UAE Corporate Tax Regime, Top 10 Question/Answers

UAE Corporate Tax

Demystifying the New UAE Corporate Tax: Your Top 10 Questions Answered

The recent implementation of corporate tax in the UAE has sparked curiosity and concern among businesses and individuals alike. What does this mean for the bustling economy of the Emirates? How will it impact businesses, both big and small?

What is Corporate Tax?

Corporate Tax is a direct levy imposed on the earnings of corporations and businesses. Also known as ‘Corporate Income Tax’ or ‘Business Profits Tax’ in some regions, it encompasses a broad spectrum of business revenues. In the UAE, Corporate Tax applies not just to companies but also extends to select partnerships, unincorporated entities, and individuals engaged in business activities.

How Corporate Tax Works

Individuals and entities liable for Corporate Tax are taxed based on their assessable income, which is their financial income adjusted for tax purposes. Typically, Corporate Tax rates are as follows:

  • 0% (zero percent) for income up to AED 375,000.
  • 9% (nine percent) for income exceeding AED 375,000.

In essence, Corporate Tax is a means for the government to collect revenue from the profits generated by businesses and individuals engaged in commercial endeavors within the UAE.

Let’s delve into the intricacies of the new UAE corporate tax and address the top 10 questions on everyone’s minds.

1. Who Pays Corporate Tax?

Corporate Tax is paid by individuals and entities known as taxable persons. These can be:
Resident Persons: Those residing in the UAE or non-residents deemed to have a significant presence in the country.
Non-Resident Persons: Including foreign entities with operations in the UAE or deriving income from certain sources within the country.
Natural Persons: Individuals conducting business activities in the UAE with a turnover exceeding AED 1,000,000 per year.

2. What is Taxable Income? Taxable income, the basis for Corporate Tax calculation, varies based on residency and presence in the UAE:
Resident Persons: Taxed on worldwide income.
Non-Resident Persons: Taxed on income derived from UAE operations or sources.
Natural Persons: Taxed on income from UAE-based business activities or linked earnings from abroad.

3. Will income from non-regular sources be subject to corporate tax (CT) apart from licensed activities?Any income earned by the corporate entity, apart from dividends and capital gains from qualifying shareholdings, will be subject to CT. However, further clarification is needed regarding what constitutes “qualifying shareholdings.”

4. Has the Federal Tax Authority (FTA) announced slab rates based on earnings? Will profits be taxed on slab rates in the future?Currently, apart from large multinational companies, all other entities will face a unified slab rate of taxes. This includes 0% tax on taxable income up to Dh375,000 and 9% on income exceeding Dh375,000 annually. However, the possibility of introducing different slab rates in the future remains within the UAE government’s discretion.

5. Our corporate financial year aligns with the calendar year. Should we adjust it to match the tax financial year starting from June 1, 2023?While there’s no mandatory requirement to change the financial year to align with the tax year, many entities might opt to do so for better synchronization with the fiscal tax year.

6. We’re a free zone registered entity with some business dealings on the UAE mainland. Are we still exempt from CT?Free zone businesses will now be subject to UAE CT, but exemptions will be granted to those adhering to regulatory requirements and not engaging in mainland UAE business. Clarification is needed regarding whether any level of business with UAE mainland entities would disqualify exemption eligibility.

7. Our group has frequent transactions between entities. Do we need precautions for related party transactions (RP)?Qualifying transactions within the group will be exempt, provided they meet specified criteria. Entities should ensure compliance with arms-length transaction principles and transfer pricing, likely among the prescribed criteria.

8. Will all company expenses be deductible for CT, or are there specific criteria?Taxable income will be the net profit/income after adjustments, likely including depreciation, amortization, allowances, subject to defined thresholds yet to be specified.

9. Can corporate losses be carried forward, and if so, for how long?The UAE CT regime permits businesses to offset losses against future taxable income, subject to certain conditions and guidelines which are yet to be fully detailed.

10. Can a group of companies register as a single tax entity?

Yes, a UAE group of companies can elect to form a tax group, treated as a single taxable entity, contingent upon meeting specific conditions. This allows for filing a single tax return for the entire group.

Conclusion

In conclusion, the implementation of corporate tax in the UAE marks a significant milestone in the country’s economic development journey. While it introduces new challenges for businesses, it also presents opportunities for sustainable growth and investment.

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