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Corporate Tax in UAE – How Does It Affect You And Are You Ready?

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corporate tax in Dubai, UAE

The tax authority of the United Arab Emirates (UAE) has announced that a corporate tax of 9% will be implemented on all businesses and entities registered in the UAE from 1st June 2023 with distinct exemptions and conditions.

Corporate tax in UAE will be applicable on the net income or profit obtained by legal entities including individuals engaged in business, professional, commercial or any other economic activity that requires a business license or a permit.

The UAE corporate tax regime will be based on international best practices for bringing tax transparency and preventing harmful tax practices while keeping minimal compliance burden on businesses.

Since the announcement has come in, there have been speculations on the nuances of the design of the corporate tax regime and its impact on the UAE economy. The biggest question that UAE businesses are currently facing is how the introduction of federal corporate tax will impact their plans and operations in the UAE.

To answer this million-dollar question, Aviaan Accounting has conducted an in-depth study in corporate tax matters to help businesses assess the potential impact of corporate tax on their business and overall economy besides helping them adopt the same in a compliant manner.

This article helps you examine the potential implications of the new tax regime on key stakeholders and the overall business ecosystem in the UAE and guides you with the necessary steps to take for a smoother and hassle-free implementation.

UAE Corporate Tax – What Does It Mean For You?

You are liable to register for corporate tax and pay tax @ 9% annually if you are:

  • A registered business earning taxable income over AED 375,000, provided you don’t fall under the free zone jurisdiction and take tax holiday benefits.
  • An individual earning taxable income over AED 375,000 from activities that require a commercial license.

Impact of Corporate Tax in UAE

Corporate tax is preserved as short-term liability for businesses which is seen to adversely affect the working capital. Therefore, businesses need to assess the gap in working capital and bridge it. This can be done by considering the impact of corporate tax on businesses and accordingly making strategies and action plans while preparing the budget for the respective period.

Corporate tax will directly impact the profitability of the company. Furthermore, it will impact the finance functions, legal functions, tax functions, supply chain functions and IT functions, among others.

The new tax regime would require a mindset shift of finance and tax professionals from process-centric (back-office activities, compliance, etc.) to data-centric (data management, risk management, etc.) to support business objectives.

Businesses will need to carefully examine all the transactions and book entries from the point of view of corporate tax. There will be a need for a robust record-keeping data architecture harmonious to tax data and tax risk management best practices.

This will also require well-defined processes and well-trained personnel who are prepared for advanced and digitally enabled tax functions.

Corporate tax will not apply to an individual’s salary and other employment income whether received from the private or public sector. Furthermore, interest income and other income earned from bank deposits or saving schemes will not attract corporate tax.

Income from dividends, capital gains and other income earned by way of investment in shares or other securities in a personal capacity do not attract corporate tax. Income from investment in real estate in a personal capacity is also not subject to corporate tax in Dubai, UAE.

In short, there will be no impact of corporate tax on individuals as long as the income is not earned from trade or business in the UAE.

Barring free zones that do not conduct business with the Mainland UAE, a corporate tax of 9% is applicable to all businesses generating a taxable income above AED 375,000 ($102,000).

For businesses that fall under OECD’s Pillar Two reforms, i.e., large multinational corporations having global consolidated revenues exceeding AED 3.15 billion (€ 750 million / $795 million), a different tax rate would apply.

It is worth noting that the 9% corporate tax rate in Dubai, UAE is still very competitive compared to other countries in the GCC region and across the globe. This ensures that UAE will still remain an attractive destination for doing business and will continue to lure foreign investors worldwide.

The below table highlights the corporate tax rates in the GCC region.

Countries Corporate Tax Rate
UAE 9%
Qatar 10%
Oman 15%
Kuwait 15%
Saudi Arabia 20%
Bahrain CT is not yet implemented

 

Besides having globally competitive corporate tax rates, the government is anticipated to reduce or completely remove charges relating to license fees and fees for setting up companies in UAE. The move will reduce the impact of the tax on profit-making businesses in the region.

Free zone entities will continue to receive tax incentives currently being offered to them. They would benefit from a 0% corporate tax rate on business profits earned from the following transactions:

  • Transactions with businesses located outside UAE.
  • Transactions with businesses located in the same or any other free zone.
  • Sale of goods from designated zones to UAE mainland businesses that are importers of record of those goods.
  • Transactions with group companies located in mainland UAE. However, payments made by the mainland group will not be deductible expenses for the mainland for corporate tax purposes.
  • ‘Passive income’ received from mainland UAE companies. This includes interest and royalties, dividends and capital gains from owning shares in mainland UAE companies.

All other income streams of a free zone company are likely to be subject to UAE corporate tax.

How to Prepare for the Corporate Tax in Dubai, UAE?

It’s time to get ready for the new tax world. The onus is on the businesses in the UAE to ensure that they are tax ready before 1st June 2023 in order to remain compliant with the corporate tax regulations in UAE.

The first step in preparing is accepting and embracing the imminent changes. With increased awareness and knowledge, businesses can successfully pivot and embrace new tax and compliance requirements.

Businesses need to have an in-depth understanding of corporate tax matters. There is a need for a change in the mindset where businesses need to focus on making tax and transfer pricing more strategic than ever.

Assess the impact of corporate tax on the business operations, financial health of your business, and expansion plans. Identify the gaps and make strategies to address them.

Businesses need to effectively plan ways to navigate through the operational, financial, contractual and legal impact of new taxes and ensure effective communication of the plan of action across every level of their organisation hierarchy.

The Bottom Line

Historically, the implementation of corporate tax regime has had a positive impact on the macro-economic outlay in other countries. Businesses in the UAE should take heart and see corporate tax introduction as an opportunity for strategic development benefiting business operations and improving internal processes.

Having said that, effective tax planning can help you save taxes and avail relevant tax deductions. A qualified corporate tax consultant in Dubai, UAE like Aviaan Accounting can help you prepare for the UAE corporate tax and smoothly transit into the next financial year.

Our corporate tax services can help you assess, analyse and implement the UAE federal corporate tax. We help you assess the impact of corporate tax on your business and guide you as to what actions you need to take so that you are ready to comply with the corporate tax regulations in the UAE.

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