Determine business profits that will be subject to UAE corporate tax

The UAE Ministry of Finance (MoF) declared on January 31, 2022 that the Federal Government Corporation tax in the United Arab Emirates (CT) on company profits/income will be implemented for fiscal years beginning on or after June 1, 2023. UAE corporate tax The regime was created to combine best practices from around the world while lowering the cost of compliance for businesses. Corporation tax will be levied on the net profits of UAE companies as recorded in their financial reports, which will be prepared in accordance with global accounting standards, subject to changes as required by the Corporation Tax Regulations.

The UAE has publicly stated the main design principles and policies of the new system, although the Corporate Tax Law has not yet been approved.

In the following article, we have summarized the essential points:

effective date

The UAE corporate tax regime will be implemented for fiscal years beginning on or after June 1, 2023.

  • A business that has a financial year beginning July 1, 2023 and ending June 30, 2024, will be subject to Corporate tax (CT) starting July 1, 2023
  • A company with a fiscal year beginning on January 1, 2023 and ending on December 31, 2023 will be subject to the UAE Corporate tax (CT) starting January 1, 2024.

Application of Corporation Tax

UAE corporate tax will be collected at the federal level. It will apply to all businesses and business operations (both natural and legal persons) operating in the UAE with a business or self-employment license. There are certain exemptions, such as companies engaged in natural resource extraction, which will continue to be subject to UAE corporate tax.

Read more : What is Corporate Tax and how does it affect business owners in the GCC?.

How is business profit/income subject to UAE corporate tax determined?

  • Except for commercial activities, such as the extraction of natural resources, which will be taxed according to the emirate-specific levies. All business and commercial activities in the UAE will be subject to UAE corporate tax.
  • Corporation tax will be paid on taxable income, which the UAE corporate tax law defines as the accounting net profit of a company after specific adjustments (deductibles). earnings after certain adjustments (deductibles), as defined by the UAE corporate tax law. Net accounting profit is the amount expressed in the financial statements produced in accordance with International Accounting Standards.
  • The UAE corporate tax policy applies to business operations, which includes all forms of business activity conducted in the UAE under a business license or authorization, as well as income earned under self-employment licenses (where taxable income exceeds AED 375,000).

The Tax Rate

The UAE corporate tax will be levied on taxable income, which the UAE corporate tax law defines as the accounting net profit of a company after specified adjustments. Net accounting profit refers to the amount established in the financial statements produced in accordance with International Accounting Standards.

The progressive tax rate will be as follows:

  • 0% for taxable income up to AED 375,000;
  • 9% for taxable income over AED 375,000; Y
  • A separate tax rate for significant multinationals that meet the specified conditions set out in ‘Pillar Two’ of the OECD’s Base Erosion and Profit Shifting project.

Foreign Corporation Tax levied on income taxable in the UAE will be credited against the UAE Corporation Tax liability. Entities subject to UAE corporate tax You will have the right to transfer the excess losses and use the losses obtained before the entry into force of the Corporation Tax.

Foreign Individuals

The UAE Corporation Tax will only apply to multinational companies and natural persons who trade or do business in the UAE on a regular or continuous basis. In the vast majority of circumstances, dividends, capital gains, interest, royalties and other investment income will be exempt from UAE corporate tax.

Free Zone in the United Arab Emirates

The free zones will be subject to the corporate tax laws of the UAE. On the other hand, the UAE corporate tax regime would maintain existing tax incentives for free zone companies that meet all regulatory requirements and do not operate on the UAE mainland.

Compliance with the Tax System

  • All companies, including free zones, will be required to register and file a Corporation Tax return.
  • The details of the registration process have not yet been revealed.
  • Under the FTA, the CT return must be filed online each tax year.
  • There are no requirements for declarations or advance or provisional payments of Corporation Tax.
  • Sanctions will be imposed in case of non-compliance with the Corporation Tax regime.

personal taxes

Individuals will be exempt from corporate and personal taxes on wages, real estate, other investments and any other source of income. In addition, dividends, capital gains and income derived from personal ownership of shares or other securities will be tax-free. Individuals will also be exempt from paying taxes on interest and other income obtained through bank accounts or savings plans.

conclusion

With the introduction of the UAE corporate tax framework by the MOF, it is clear that the corporate tax system would be based on a statutory rate of 9% and 0%. The fundamental characteristics of the design have been confirmed. However, there are still several unknowns. The goal is to make the rule basic and straightforward so that UAE companies can comply with it as little as possible. The MOF will provide comprehensive legislation, regulations, guidance and enforcement mechanisms.

If you require advice or information on the potential impact of UAE corporate tax on your organization or activities in the UAE, please do not hesitate to contact us.

Read more : Introduction of federal corporate tax in the UAE on business profits by the Ministry of Finance from June 1, 2023.

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