According to the Ministry of Finance, starting from the 1st of June 2023 financial year, businesses in the UAE will be required to pay a federal corporate tax of 9% on their profits. However, this tax will only apply to businesses whose profits exceed AED 375,000. Despite the introduction of this tax, the corporate tax rate in the UAE remains highly competitive and is the lowest among GCC countries, with Bahrain being the sole nation without a corporate tax regime. The UAE aims to adopt internationally recognized best practices for corporate taxation, ensuring straightforward compliance requirements for businesses.
UAE companies will have to pay corporate tax on their profits as reported in their financial statements in accordance with internationally accepted accounting standards. It is expected that there will be a minimal amount of exceptions and adjustments. As a result, financial statements must now be audited on time without exception.
Only natural resource extraction will be exempt from corporate taxation, the announcement says, which is likely to remain at emirate-level (e.g., Dubai’s corporate tax differs from Abu Dhabi’s). Entities operating in Free Zones will also be eligible for exemptions, subject to certain conditions.
Concerns regarding the worldwide minimum income tax of 15% are likely to be addressed with this introduction of conditions. No withholding taxes will be applied, and thanks to the UAE’s Foreign Tax Credit, no more taxes will need to be paid over the credit limit.
In a significant move, the UAE has decided to eliminate corporate tax on capital gains and dividends, further strengthening the holding company structure. Under the new tax code, it allows for group tax registrations or the taxation of the group as a whole. This means that inter-company losses can be considered when calculating taxable profits. This progressive approach aims to encourage a favorable environment for businesses and promote growth within the UAE. According to the OECD Transfer Pricing Guidelines, UAE enterprises will be subject to transfer pricing and documentation requirements.
Corporate Tax Implementation in the UAE
Within the dynamic and ever-changing legal and regulatory landscape of the UAE, there will be extensive discussions surrounding the newly introduced UAE Corporate Tax (Dubai/UAE CT) and its accompanying administrative framework for corporate tax compliance. The broader regional and global economy will closely monitor the implementation process and take into account the corporate tax rate in the UAE when making their calculations. It is important to emphasize that, even with this change, the UAE corporate tax rate will remain exceptionally low compared to global standards. However, it represents a significant shift from the previous tax system. The introduction of this tax will have a profound impact on various aspects of business operations, including pricing, marketing strategies, accounting procedures, documentation requirements, and IT infrastructure.
All businesses operating in the UAE, including those with activities both offshore and onshore, should carefully assess the impact of the new Company Tax on their transactions, including cross-border transactions and entity structure. It is essential for businesses to ensure compliance with the updated Corporate Tax requirements. Implementing effective Corporate Tax planning strategies early on will be vital for the success of all businesses operating in the UAE.
Providing a Smooth and Seamless Transition to the New Era
Early planning for corporation tax compliance is crucial in order to minimize implementation costs and alleviate the pressure on internal teams to meet a tight last-minute deadline. Many of the country’s top companies have already initiated assessments to determine their preparedness for the UAE CT.
Our knowledge and experience will guide you through this new environment and ensure that your company transitions to the Corporate Tax era smoothly and seamlessly.
Frequently Asked Questions
- How much does it cost to register for Corporate Tax? And what is the typical timeframe for the registration process?
- Obtaining Corporate Tax (CT) registration does not require any fee payable to the FTA (Federal Tax Authority). The professional fee for CT registration depends on the legal form or structure of the business. Typically, this fee can range from AED 1,000 to AED 3,500, plus VAT at a rate of 5%.
- Once all the necessary documents have been filed, the FTA generally grants registration within a period of 3-5 working days. However, if the FTA raises any queries or requests additional documents or clarifications, the registration process may take longer.
- What are the specific documentation necessary for the registration process of Corporate Tax (CT)?
- The documentation required for Corporate Tax (CT) registration varies based on the legal structure of the business. Typically, the necessary papers and documents include a copy of the business license, Memorandum of Association (MOA), and relevant contact details.
- Is Corporate Tax mandatory for businesses operating in all Emirates of the UAE?
- Unless there is a specific exemption from corporate tax, it is mandatory for businesses in all Emirates of the UAE to pay Corporate Tax.
- In the UAE, is it necessary to pay Corporate Tax (CT) in addition to Value Added Tax (VAT)?
- Indeed, both VAT and CT are distinct taxes governed by separate decree laws in the UAE. VAT is applied to individual sale and supply transactions within a business, while CT is a federal tax imposed on the overall profits of the corporation or business.
- For which particular business activities is the payment of Corporate Tax required?
- Unless specifically exempted under CT Law, all corporations and businesses are obligated to pay corporate tax.
- In the UAE, who is eligible for exemption from Corporate Tax (CT)?
- The CT law in the UAE includes a dedicated article that outlines a list of individuals and entities eligible for exemption. For instance, government entities, government-controlled entities, charitable businesses, and investment fund management businesses are exempt from paying CT, provided they fulfill the prescribed conditions.
- What are the relevant Corporate Tax rates for entities that are established in a Free Zone within the UAE?
- The applicable tax rates for entities established in a Free Zone within the UAE can either be 0% or 9%. The specific rate depends on whether the income of the free zone falls under the definition of qualifying income and if the free zone business satisfies the eligibility conditions outlined in the CT Law.