CORPORATE TAX FILING

WHAT IS CORPORATE TAX IN THE UAE?

Corporate tax in the United Arab Emirates (UAE) is a tax imposed on the taxable income of businesses registered in the country. Starting from June 1, 2023, new taxation policies will be implemented, subjecting many businesses operating in the UAE mainland to taxation based on their annual net profit.

BACKGROUND OF CORPORATE TAX IN THE UAE

The UAE has long been regarded as one of the most profitable locations for entrepreneurs and investors to establish new businesses. Its stable political environment, strategic location, excellent business infrastructure, and, notably, the 0% corporate tax regime have attracted both large companies and startups.

As per the findings of the International Monetary Fund (IMF), the UAE boasts the Middle East’s fifth-largest economy. Although historically reliant on revenue from oil and natural resources, the country has gradually reduced its dependence on oil in recent years.

IS CORPORATE TAX THE SAME AS VALUE ADDED TAX (VAT)?

When the UAE government initially announced the introduction of corporate tax, many businesses confused it with Value Added Tax (VAT). However, corporate tax and VAT are distinct forms of taxation.

VAT is a consumption tax applied to the sale of goods and services, with customers paying it at the time of purchase. On the other hand, corporate tax is levied on businesses’ taxable income.

Companies will pay corporate tax based on their annual net profits, whereas businesses collect VAT from customers during the sale of products or services and subsequently remit it to the government.

Corporate tax is paid directly to the government and calculated using the company’s net income, not total revenue or sales volume.

Now that we understand what corporate tax is in the UAE and its implementation date, let’s delve into further details about the taxation process.

WHO WILL BE SUBJECT TO CORPORATE TAX IN THE UAE?

According to the UAE Ministry of Finance (MOF), all business entities operating within the UAE will be subject to the new tax regime from June 1, 2023, onwards. The tax calculation period for businesses will differ based on how they report their financial year:

1. Businesses reporting financial years from July 1 will commence tax calculation from July 1, 2023.
2. Companies reporting financial years starting on January 1st will initiate tax calculations from the same date in the year 2024.

With a few specific exceptions, all commercial activities taking place within the UAE must register and file for corporate tax.

TAX EXEMPTIONS

The MOF has announced several exemptions for certain entities. Businesses falling under these exemptions are not required to file tax reports or pay taxes. The exempt entities include:

1. Governmental or public entities, encompassing federal and regional offices, departments, divisions, and all other public institutions.
2. Enterprises engaged in the extraction or mining of natural resources within the UAE fall under Emirate-level taxation jurisdiction, eliminating the necessity for them to submit an independent corporate tax report.
3. Organizations engaged in charitable and social causes. However, these businesses must register as social or charity organizations with the MOF. Eligible entities must first obtain formal clearance from relevant authorities before applying for MOF registration.
4. Public or regulated private entities managing social benefit funds, such as pension or retirement planning.
5. Real estate and other regulated investment funds. Similar to charitable organizations, these funds must apply to the MOF and the Federal Tax Authority (FTA) to obtain formal exemption approval.
6. UAE enterprises that are wholly owned by the UAE government and officially listed through a ministry-level decree are eligible for tax exemption.

WHAT ARE THE CORPORATE TAX RATES IN THE UAE?

The UAE’s regulatory body for corporate tax, the Ministry of Finance (MOF), has implemented a taxation policy with three tiers:

1. Businesses with net yearly profit up to AED 375,000: These businesses are subject to a 0% tax rate.
2. Businesses with net yearly profit above AED 375,000: Such businesses are subject to a 9% tax rate on their annual net profits exceeding AED 375,000.
3. Large multinational companies: These companies fall under a separate taxation policy known as “Pillar Two” of the OECD Base Erosion and Profit Shifting project. Companies with total global revenue surpassing EUR 750 million (equivalent to AED 3.15 billion) belong to this category.

CORPORATE TAX FOR FREE ZONE BUSINESSES

The UAE has established more than 60 economic free zones over the past few decades to attract global investors and businesses to operate within the country. These free zones offer advantages such as zero tax, 100% ownership, and liberal profit repatriation policies.

To maintain a business-friendly environment in the free zones, the UAE government has made an exception regarding the corporate tax rate for businesses operating in these zones.

Under this exception, free zone businesses continue to enjoy a tax-free status. However, they are still required to file complete and proper taxation reports, reflecting a 0% corporate tax rate. This 0% corporate tax benefit is granted to free zone businesses as long as they comply with all other governmental policies.

If you wish to benefit from the 0% corporate taxation in free zones by establishing your business in Dubai, you can explore the available free zone locations and licensing costs.

CORPORATE TAX FOR FREELANCERS

According to the MOF, individual income is not subject to corporate tax. However, freelancers may wonder whether they will be treated as individuals or business entities for tax purposes.

As per the corporate tax policy, any entity requiring a business license in the UAE becomes subject to taxation. The three main types of business licenses are professional, commercial, and industrial licenses.

The UAE, including Dubai, is an attractive destination for many freelancers due to its easy taxation regulations and the availability of affordable and flexible coworking spaces.

However, if you intend to work as an independent professional or freelancer in the UAE, you will need a professional license, which automatically brings you under the tax regime.

Therefore, as a freelancer, if your annual income exceeds AED 375,000, you will be required to pay the 9% corporate tax for the relevant income amount.

Tax Exemption and Deductions for Dividends and Capital Gains

In addition to the exemptions mentioned earlier, the Ministry of Finance (MOF) in the UAE has introduced tax deductions and exemptions for two specific cases:

1. Dividend Payments: Companies can qualify for a tax deduction on earnings from dividend payments.
2. Capital Gains from Subsidiary Sales: Companies can also benefit from a tax exemption on capital gains derived from selling shares of their subsidiary companies, provided they own at least a 5% share of the subsidiary operating abroad. The ownership requirement may vary for specific countries. For example, in the case of the UK, the UAE shareholder entity must own at least 10% of the UK company’s ordinary share for ten consecutive months to be eligible for a tax-deductible earning.

TAX DEDUCTION FOR COMPANIES WITH FOREIGN BRANCHES

Foreign company branches located in the UAE have the option to choose one of the following:

1. Foreign Tax Credit: Companies with branches or offices in other countries can claim a foreign tax credit for the amount of tax paid in that country.
2. Exemption on Foreign Branch Profit: Alternatively, companies may apply for an exemption based on the profit generated by their foreign branches outside the UAE.

DEDUCTIONS ON FINANCING COSTS

However, there is a 30% interest expense deduction cap to discourage excessive reliance on high-risk debt financing. This cap promotes a focus on equity financing, reducing the potential risks for investors and stakeholders. Additionally, businesses can report their losses as future tax-deductible expenses.

ADMINISTRATION OF CORPORATE TAX UAE

The UAE Ministry of Finance (MOF) has bestowed authority upon the Federal Tax Authority (FTA) to act as the regulatory oversight entity entrusted with overseeing the corporate tax framework.

Businesses are required to file their corporate tax returns along with their financial reports on an annual basis.

HOW TO FILE CORPORATE TAX AND FINANCIAL REPORTS

The Federal Tax Authority (FTA) requires all companies to register with them for tax filing purposes. The registration process can be completed online once it is implemented. Although registration is initially voluntary, the FTA may enforce it in the future. Companies will have nine months after the completion of the financial year to file their tax returns and financial reports.

PROBABLE IMPLICATIONS OF CORPORATE TAX UAE

The introduction of corporate tax in the UAE is expected to promote economic diversification and long-term sustainability. It will enhance the country’s appeal to foreign investors. It’s worth noting that several countries in the Middle East and Gulf region already have corporate tax regimes with varying tax rates. In comparison to other regional and global economies, the UAE’s tax rate of 9% remains relatively low, making it an attractive destination for businesses.

WRAP-UP: CORPORATE TAX UAE

To ensure compliance with the evolving regulatory and tax policies in the UAE, it is crucial to stay updated on the latest announcements from the government. Seeking professional assistance from tax advisors can help structure your business efficiently in managing corporate tax obligations. Findesk, for example, offers a team of experienced professionals who can assist with tax registration and business management. Stay connected with the latest developments and reach out to Findesk for comprehensive support