The United Arab Emirates (UAE) has long held a reputation for its attractive zero-tax policies, drawing businesses and workers from all corners of the world. However, in recent times, the UAE has made a noteworthy shift in its fiscal strategy. This is because of the new introduction of UAE corporate tax.
This decision is seen as a well-thought-out move aimed at broadening the UAE’s sources of income beyond its reliance on oil revenues, all the while ensuring its continued prominence as a major commercial hub in the region.
This article will dive into how UAE corporate tax was introduced, what are the rates, and how it operates within the country.
So let’s start with what corporate tax is in general, and then we’ll see how UAE corporate tax is defined.
What Is Corporate Tax?
Corporate tax is a type of tax that businesses, like companies and corporations, pay on their profits.
Just like how you pay income tax on the money you earn from your job, companies pay corporate tax on the money they make from their business activities.
This tax money helps the government fund important things like schools, hospitals, and infrastructure.
It’s an essential part of how countries manage their finances, and it ensures that even big companies contribute to the well-being of the society they operate in.
What Is UAE Corporate Tax & How’d It Start?
The folks in the UAE have some news to share. They’re starting corporate tax from June 1, 2023. What this means is that if you’re running a business, you’ll need to pay 9% of your profits in taxes, but only if your business year begins on or after that date.
This news has stirred up a lot of excitement among businesses and tax experts. With this move, the UAE is now the fourth country in the GCC (Gulf Cooperation Council) to have a national corporate tax.
The goal behind bringing in this federal corporate tax is to make the UAE an even stronger global hotspot for businesses and investments. It also helps the country meet international tax standards and prevents any tricky tax tricks.
Since this corporate tax is brand new in the UAE, businesses must wrap their heads around the concept.
The scope of UAE corporate tax
The UAE has brought in a new national tax system that applies to all businesses and commercial activities across its seven emirates. However, there are some exceptions:
- Companies involved in getting stuff from the ground, like oil or minerals, will still follow the tax rules set by their specific emirate.
- Regular folks making money in their capacity, like from their job or investments, won’t be taxed unless it’s a business activity that needs a license.
- Businesses located in Free Trade Zones can avoid this new tax as long as they follow all the rules and don’t do business with the rest of the UAE.
Here’s the interesting part: Foreign banks used to follow their emirate’s bank tax rules, but now they’ll have to follow the UAE’s national tax law. How this change affects them and local banks will be explained later.
It’s a big deal because they’ll all need to adapt to these new UAE corporate tax rules.
Brief On UAE Corporate Tax Rates
The new tax rules in the UAE work like this: They have three different rates based on how much money a company makes.
- If a company’s annual profits are less than AED 375,000, they don’t pay any tax.
- If a company’s annual profits are more than AED 375,000, they pay a 9% tax on the extra money they make.
- Big multinational companies, the ones covered by international tax rules called Pillar 2 of BEPS 2.0, pay taxes based on those global rules if they make more than AED 3.15 billion.
This tax is applied to the money a company makes after making some adjustments to its accounting profits.
Are there any exemptions?
In simple terms, some types of income won’t be taxed in the UAE. These include:
- Money a UAE company makes from shares it owns in certain other companies (the specific rules will be in the law).
- Profits from selling assets like property or investments.
- Profits when companies within the same group reorganize.
- Profits from transactions between companies in the same group.
Also, there won’t be a tax when you send money within the UAE or to other countries.
Because of these income exemptions, it’s expected that the law will have rules like those used in other countries. Businesses will need to check if they meet these rules to get the tax exemptions.
Wrapping Up: Common Questions Regarding UAE Corporate Tax
As the UAE corporate tax is newly introduced, many common questions are being asked by the UAE citizens and people conducting business in the country.
We’ve listed some of them for you below:
Q1. Who has to pay UAE corporate tax?
A1. If a company makes more than 375,000 AED in profit, it has to deal with corporate tax. They’ll have to give a portion of their profit as tax to the government.
Q2. What’s the UAE corporate tax rate?
A2. The corporate tax rate is 9% of the money businesses earn as profit. But here’s some good news for small businesses and start-ups: If your profit is less than 375,000 AED, you won’t have to pay any corporate tax at all. It’s like a special break to help out the little guys and those just getting started.
Q3. When can we get our hands on the corporate tax law from the government?
A3. They put out the corporate tax law on December 9, 2020. You can find the UAE corporate tax info on their official website under ‘Federal Decree-Law no. 47 of 2022. If you want to download it, just head over to the Ministry of Finance website.
Q4. What businesses or incomes are outside the scope of UAE corporate tax?
A4. If a business in the UAE makes more than 375,000 AED in profit, they have to pay corporate tax. But, there are some exceptions. Here’s a list of things and people that don’t have to pay corporate tax:
- If you’re an individual and your money comes from things like your job, real estate, or investments, you’re in the clear. It’s only business-related income that gets taxed.
- Foreign investors who aren’t running a business in the UAE don’t have to worry about corporate tax.
- If you’re a business in a free zone and you’re following all the rules, you might get some tax benefits.
- Any money a UAE business makes from selling shares or getting dividends from certain investments won’t be taxed.
- If you’re moving money around between different parts of the same company or doing a major business overhaul, you won’t be hit with corporate tax either.
Q5. How do you calculate UAE corporate tax?
A5. In the UAE, they figure out how much a company has to pay in corporate tax in a specific way. They take 9% of the profit that the company shows in its financial documents. But here’s the catch – they only start taxing when the profit goes beyond 375,000 AED. Anything less than that is tax-free.
So, let’s say a company makes 475,000 AED in profit. They’d only pay tax on the extra 100,000 AED (475,000 – 375,000). To calculate that tax, you’d multiply the extra profit (100,000 AED) by 9% (which is the tax rate), and that gives you 9,000 AED. So, in this example, they’d pay 9,000 AED in corporate tax.
It’s like you have to pay taxes on your income, but only on the part that’s above a certain amount. This system helps businesses and encourages them to grow while contributing to the country’s finances.
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