The United Arab Emirates has marketed itself as a destination where international investors are welcomed and income is tax-free. Low taxes and a business-friendly environment have helped change the country over time. However, on Monday January 31, UAE has announced that it is introducing a new federal Corporate tax on business earnings for the first time.
The Ministry of Finance stated that the new federal profit tax of 9 per cent will come into effect on June 1, 2023. It is the latest move to put the country in line with other governments around the world.
The UAE has been steadily implementing new taxes to raise its revenue. The new Corporate Tax regime will boost investment and headquarters activities while ensuring the free flow of capital, trade, financing, and services.
The Corporate tax will be charged on the profits of UAE-based enterprises, with a few exceptions and adjustments. These will be stated in the financial reports of the companies, which will be prepared in accordance with internationally accepted accounting standards.
According to sources, firm income over 375,000 AED ($102,000) will be taxed at 9 per cent beginning in June next year. It allows UAE business groups to be taxed as a single entity or to seek relief in the event of losses or restructuring. To avoid double taxation, international taxes can be credited against the UAE’s Corporate tax. Thus, the Corporate tax policy will also lower compliance costs for businesses or firms.
Valerian Dalmaida, Managing Partner of Quick Accounting and Advisory LLC said, “It was long overdue, and once implemented, it will boost the economy. Taxing at the group level might create some bottlenecks. Tax consultants will have more work for tax consultancy work.”
The new Corporate tax system would keep the corporate tax incentives that presently apply to free zone businesses that meet all regulatory requirements and do not conduct business in the rest of the UAE. Thus, the corporate tax system for free zones has remained unchanged. The ‘withholding taxes’ on domestic and cross-border payments, foreign investors who do not conduct business in the UAE will not be imposed.
It will ensure that compliance costs are kept to a minimum for businesses that generate and maintain transparent financial statements. Businesses would only have to file one corporate tax return per fiscal year and would no longer be needed to make advance tax payments or prepare provisional tax returns.
As per the reports, businesses involved in the extraction of natural resources will continue to be taxed at the Emirate level.
Small business and startup profits up to $102,000 would not be taxed to encourage small enterprises and startups, stated the Ministry. Personal income from employment, real estate, and other investments, as well as revenue earned from a business licenced outside the UAE, will be exempt from the Corporate tax. Oil and gas firms are another exception, as they have their taxation structures.
UAE businesses will be subject to transfer pricing and documentation requirements based on the OECD Transfer Pricing Guidelines.
By mid-year, the UAE Ministry of Finance plans to issue more information on the UAE corporate tax system to help businesses prepare for and comply with the new regime.
The UAE has also taken similar steps recently to try to retain foreign investors, including relaxing restrictions on corporate ownership rules and granting visas for longer periods. It has also liberalised various Islamic restrictions concerning alcohol and unmarried couples, as well as switching to a Monday-Friday workweek.
