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How does the proposed UAE corporate tax impact your business?

By Dr. Yass Alkafaji DBA, CPA.

May 8, 2022

If you’ve heard about the newly proposed corporate tax in the UAE, you may be wondering how it will impact your business. Keep reading for a simple breakdown of the tax and answers to frequently asked questions. Look out for future posts where we’ll take a deeper dive into specifics including free zone entities, passthrough entities, transfer pricing, and the issue of residency and double taxation. Please note that this is not professional advice and that the final language in law may change once passed.

In April 2022, the UAE Ministry of Finance issued a consultation document outlining what the proposed corporate income tax law will look like once it is officially passed.

Question: What is corporate tax and how is it different from value-added tax?

Answer: Corporate Tax (CT) is a tax on the net income or net profit of a business. Value-Added Tax (VAT) is a consumption tax assessed on the end consumers, not businesses. For VAT, the business collects the tax from the buyers and send it to the government. CT is a tax assessed on and paid by the business and, thus, becomes part of the cost of doing business.

Question: Why is the UAE introducing corporate tax?

Answer: The UAE introduced corporate tax law to adhere to the new Global Minimum Tax Regime formulated by the Organization for Economic Co-Operation and Development (OECD) and accepted by more than 136 countries. This tax is effective beginning in 2023. It mandates a minimum tax rate of 15%.

Question: Does the UAE’s corporate tax law apply to individuals?

Answer: Generally, no, with exceptions. This law, as the name indicates, applies to corporations or businesses. However, if an individual is conducting business as a proprietorship or unincorporated partnership, that person will have to file and pay tax on the profit generated from the business but not on personal income. This is commonly called pass-through income tax. Our next blog will address this issue.

Question: Does the law apply to all corporations and businesses?

Answer: Corporate tax is imposed on UAE registered corporations or foreign corporations that meet certain criteria of residency. The proposed law requires UAE corporations to report and pay taxes on their income within the UAE and in other countries.

Question: Does the law apply to all levels of income?

Answer: Small businesses with net income of AED 375,000 or less will have a 0% tax rate. Businesses that generate income higher than that will be subject to a 9% flat tax rate. Multinational corporations with global net profit greater than €750 million are subject to a 15% tax rate.

Question: Does the corporate tax law apply to businesses incorporated within a free zone?

Answer: Generally, businesses incorporated in the free zones will pay 0% tax. However, these businesses are still required to file annual corporate income tax returns. If a free zone corporation conducts business in mainland, the profit generated from such business is taxable.

Question: Does the corporate tax law apply to global income or only to income generated within the UAE?

Answer: As we mentioned above, UAE based corporations may be liable to pay corporate tax on global income if the key decisions concerning foreign corporations are made within the UAE. If foreign businesses pay taxes to foreign countries, then the UAE’s corporate tax law allows them to deduct it from the UAE tax.

Question: Are all types of corporate income subject to corporate tax?

Answer: A few types of income are exempt. This will include dividends received on investments from owning shares of other companies. This is commonly referred to as passive income. Additionally, when a company sells shares of subsidiaries for a profit, that profit (commonly called capital gain) is exempt from taxation.

Question: When will this law go into effect and when will my business need to file tax documents?

Answer: The law will become effective for the fiscal year beginning June 1, 2023. Tax documents, also known as a tax return, will need to be filed within 9 months of the end of the previous fiscal year. For example, if a corporation’s fiscal year begins June 1, 2023 and ends May 31, 2024, this corporation has to file its tax return and pay the tax liability no later than February 28, 2025. For companies that adopt the calendar year as their fiscal year (i.e., beginning January 1 of each year), they are required to file the firs tax return no later September 30, 2024.

Question: Are businesses required to have audited financial statements?

Answer: Corporate tax law relies on the honor system of corporations to report the correct amount of net income. However, the FTA will investigate if they have reason to or as part of their routine random audits.

Even though the law will not come into effect until June 1, 2023, we highly recommend you start preparing your business now. Ledgers is uniquely qualified in advising businesses on how to comply with tax laws across the world, including within the UAE. Don’t wait until 2023 to get your business ready. Reach out to Ledgers today!

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