related to the qualifying activities within the Free Zone, it falls under the qualifying income category. As per Corporate Tax UAE regulations, qualifying income is subject to a 0% tax rate. Therefore, ABC Manufacturing FZCO’s qualifying income of AED 500,000 is not subject to any corporate tax, resulting in a tax liability of 0% on this portion of income.

Example of non-qualifying income: In addition to manufacturing activities, ABC Manufacturing FZCO also owns rental properties located outside the Free Zone. For the financial year 2023, the rental properties generate a total income of AED 200,000.

Since the rental income is not directly related to the qualifying activities within the Free Zone, it falls under the non-qualifying income category. Non-qualifying income is subject to the 9% corporate tax rate under Corporate Tax UAE. Therefore, ABC Manufacturing FZCO will have a tax liability of 9% on the non-qualifying income portion of AED 200,000, resulting in a tax liability of AED 18,000.

In this example, ABC Manufacturing FZCO has a total income of AED 700,000 (AED 500,000 from qualifying income + AED 200,000 from non-qualifying income). The tax liability will be calculated based on the respective tax rates for qualifying and non-qualifying income.

This example demonstrates how different income categories are subject to different tax rates under Corporate Tax UAE, highlighting the 0% tax rate for qualifying income and the 9% tax rate for non-qualifying income. The specific income figures may vary based on individual company circumstances and applicable tax regulations.

  • Is there any Relief for Small Businesses: Relief is provided for small businesses, allowing them to elect to be treated as not having derived taxable income for a tax period.
  • Tax Grouping: UAE group companies can form a tax group and file a single tax return for the entire group, allowing for the transfer of tax losses within the group.
  • Transfer Pricing: The Corporate Tax UAE regime includes transfer pricing rules and documentation requirements aligned with the OECD Transfer Pricing Guidelines. A multinational company with subsidiaries in the UAE is required to comply with transfer pricing rules. They must document and justify the prices used for intra-group transactions, ensuring they align with arm’s length principles to avoid potential transfer pricing adjustments.
  • The Federal Tax Authority is responsible for administrating, collecting, and enforcing Corporate Tax UAE.
  • The application of Pillar Two rules in a domestic context is not addressed in the Corporate Tax UAE, but it is expected that the UAE will adopt a minimum 15% CT rate or a Qualified Domestic Minimum Top-Up Tax for multinational enterprises (MNEs).
  • Who are all excluded: Certain categories of taxpayers, such as government entities, government-controlled entities, entities engaged in extractive businesses, public benefit entities, and investment funds, are exempt from Corporate Tax UAE under specified conditions.
  • How is Taxable income calculated: Corporate Tax UAE is based on the accounting net profit reported in the financial statements of the business, with certain exceptions and adjustments. There is a limitation on the deductibility of interest, and tax losses can be carried forward to offset taxable income in future periods.
  • To whom UAE Corporate Tax UAE is not applicable: UAE Corporate Tax does not apply to employment income, income from real estate, income from savings, investment returns, and other personal income not related to UAE trade or business.
  • Which income are exempted: Dividends, other profit distributions from a UAE resident person, and certain capital gains and profits from foreign participation are exempt from Corporate Tax UAE.
  • Withholding Tax: Domestic and cross-border payments of interest, dividends, royalties, and other payments do not attract withholding tax in the UAE, and a foreign tax credit may be available for taxation incurred by UAE businesses on income earned outside the UAE.
  • What is the Due date for filing the return: Corporate Tax returns must be filed electronically within 9 months from the end of the financial year, and there are no requirements for advance Corporate Tax payments based on provisional tax returns.
Example: 3 Tax Return Filing

XYZ Enterprises FZCO is a Free Zone Company operating in the UAE. The company’s financial year-end is December 31st. According to the tax regulations, XYZ Enterprises FZCO is required to file its corporate tax return within a specified period.

Assuming the return filing deadline for corporate tax in the UAE is 9 months from the end of the financial year, here’s the revised example:

In this example, since XYZ Enterprises FZCO has a financial year-end on December 31st, the return filing deadline for the corporate tax return would be 9 months from that date.

Therefore, the return filing deadline for XYZ Enterprises FZCO to file its corporate tax return for the financial year ending December 31st would be September 30th of the following year.

In conclusion, the introduction of the Corporate Tax UAE in the UAE marks a significant milestone in the country’s corporate tax landscape. The alignment with international best practices and the focus on minimizing compliance burdens for businesses demonstrates the commitment to creating a competitive and business-friendly environment. However, it is important to note that each business is unique, and the application of the Corporate Tax UAE may vary based on individual circumstances. Seeking professional advice and guidance before adopting any tax strategies or making compliance decisions is highly recommended. By consulting with tax professionals, businesses can ensure that they navigate the complexities of the Corporate Tax UAE effectively and make informed decisions tailored to their specific needs.

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