Governments have imposed taxes across the globe; nations have been following the tax laws imposed by their governments. Sufficient evidence of tax systems can be found in the Greek, Persian, and Muslim civilizations. Taxes serve as a source of income for the state, and taxes are spent on public welfare by the governments. The corporate tax is imposed on businesses and organizations by the governments taking a specific amount out of their profits. The value charged as a tax is usually calculated after the net profit is determined.
Corporate Tax in UAE, in simple words, is a tax imposed on the profits that a business earns after the deduction of the cost of goods sold, expenses incurred on administration and general expenses, sales and marketing expense, research and development expenditure, depreciation, and other related expenses. Corporate Tax is calculated based on the pre-determined slab rates as set by the competent authority of the country or Emirate, as in the UAE.
UAE, in the past, was considered a heaven for investors, large businesses, and individuals alike due to its 0% tax-based economy. Still, due to the ever-changing international market dynamics and economic factors and to elevate the UAE economy by international standards, the government of the UAE introduced a 5% VAT a couple of years ago.
Taxes are being slandered in the UAE to equilibrate its economy according to international standards and reduce its dependence solely on the oil reserves, a major contributor to the nation’s income.
Corporate Tax in UAE, commonly known as CT, shall come into effect starting June 1st, 2023. It shall apply to all the businesses irrespective of the nature or mentioned otherwise. It shall be calculated entirely on the profits of a business as per the below-approved schedule.
Taxable Income CT Rate
AED 0-375,000 0%
Above AED 375,000 9%
It will be compulsory for all businesses to submit a formal CT return with the authorities, except for businesses operating in the Free Zones under certain circumstances.
Corporate Tax for Free Zone Business
Although it will be mandatory for all free zone businesses to file the annual CT returns, they will have an option to enjoy a 0% corporate tax if they comply with all the regulatory requirements set for the businesses operating in the free zones and have no business in the mainland UAE.
Multinationals that fall “Pillar Two” and meet the criteria of OECD having a global income of more than EUR 750m shall have different CT rates.
Calculation of Corporate Tax
It shall be calculated on the “Accounting Net Profit” of a business depicted in the financial statements, with nominal limitations and some exemptions. If a business experiences tax loss, there will be an option provided to carry forward it to the next year to offset the effects in the future.
Exempted Incomes from the Corporate Tax
Any income generated from employment income proceeds from real estate, income generated from savings, returns from investment, any income generated by a person in his capacity that is not related to any business in UAE.
Any income from shares and capital gains from shareholders will also be exempt from CT.
FAQ regarding the Corporate Tax in UAE
- All sorts of income generated by a business, whether related to its core business area, shall be taxable under the new corporate tax regime in UAE.
- It shall only be applicable if profits are more than AED. 375,000 and shall be charged at the rate of 9%
- The residual amount left with a business after deducting the cost of goods sold, expenses incurred on administration and general expenses, sales and marketing expenses, research and development expenditure, depreciation, and other related expenses shall be considered Profits.
- The businesses operating in the free zones in UAE shall continue enjoying 0% CT if they follow the procedures and guidelines laid down for businesses operating in the free zones
- In case a business operating in the free has a small chunk of income generated from the operations in the mainland UAE, will all its income be subjected to the CT? Clarification is still pending at the end of the authorities.
- Multinational businesses and the oil and gas sector shall be governed under different slab rates.
- It shall be filed online on June 1st every year starting from 2023. Businesses shall not be liable to shift their business year from the calendar to financial, and they can continue operating as they did; only the CT shall be filed yearly on the said date.
- Any profits generated by a business working within its group shall be exempted from the CT. Still, the profits depicted by the group shall be taxable in the law governing corporate tax in UAE.
- Although businesses can carry forward their losses to offset taxable income for subsequent financial years, clarification is still awaited for how many years the loss can be carried forward to offset the effects of corporate tax in the UAE.
Conclusion
Although taxes are a new idea to the people in UAE, the UAE government is taking stern actions to implement a healthy tax regime in the country, focusing on more federal income generation and less reliance on the oil reserves. The tax regime that the Federal Tax Authority is governing will enable states other than Abu Dhabi, an oil-rich state, and Dubai, a world-renowned tourist destination, to benefit from the tax revenue the authority foresees to generate.
BS Auditing of Accounts has thorough understanding of all laws governing businesses in the UAE. Our team of skilled professionals can provide the best guidance and assistance regarding the new tax regime. Feel free to consult us:
• Office # 0641, Tamani Arts Offices, Business Bay, P.O. Box 111390, Dubai, UAE
• +971 4 570 7357
• +971 58 108 5690
• info@bsauditing.com
