How does the Ministry of Finance of UAE manage and develop the federal government’s financial resources? Through fiscal policies and local and international relations, the ministry aims to ensure the fiscal system’s development, integrity, and sustainability by the best practices available. The ministry has recently implemented a new corporate tax regime as part of its efforts. This initiative is intended to position the UAE as a supreme transnational hub for businesses and investments. By introducing this tax, the UAE aims to further enhance its development and transformation, ultimately achieving its strategic objectives. Let’s look at some common questions on corporate tax in UAE.
What is federal corporate tax?
A corporate tax is imposed on the income or capital of corporations and other entities. It is levied on the taxable income generated by businesses. Similar to how individuals pay income tax, corporations are subject to corporate tax. Many countries have both national and state-level corporate taxes.
How is corporate tax calculated?
Corporate tax is calculated based on a company’s net or taxable income. Net income, or net earnings, involves calculating all the income generated from various revenue streams. The company’s expenses, including operating expenses, depreciation, amortization, interest on loans, and others, must be considered. Business management software like Tally Prime can simplify the process by providing readily available financial reports of balance sheets and profit and loss accounts.
Is there a federal corporate tax in the United Arab Emirates?
The United Arab Emirates (UAE) does not have a federal corporate tax. Corporate tax in the UAE is calculated on a territorial basis, with tax decrees issued by each Emirate’s government. The corporate tax rates vary across the seven Emirates, ranging from 10 percent in Qatar to 20 percent in Saudi Arabia.
However, on 31 January 2022, the Ministry of Finance (MoF) announced the upcoming implementation of a new federal corporate tax (CT) system. It is expected to be effective on 1 July 2023 or 1 January 2024, depending on the financial year followed by businesses. Businesses must register accordingly once the Ministry of Finance announces the registration process and ongoing business compliance obligations.
What is the rate of the new corporate tax in the UAE?
The new corporate tax rate in the UAE will be 9 percent, with some exceptions. Businesses with a net or taxable income of AED 375,000 or additionally will be subject to this tax. Small businesses whose taxable income accomplishes not exceed AED 375,000 will continue to have a tax rate of 0 percent.
Which entities are liable to pay corporate tax in the UAE?
Corporate tax in the UAE applies to the following entities: individuals operating businesses with a commercial license, foreign businesses engaged in regular trade or business activities within the UAE, banking operations, and companies involved in real estate management, development, and brokerage. These entities are required to fulfill their corporate tax obligations in accordance with UAE tax regulations.
What is required for compliance with the new corporate tax?
Under the new corporate tax law, businesses will use the accounting net profit position in their financial statements as the beginning point for determining taxable income. Therefore, financial reports, financial statements, and accounting books of businesses will be crucial for tax assessment and compliance.
What are the exceptions to the new corporate tax?
While the UAE has introduced a federal corporate tax applicable to businesses and commercial activities across all seven emirates, there are exceptions:
- Businesses operating in the natural resources extraction industry will follow the tax decrees issued by their respective emirates.
- Businesses registered in free trade zones are exempted if they comply with regulatory requirements and do not operate mainland UAE businesses.
- Individuals’ income, unless it arises from business, commercial, professional engagements, freelancing, or other economic activities requiring permits or licenses.
- Individuals income from personal real estate investments, as long as they are not conducted as a business requiring a commercial license.
- Individuals’ income, capital gains, and dividends earned from personal investments in shares and securities, and interest earned from deposit and savings accounts.
What are the objectives of the new corporate tax in the UAE?
The objectives of the new corporate tax in the UAE are to establish the UAE as a top global hub for business and investment, drive development and transformation in line with strategic objectives, and demonstrate the UAE’s commitment to meeting international standards for tax transparency and combating harmful tax practices.
How many different tax levels are there in the corporate tax?
According to the Ministry of Finance, the new corporate tax rates are structured as follows:
- For taxable income up to AED 375,000, the tax rate is 0 percent.
- For taxable income exceeding AED 375,000, the tax rate is 9 percent. Additionally, there will be a separate tax rate for large multinational corporations that meet specific criteria established under Pillar Two of the OECD Base Erosion and Profit Shifting Project.
Who will be responsible for administering the new corporate tax?
The management, display, and enforcement of the new corporate tax will be overseen by the Federal Tax Authority (FTA).
Will foreign companies or individuals be required to pay the new corporate tax?
Yes, foreign companies and individuals will be subject to the new corporate tax in the UAE if they conduct business or trade in the UAE on an ongoing or regular basis.
Will the income earned by foreign investors be subject to the new corporate tax?
No, the income gained by foreign investors from rewards, interest, royalties, capital gains, and other investment returns will not be subject to the new corporate tax.
What is the corporate tax rate for entities established in a free zone?
Entities based in a free zone that meet specific conditions will be classified as “Qualifying Free Zone Persons.” The corporate tax rates applicable to them are as follows:
- 0% on preparing income
- 9% on taxable income that does not meet the income definition.
What is a Tax Period?
The Tax Period refers to the specific time frame for calculating and reporting corporate tax. In the case of corporate tax, the tax period is typically based annually. The standard tax period is the Gregorian calendar year, from 1 January to 31 December. However, a business can choose a different 12-month period for preparing its financial statements. For example, if a business follows a financial year starting from 1 April, the tax period would be 1 April to 31 March.
Will I have to pay Corporate Tax in UAE (CT) alongside Value Added Tax (VAT) in the UAE?
If your business is registered for VAT, you must pay VAT and CT separately. These are two distinct taxes with separate obligations. However, if your business is not VAT registered, you may still be liable to pay federal corporate tax.
Will VAT paid be deductible for UAE Corporate Tax?
For UAE Corporate Tax purposes, only irrecoverable input VAT may be deductible. This means that if VAT paid on purchases is non-recoverable, it can be deducted to calculate taxable income. However, VAT charged on sales and VAT incurred on recoverable purchases would not impact taxable income calculation for corporate tax purposes.
How can businesses prepare for federal corporate tax in the UAE?
To prepare for federal corporate tax in the UAE, businesses should consider the following steps:
- Understand the corporate tax laws and regulations by accessing information from the Ministry of Finance and Federal Tax Authority websites.
- Assess your business’s corporate tax obligations, including the need for registration and determining the applicable accounting or tax period.
- Determine the deadline for filing the UAE corporate tax return and gather the documents and applications required for corporate tax purposes.
- Evaluate how UAE corporate tax may impact your business’s obligations and liabilities under contracts with customers and suppliers.
- Maintain accurate financial information and records relevant to corporate tax calculations.
- Stay updated with the latest information and guidelines by regularly checking the official websites of relevant authorities.
- Ensure your team knows corporate tax applicability and its implications for your business.
- Consider using accounting or business software like Tally Prime to manage your business requirements and simplify corporate tax calculations.
What is Tally Prime, and how can it help calculate taxes?
Tally Prime is an accounting and business software that can assist businesses in preparing for corporate tax in the UAE. It offers several features that make businesses corporate tax-ready and VAT compliant, including:
- Generating instant business reports related to accounting, inventory, and financial statements of balance sheets and profit and loss accounts, facilitating the calculation of corporate tax.
- Streamlining the process of filing VAT returns with high accuracy and consistency.
- Generating VAT-compliant invoices and managing different VAT supplies, such as imports and exports.
- Providing tools to manage account books accurately and consistently.
- Offering flexibility to accommodate various purchase and sales processes.
- Allowing multiple price levels for products, catering to different pricing scenarios like wholesale, retail, and customer-specific levels.
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