Corporate Tax in UAE

Corporate Tax in UAE

Scritto da MP

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Categorie: Events | News

Pubblicato il June 30, 2023

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On 31st January 2022, the UAE’s government announced it would be introducing a new corporate tax. Historically, The United Arab Emirates has not imposed taxes on the profits of corporations except those in a handful of industries such as resource extraction and foreign banks. However, from the financial year beginning on 1st June 2023, many more companies operating in the territory will need to begin paying the new 9% corporate tax rate.

The new UAE corporate tax will not affect every business, and many will not need to pay the tax at all. Let’s learn more about the new UAE corporate tax and what it means for you.

In this quick guide, you will learn about:

  • The UAE’s corporate tax history
  • The UAE’s 2023 corporate tax – what is it?
  • Features of Corporate Tax – What Is It?
  • Will free zone companies be taxed?
  • Will personal income be taxed in Dubai?
  • Will there be capital gains tax on dividends in Dubai?

Here is everything you need to know about the United Arab Emirates’ newly announced corporate tax.

The UAE’s corporate tax history

For many years, the United Arab Emirates operated as a very low tax jurisdiction. Citizens do not pay tax on their income and most companies have never had to pay any form of corporate tax. Most of the state’s revenues came from nationalised and private fossil fuel extraction industries that paid around a 50% tax on revenues. Meanwhile, foreign banks have long paid a 20% corporate tax on operating profits, and hotels and restaurants in Dubai paid certain taxes, too.

However, in recent years the United Arab Emirates has begun trying to diversify its economy away from fossil fuels. This means that there are a growing number of businesses that currently do not pay any tax at all. With less potential revenue from fossil fuels and a fast-growing economy, it makes sense for the government to tax revenues on businesses to enable further investment in infrastructure, education and healthcare.

The United Arab Emirates first introduced a VAT tax in 2018, which imposed a 5% levy on all consumer purchases. Then in January 2022, the government announced a corporate tax of 9% that would come into effect the following year.

Another reason is that the United Arab Emirates has introduced its new corporate tax is to bring the country in line with international norms and to help tackle tax avoidance. Most other advanced economies around the world impose taxes on business profits, and the 9% tax on UAE companies is still significantly lower than the norm in most other developed countries (which is usually around 20%). The new UAE corporate tax will also help disincentivise foreign businesses from trying to use the country as a base to avoid tax in their home countries.

Read more about taxes in Dubai

The UAE’s 2023 corporate tax – what is it?

The UAE’s 2023 corporate tax will be a 9% tax on the profits (revenue minus expenses) of all businesses which generate over 375,000 AED (about USD $100,000). Businesses that generate less than this sum of money will continue to pay a 0% tax rate.

In addition to the corporate tax, the UAE has also announced that large multinational firms with profits of more than EUR 750 million will have to pay a 15% tax – this is in line with the Global Minimum Corporate Tax Rate agreement.

The new UAE corporate tax will come into effect in the tax year beginning June 1st 2023, and so most companies will have to start setting aside money to pay their taxes from that date. Businesses whose tax year begins in January will not have to start paying tax on revenues generated before 1st January 2024.

Features of Corporate Tax Regime

The corporate tax regime in Dubai includes a diverse amount of policies, from tax-free free zones to corporate taxes, VAT systems and the absence of federal income tax. Read on to find out notable features of the tax system.

  • Who can be taxed?

Legal entities with notable legal personalities like LLCs, PSCs, PJSCs, LLPs and others will be levied with tax. On top of that, any foreign legal entity that earns income in the UAE and is a tax resident will be charged. Although free zones will incur 0% corporate taxes in return that they comply with all regulatory requirements, this is also applicable to free zone companies that engage in trade activity with the mainland. Non-residents and residents of the UAE may also be subjected to corporate taxing policies.

  • Tax rates

If a business earns income that doesn’t exceed AED 375,000, 0% tax will be charged, and 9% will be charged if income earned exceeds AED 375,000. Also, a different tax rate will be charged for larger multinational companies that have different business conditions.

  • Who is exempted?

Upon receiving dividends or selling shares of a subsidiary company, corporate tax law will include a participation exemption from corporate tax. Also, charities, public benefit organisations, investment funds, businesses engaged in the extraction of oil and resources along with wholly government-owned companies are excluded from corporation taxes.

  • Calculating taxable income

Generally, the account net profit or loss shown in the company’s financial statements will be used to determine the tax percentage and income. In case of a company loss, the business could offset the value against taxable income in future financial years up to 75%.

  • Groups

A group of companies may be able to form a tax group in which they would be capable of being treated as a sole taxable entity. To do so, a company or subsidiary needs to refrain from being an exempted party or being registered in a free zone.

  • Tax credits

In efforts to avoid double taxation, the regime will allow for a credit in parallel with foreign tax paid in a foreign jurisdiction against foreign tax income which has not been exempted.

Will free zone companies be taxed?

It is not yet entirely clear how the new UAE corporate tax will apply to businesses that are based in free zones. According to the government announcement, free zone companies will still be able to benefit from the advantages provided by their own specific free zone’s pre-agreed incentives. However, in future, free zones may decide to change the rules and could potentially introduce the tax.

If free zone companies do business with mainland businesses, they will normally have to pay the corporate tax on revenues generated by working with them.

Free zone companies will also need to register and file a corporate tax return, even though they won’t have to actually pay any tax.

Will personal income be taxed in Dubai?

No, there are currently no plans to tax people’s personal income in Dubai or the rest of the UAE. The only form of personal income tax in Dubai is the 5% VAT tax which everyone must pay on consumer goods and services.

Will there be capital gains tax on dividends in Dubai?

No, there are currently no plans to introduce a capital gains tax on dividends received in the United Arab Emirates or Dubai. At the time of writing (March 2022) business owners and investors do not pay any capital gains tax on dividends from the businesses they’ve invested in.

Why start your company with us?

MP Group is located in DIFC, in the financial hearth of Dubai.

Companies based in Dubai, with our careful supervision and control can continue to benefit from the pre-existing incentives we have negotiated with the government, including a 0% tax rate on profits. So, even when the new UAE corporate tax rate comes in from June 2023, you will not be required to pay it (unless you do business with mainland companies).

Our experienced consultants can support you with all aspects of business setup in Dubai, which means you can focus on launching your business – and leave the admin to us. We can even advise you on things like filling in your corporate tax return (also free zone companies still need to file and register one after June 2023, even though they don’t have to pay the tax itself).

FAQ 1: Is UAE tax-free for business?

Business set up in the UAE mainland will be subjected to a certain amount of taxes, although free zones in Dubai, such as Meydan Free Zone allow 0% corporate and personal tax to be levied upon business profits.

FAQ 2: Who pays corporate tax in the UAE?

All businesses operating in commercial activities and other businesses are subjected to paying corporate tax with a few business models having exemptions. Ex- Businesses involved in the extraction of oil.

FAQ 3: Why is corporate tax introduced in the UAE?

A detailed and extensive corporate regime in the UAE was introduced in order to amplify Dubai’s global position as a hub for investment and innovative startups, with affordable registration costs, inclusive of no corporate taxes.

FAQ 4: How much is corporate tax in the UAE?

Dubai follows a progressive corporate tax system with rates between 9% to 55%.

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