Governments are constantly looking for ways to increase the revenue they are receiving from their constituents. One way the UAE is adding additional revenue to its budget is through the introduction of corporate taxes for business owners. Navigating this new tax is a top priority for business owners to avoid overpaying in taxes and to remain in compliance with the UAE.
The Background of Corporate Taxes
The Ministry of Finance in the United Arab Emirates (UAE) recently announced the introduction of a federal Corporate Tax for tax years beginning after June 1, 2023. This is a tax assessed on business profits. Up until the Ministry of Finance announced this change, there was no federal CT regime that businesses needed to follow unless operating in the oil and gas industry or as a foreign bank.
Additionally, there were no taxes assessed on employment-based income as the UAE boasts over 40 free zones, making it a hot spot for businesses looking to reduce their tax burden. The UAE is using the recently passed legislation as a stepping stone to its commitment to the minimum effective tax rate concept that was proposed by Pillar II. This new revenue stream for UAE allows for diversification in the budget.
Who is Required to Remit Corporate Taxes?
Businesses formed as LLCs, PSCs, PJSCs, LLPs, and any other business type are subject to corporate taxes. Foreign entities may also be subject to corporate taxes if they have a permanent establishment in the UAE that earns source income or are a tax resident in the UAE. Natural persons of the UAE who do not engage in business activities are exempt from corporate taxes. However, sole proprietorships and individual partners in an unincorporated partnership are subject to corporate taxation.
Despite having free zones, qualifying companies located in these areas may still be subject to corporate taxes. Pre-existing tax arrangements will be honored, resulting in a 0% corporate tax rate as long as the company maintains compliance with regulatory requirements. Furthermore, a free zone person with a branch located in mainland UAE will be taxed at the regular corporate tax rate on income derived on the mainland while the 0% corporate tax rate remains in place on other income.
There are certain categories of businesses that are exempt. First, the federal UAE Government and branching departments, including public institutions, are exempt from corporate tax. Additionally, wholly owned government UAE companies that carry out mandated activities, businesses engaged in the exploitation of UAE natural resources that are subject to other taxes, charities and public organizations, regulated public and private social security and retirement plans, and investment funds are excluded from taxation.
What is the Corporate Tax Rate?
The corporate tax rate assessed varies based on the business profit. For taxable income under AED 375,000, there will be a 0% tax rate assessed. Business income exceeding AED 375,000 is assessed a 9% tax. The tax rate for large multinationals that meet a specified set of criteria that Pillar II of the OECD BEPS has laid out will be assessed at a certain tax rate that has not been decided yet.
The starting point for determining taxable income is the net income or loss number found on the financial statements. This number will then be adjusted for certain taxable and non-taxable events, resulting in a taxable income with corresponding taxes assessed.
Are There Ways to Reduce Corporate Taxes?
The good news is that there are ways you can reduce corporate taxes. There are rules in place that exempt domestic dividends and capital gains earned from UAE companies from taxable income. To benefit from the participation exemption, the UAE shareholder company must own at least 5% of the subsidiary. This is in line with other jurisdictions.
The UAE also offers international taxation benefits, such as the ability to claim foreign tax credits for amounts paid to other countries. Financing costs, including interest, depreciation, and amortization, will also be deductible from accounting income to lower taxable income; however, there are capping rules to deter businesses from using excessive levels of debt financing.
Additionally, the UAE has rules in place allowing taxable losses to offset future income, up to 75% in any given year. Losses are able to be carried forward indefinitely as long as the same shareholders own at least 50% of the shares from when the loss was incurred to when it is used.
Why is Accounting Necessary for Corporate Tax Compliance?
Up until the recent legislation was passed, audits were done by only a few companies. However, with the expanded corporate taxation, accounting relevance has increased, calling on the need for businesses to maintain books in accordance with UAE standards. If your business were to get audited and you don’t have sufficient accounting information to back up your tax position, you can face fines and penalties for mistakes on your tax return. This makes accounting a must for all companies, regardless of if they are exempt from corporate taxation.
Summary
Understanding the new corporate tax rates imposed by the UAE can be a tricky subject, especially when free zones are taken into consideration. This is why working with a tax expert like AMAJ UAE is so beneficial. The experts at AMAJ UAE can not only help you file and pay your corporate taxes, but they can also consult you on tax saving initiatives to lower your burden. Reach out today to set up a consultation.
