The Corporate Tax in UAE Law provides the legislative framework for the approval and implementation of a Federal Corporate Tax (often known as “Corporate Tax”) in the UAE for fiscal years commencing on or after 1 June 2023. According to Federal Decree-Law No. 477 of 2022, which was issued on December 9, 2022, the Corporate Tax would begin to be applied in the UAE.
What is corporate tax in UAE?
The net income of companies and other enterprises is subject to corporate tax, and it is a type of direct tax. In certain other jurisdictions, the term “corporate tax” is also used to refer to “corporate income tax” or “business profits tax.”
The implementation of Corporate Tax in UAE is meant to hasten the UAE’s development and transition while also assisting it in achieving its strategic goals. The UAE will solidify its position as a top jurisdiction for business and investment thanks to the certainty of a competitive corporate tax in UAE structure that complies with international standards and its wide network of double tax treaties.
The introduction of corporate tax in UAE will primarily apply to Four sorts of entities or people.
1.UAE Companies
UAE corporations and other legal entities that are incorporated in the UAE or that are effectively managed and controlled there;
2. Natural Persons (Individuals)
Natural Persons are those, who operate a business or engage in a commercial activity as described in a cabinet decision that will be released in due course
3. Non-Resident Juridical Persons (Foreign Legal Entities)
This group includes such individuals who have a permanent establishment within the UAE. As “Taxable Persons,” judicial entities created in a UAE Free Zone are likewise subject to corporate tax and must abide by the rules outlined in the corporate tax law.
4. Free Zone Person
A Free Zone Person who satisfies the requirements to be regarded as a Qualifying Free Zone Person, however, can profit from a Corporate Tax rate of 0% on their Qualifying Income.
What is Withholding Tax in Corporate Tax in UAE ?
Withholding Tax (at a rate of 0%) may apply to non-residents who do not have a permanent establishment in the UAE or who receive income from the UAE that is unrelated to their permanent establishment. A type of corporate tax known as withholding tax is taken out at the source by the payer on behalf of the income receiver. The payment of dividends, interest, royalties, and other forms of income across international borders is frequently subject to withholding taxes, which are present in many tax systems.
Exemptions from Corporate Tax in UAE
There are four categories of entities are primarily exempted from Corporate Tax
1. Automatically exempted Companies
All Government Entities and Government Controlled Organizations that a are specified in the Cabinet Decision lists
2. Entities exempted by Ministry of Finance Notification
All types of Extractive Businesses and Non-Extractive Natural Resource Businesses are comes under this group.
3. Entities exempted by Cabinet Decision
Qualifying Public Benefit Entities are comes under this group
4. Entities exempted by Federal Tax Authority
Public or private pension and social security funds, Qualifying Investment Funds, subsidiary of a government entity, a government controlled entity, a qualifying investment fund, or a public or private pension or social security fund that are fully owned and controlled within the UAE.
Registration of Corporate Tax in UAE
It will be necessary for all Taxable Persons to register for Corporate Tax and get a Corporate Tax Registration Number, including Free Zone Persons. Some Exempt Persons may also be asked by the Federal Tax Authority to register for Corporate Tax in UAE.
For each Tax Period, Taxable Persons must submit a Corporate Tax return within nine months after the conclusion of the applicable period. The payment of any Corporate Tax owed in relation to the Tax Period for which a return is submitted would typically have to be made by the same date.
A taxable person must pay corporate tax on any taxable income they receive during a tax period.
Corporate Tax would typically be levied once a year, with the Taxable Person determining their own Tax obligation through self-assessment. This indicates that the Taxable Person files a Corporate Tax Return with the Federal Tax Authority in order to calculate and pay the Corporate Tax.
The accounting income (i.e., net profit or loss before tax) of the Taxable Person as reported in their financial accounts serves as the basis for computing Taxable Income. To establish their Taxable Income for the applicable Tax Period, the Taxable Person will next need to make a few modifications. For instance, it could be necessary to make adjustments to accounting income for revenue that is exempt from corporate tax and for expenses that are entirely or partially non-deductible for corporate tax reasons.
The timing of the deduction may vary depending on the kind of cost and the chosen accounting system, but in general, any legitimate business expenses made entirely and exclusively for the purpose of generating Taxable Income will be deductible. For capital assets, expenses are typically recorded through amortization or depreciation deductions throughout the course of the asset’s or benefit’s economic life.
Dual-purpose costs, such those expended for both personal and company needs, must be allocated, with the appropriate part being considered as deductible if it was incurred completely and solely for the taxable person’s business.
The following expenses do not consider for the calculation of Taxable Income in Corporate Tax in UAE
- Bribes give to any party for any purposes
- Penalties and fines (other than amounts awarded as compensation for damages or breach of contract)
- gifts, grants, or donations given to a non-qualifying public benefit organization
- Distributions of dividends and other earnings
- The Corporate Tax Law imposes corporate tax.
- Expenditure not made entirely and only for the taxpaying individual’s business expenditure made in order to derive revenue exempt from corporate tax
- 50% of the amount of the expenditure spends on Client entertainment expenditure. (This means 50% you can deduct for the calculation of corporate Tax.
- the amount of earnings before interest, tax, depreciation, and amortization may not exceed 30% of the total amount of earnings (except for certain activities)
Rate of Corporate Tax in UAE
For Individuals and juridical persons, do not pay any corporate tax if their taxable income is less than 3,75,000 Dhs (amount to be confirmed in a Cabinet Decision) for a Financial Period. If Taxable income exceeds 375,000 Dhs, they are liable to pay 9% of Taxable Income.
For Free Zone Entities are liable to pay 9% on taxable income that does not meet the qualifying income definition and 0% on their Qualifying Income.
As all Taxable Person determining their Tax obligation through self-assessment, it is required to create and maintain proper accounting system for calculating Taxable income. For easy maintenance of accounting procedures, you can use Simplified ERP Software like Fortuner, from Fortune Technology LLC, which can be operated without excellent knowledge in Finance.
If you want to download complete Law of Corporate Tax, you can download from Ministry of Finance Website