What is Corporate Tax in UAE?
The FTA (Federal Tax Authority) of the United Arab Emirates on January 31st 2022 announced a brand new kind of tax for business owners in the country named as the Corporate Tax which is aimed to be implemented from June 1st 2023. Recently Federal Tax Authority of the United Arab Emirates has answered a bunch of frequently asked questions that naturally overwhelmed the minds of business owners in the country. The corporate tax will be applicable to revenue received by legal entities, including people who are involved in business, commercial, professional, or any other economic activity that needs a business license or authorization, subject to specific exemptions and limitations.
Background
On January 31st 2022, the Federal Tax Authority of United Arab Emirates announced that all businesses and commercial entities which are registered in UAE are liable to pay Corporate Tax at the rate of 9% starting from June 1st 2023, after meeting certain criteria.
The Criteria
The eligibility criteria have been established, for small- and medium-sized UAE businesses. The law and rules pertaining to this have yet to be issued in full. Meanwhile, you should be aware that the following situations will result in you having to pay corporate income tax:
- A company that generates a taxable income of more than AED 375,000 (US$ 102,000), provided you do not fall under the authority of a free zone and do not benefit from tax holidays.
- An individual who engages in activities that need a business license and generates net income of more than AED 375,000
How will the Corporate Tax possibly impact businesses in UAE?
The initial implementation of the new tax system would undoubtedly necessitate a shift in the tax and finance division of any business’s mentality. From now on, it will be crucial to look at every transaction and book entry from the perspective of Corporate Tax. Businesses in the UAE generally prepared themselves pretty strongly after the establishment of the value-added tax (VAT) and excise systems, to a certain extent. In exchange, the government helped businesses by being compliant on matters of violations, drastically lowering penalties, and by extending the deadlines for paying those penalties.
The impact of the new Corporate Tax regime would be reflected on:
- General Finance Functions
- IT Functions
- Legal Functions
- Supply Chain Functions
- Tax Functions – It will become an even more crucial function for driving business decisions
- Businesses will also be obliged to have strong data architecture for record-keeping that is in line with best practices for managing tax data and tax risks
Calculations for Corporate Tax in UAE
Accounting net income is the basis for calculating corporate taxes. One must take into account all of the revenue from all of the revenue streams in order to calculate net income, also known as net profit or net earnings. They must also calculate the costs associated with generating such incomes, such as operating costs, loan interest, depreciation, and amortization costs, among others. You must multiply your net or taxable income by 9 percent in order to determine your company tax liability. Additionally, you must subtract the total of all business costs from the total income in order to determine your company’s taxable income. Be aware that the accounting net income will follow generally accepted accounting rules (subject to a few changes).
What are the exemptions in the UAE Corporate Tax 2023 Scheme?
Not all entities in the UAE are required to pay corporate tax at the rate of 9%. The tax rate can range from 0% to 15%, with the exception of businesses involved in the extraction of natural resources.
The new UAE corporate tax scheme also relieves some organizations, including people, by completely exempting them from paying tax and increasing the rate for businesses that may generate large sums of money. All this information is still not complete until a detailed document for all terms and conditions is released by the Federal Tax Authority. Following is the list of exemptions:
For Individuals
- Income from job
- Freelance income
- Income through real estate investments in personal capacity
- Income from any kind of business activity that does not lawfully require a permit or license
- Income from personal investments in stocks and shares entities
- Income from interest in savings account
For Businesses
- Large multinational corporations that satisfy certain criteria could be required to pay a slightly higher corporate tax rate that has not yet been announced
- Corporate tax is zero percent for small and medium-sized businesses with recorded income of not more than AED 375,000
- Companies registered in the free zone that abide by all rules and refrain from doing business with mainland UAE firms would still get benefits from the free zone, such as exemption from income and corporation taxes
So, are you prepared for the UAE Corporate Tax 2023 Scheme?
Taxes anywhere in the world are inevitable and they are only implemented to regulate the world economy in a better way. While the news of Corporate Tax has worried the business owners in UAE, it has also given them plenty of time to make effective financial plans for next year. All they need to do is to find a suitable and trustworthy corporate tax consultant in UAE to facilitate them with all queries regarding the Corporate Tax 2023 Scheme. Through a qualified tax consultant, you can assure that the transition of your business into the next fiscal year is smooth and glitch-free.
