The UAE’s recent introduction of corporate tax has created a need for businesses operating in the region to understand its implications and navigate the new regulations effectively. This article provides a comprehensive overview of the key aspects of UAE corporate taxes, covering who is subject to the tax, what income is taxable, exemptions available, and the applicable tax rates.
Corporate Tax Overview
1. Legal Framework
Federal Decree Law Number 47 of 2022 on the taxation of corporations and businesses provides the legal framework for corporate taxation.
2. Enactment & Publication
Signed on October 3, 2022, the corporate tax law was officially published in issue number 737 of the Official Gazette of the UAE on October 10, 2022
3. Scope of Taxation
The corporate tax law establishes the legislative foundation for imposing a federal tax on corporations and business profits within the UAE.
4. Applicability Date
The provisions of the corporate taxes law are effective for taxpayers commencing business on or after June 1, 2023.
5. Applicable Uniformly
As per Article 2, corporate tax is uniformly applicable across all emirates, ensuring consistency in its implementation throughout the UAE.
6. Nature of Tax
Corporate tax is a direct tax levied on the taxable income of businesses, contributing to the overall revenue generation for the federal government
7. Payment Schedule
Businesses are required to pay tax annually, aligning with the tax period of the taxable person. Payment is due within nine months from the end of the applicable tax period
8. Entities Subject to Tax
Corporate tax applies to both businesses and taxable persons. These taxable persons can be residents or non-residents, natural persons, or juridical persons, as defined by Article 11 of the corporate tax law.
9. Residency & Personhood
Taxable persons, whether residents or non-residents, can be either natural or juridical persons, reflecting the inclusive scope of the corporate tax
10. Applicability to Mainland and Free Zone Companies
The corporate tax applies to the mainland and free zone companies, encompassing a broad spectrum of businesses operating within the UAE.
Who is subject to Corporate-Tax
- Resident Entities: Corporate tax applies to judicial persons incorporated in the UAE.
- Foreign Entities: Foreign judicial persons effectively managed and controlled in the UAE fall under corporate tax.
- Freezone Entities: Freezone can benefit from a 0% Corporate Tax rate on “Qualifying Income” by meeting specific criteria.
- High Turnover Individuals: Natural persons conducting business in the UAE with an annual turnover exceeding 1 million dirhams are subject to corporate tax.
- Permanent Establishment: Non-resident entities with a UAE permanent establishment or deriving income from UAE sources are subject to corporate tax.
What is Taxable Income
- Income Determination: Taxable income is calculated by adjusting annual accounting income, sourced from financial statements complying with UAE accounting standards or IFRS for small and medium entities in the relevant tax period.
- Adjustments and Expenditures: Taxable income is shaped by applying adjustments and expenditures to a taxable person’s annual accounting income, ensuring alignment with accepted accounting standards in the UAE or IFRS for smaller entities.
- Resident Taxation Scope: Corporate tax for resident persons encompasses income from both within and outside the UAE.
- Non-Resident Entities: Non-resident entities with a permanent establishment or nexus in the UAE are taxed on income attributed to that establishment or nexus.
- Withholding Tax: Non-residents without a permanent establishment or nexus in the UAE but earning income from the country are subject to 0% withholding tax.
What is Exempt Income
Articles 22 to 25 of the corporate tax laws outline various exemptions designed to align UAE’s corporate tax treatment with international standards and facilitate fair taxation.
Purpose of Exemptions:
Exemptions are granted to income and capital gains arising from the activities of foreign branches or juridical persons, ensuring alignment with international tax practices.
Symmetrical Nature:
Exemptions come with a symmetrical condition – any expenditure incurred in deriving exempt income cannot be deducted for corporate tax purposes.
Domestic Dividends Exemption:
Profits and dividends received from a resident person, including distributions by a resident free zone juridical person to another, are exempt from corporate tax without additional conditions
Participation Exemption
Distributions received from foreign juridical persons are exempt if the recipient holds a participating interest, meaning a substantial long-term ownership interest (5% or more) for at least 12 months.
Corporate Tax in Foreign Jurisdiction:
The participation must be subject to corporate tax in its resident country at a rate of at least 9%, establishing a consistent tax presence throughout a given tax period.
Conditions for Participation Interest:
The ownership interest of 5% or greater, entitlement to at least 5% distributable profits and liquidation proceeds, and no more than 50% of participation assets consisting of non-exempt ownership interest.
Conclusion:
In conclusion, a nuanced understanding of corporate tax in the UAE is imperative for businesses and individuals navigating the dynamic economic landscape. The legal framework, applicability, taxable income, exemptions, and relief measures collectively shape the corporate tax landscape. Staying abreast of the latest legal developments and consulting with professionals, such as Growbox, ensures access to accurate and up-to-date information tailored to specific business needs. Embrace the transparency and consistency offered by the UAE’s corporate tax system to propel your business toward sustainable growth in this era of economic evolution.
