Demystifying Corporate Tax in the UAE: A Comprehensive Guide

HLB HAMT Tax Team

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HLB HAMT - Accounting Firm in UAE

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    In recent years, the United Arab Emirates (UAE) has become an attractive destination for businesses and entrepreneurs worldwide. With its strategic location, business-friendly environment, and tax benefits, the UAE has seen significant growth in foreign investments.

    One key aspect that often raises questions among business owners is corporate taxation. This blog aims to demystify Corporate Tax in the UAE and provide a comprehensive guide to help you understand the regulations and benefits associated with it.

    UAE Corporate Tax Law Takes Effect in June 2023

    Corporate Tax is levied on the taxable income earned by a taxable person during a specific tax period. The taxable person is responsible for calculating and paying corporate tax through self-assessment, which involves filing a Corporate Tax Return with the Federal Tax Authority.

    • To support the UAE in addressing global demands for economies to adopt a minimum corporate tax, the UAE introduced the Corporate Tax Law on December 2022.
    • This law came into force in October 2022 and applicable to companies whose financial year starts on or after June 1, 2023. Its purpose is to aid the UAE in responding to international calls for implementing a minimum tax on corporations.
    • The regime aims to build from best practices globally and incorporates principles internationally known and accepted.

    Corporate Tax Liability: Who’s Responsible?

    UAE - incorporated companies and entities
    UAE – incorporated companies and entities that are either based in or effectively managed and controlled within the UAE.
    Individuals who engage in business activity in the UAE under a license
    Individuals who engage in business activity in the UAE under a license.
    Non-resident entities that have a "Permanent Establishment" in the UAE, as explained earlier
    Non-resident entities that have a “Permanent Establishment” in the UAE, as explained earlier.
    Non-residents who do not have a Permanent Establishment in the UAE or earn income in the UAE
    Non-residents who do not have a Permanent Establishment in the UAE or earn income in the UAE that is unrelated to their Permanent Establishment may potentially be subject to a 0% withholding tax rate.
    Ministry of Finance has emphasized that Free Zone companies
    The Ministry of Finance has emphasized that Free Zone companies will be subject to the new Corporate Tax system.

    Free Zone Persons, therefore, fall under the category of “Taxable Persons” and can benefit from a Corporate Tax rate of 0% on their Qualifying Income if they meet the conditions.

    The Ministry of Finance will grant corporate tax exemption to Free Zone companies if they adhere to the regulatory requirements and refrain from conducting non-qualifying activities within the threshold stated.

    Corporate Tax Exemptions: Who’s Excluded?

    Government entities
    Government entities.
    Government-controlled entities mentioned in a Cabinet Decision
    Government-controlled entities mentioned in a Cabinet Decision.
    Extractive businesses and non-extractive natural resource businesses
    Extractive businesses and non-extractive natural resource businesses (if they have notified the Ministry of Finance and do not meet certain conditions).
    Qualifying public benefit entities
    Qualifying public benefit entities (if they are listed in a Cabinet Decision).
    Pension and social security funds
    Pension and social security funds.
    Qualifying investment funds and wholly-owned and controlled UAE subsidiaries of government entities
    Qualifying investment funds and wholly-owned and controlled UAE subsidiaries of government entities, government-controlled entities, qualifying investment funds, or public or private pension or social security funds (if they have been approved by the Federal Tax Authority and meet certain conditions).

    Permanent establishment

    • A Permanent Establishment is a concept in international tax law that determines whether a foreign entity has established a sufficient presence in a country, thereby requiring their business profits to be subject to Corporate Tax.

    Resident Person

    • For Corporate Tax purposes, companies and other legal entities incorporated or formed under the laws of the UAE are automatically considered “Resident Persons.”
    • It includes UAE-incorporated entities governed by UAE Federal legislation or relevant Free Zone regulations.
    • Foreign companies can be considered Resident Persons for Corporate Tax if they are managed and controlled within the UAE.
    • Natural persons will also be subject to Corporate Tax as Resident Persons on income derived from domestic and foreign sources if generated through a business conducted by such individuals in the UAE.

    Non-Resident Person

    • A Non-Resident Person refers to a legal entity not considered a Resident Person.
    • They may qualify as Non-Resident Persons if they either have a Permanent Establishment in the UAE or derive income from sources within the country.
    • Non-Resident Persons are subject to Corporate Tax on the taxable income attributable to their Permanent Establishment.

    Corporate Tax: How It Affects Taxable Entities

    The Corporate Tax Law imposes taxes on the income of a taxable person based on residence and source principles.

    • A “Resident Person” is subject to taxation on income earned from domestic and foreign sources, whereas a “Non-Resident Person” is only taxed on income derived from sources within the UAE.

    The determination of residence for corporate tax purposes is based on specific factors outlined in the Corporate Tax Law.

    Corporate Tax Exemptions: Types of Income Exempted

    • It includes dividends and capital gains derived from domestic and foreign shareholdings.
    • Additionally, a Resident Person can exclude income from a foreign Permanent Establishment for UAE Corporate Tax.

    Corporate Tax Deductions: Eligible Expense Categories

    In general, all valid business expenses incurred solely and exclusively to generate taxable income are deductible for corporate tax purposes.

    • However, there may be instances where certain expenses, which are deductible according to general accounting rules, may not be fully deductible for Corporate Tax purposes.

    Corporate Tax Rates

    • The corporate tax rate in the UAE is 9% on taxable income that exceeds AED 375,000. For taxable income below this threshold, the corporate tax rate is 0%.
    • However, for Qualifying Free Zone Persons, the rate is 0% on qualifying income, while a rate of 9% applies to taxable income that does not meet the definition of “Qualifying Income.”

    It is important to note that the legislation does not provide a comprehensive definition of “Qualifying Income,” leading to uncertainty regarding the circumstances under which a Free Zone company might be required to pay corporate tax.

    Withholding tax rate in the UAE

    Certain types of UAE-sourced income paid to non-residents may be subject to a 0% withholding tax rate. Please take note that transactions between individuals who are residents of the UAE are exempted from withholding tax.

    Qualifying Free Zone Person: Criteria and Circumstances

    A Free Zone Person can be considered a Qualifying Free Zone Person if they meet several conditions.

    • These conditions include maintaining sufficient substance in the UAE, deriving “Qualifying Income,” not electing to be subject to Corporate Tax at standard rates, and complying with transfer pricing requirements stated in the Corporate Tax Law.

    Tax Groups Formation

    • Tax Groups are formed by two or more Taxable Persons who satisfy certain conditions.
    • These conditions include being resident legal entities, having the same Financial Year, and preparing financial statements using the same accounting standards.
    • Additionally, the parent company must own at least 95% of the share capital, hold at least 95% of the voting rights, and be entitled to at least 95% of the profits and net assets.
    • Transactions between the parent company and each group member, as well as transactions among the group members, are eliminated when calculating the taxable income.

    Process for registering, filing, and paying corporate tax

    • Corporate Tax Registration and obtaining a Corporate Tax Registration Number is mandatory for Taxable Persons, which includes Free Zone Persons.
    • They must also file a Corporate Tax return for each Tax Period within nine months from the end of the relevant period.

    Unlocking Your Corporate Tax Potential: HLB HAMT to Assist

    HLB HAMT is committed to providing comprehensive assistance and guidance regarding corporate tax and other tax matters. We offer reliable support to help businesses understand their tax obligations, navigate the complexities of tax compliance, and optimize their tax strategies.

    At HLB HAMT, we recognize the importance of staying up to date with evolving tax legislation. We continuously monitor changes in tax laws and regulations to ensure that our clients receive accurate and timely advice.

    For any tax related query or assistance, don’t hesitate to call us at +971 4 327 7775 or email to tax@hlbhamt.com

     

     

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