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As the United Arab Emirates (UAE) government introduces visas and reforms, more businesses and investors are coming to the country to establish trade, increasing the UAE’s revenue streams. There is no doubt that the country is growing into an international business hub.
As a next step in regulating the business sector, the UAE government has announced a corporate tax of 9% from June 2023. The corporate tax is expected to primarily affect the country’s corporate sector. According to the requirements, legal person companies in the UAE should make regulations and submit all accounting audit reports and tax returns to the UAE federal tax authorities.
The initial announcement regarding the UAE corporate tax of 9% was on 31 January 2022 and corporate tax Will be effective from June 2023. This provides ample time for all businesses to make the required changes. Before understanding how this will affect the country, you should take a look at the demographics of the UAE business market.
Understanding the UAE business market
The UAE business market is brimming with new investments and opportunities, with growth potential higher than ever. Compared to previous years, UAE National Economic Register data shows that the total number of active businesses increased by 1.9% until July 2022. According to data records, nearly 80% of the licensed companies are located in Abu Dhabi and Dubai in Sharjah, with Dubai having the largest share of the licensed business in the country at 46%.
Sharjah followed with 14% and Abu Dhabi accounted for 23% of licensed businesses. According to the UAE National Economic Register, 40% of registered businesses are limited liability companies, with individual companies contributing as much as 33%. Furthermore, between 80% and 85% of registered and active companies in the UAE are micro, small and medium enterprises.
Eligibility for UAE corporate tax
- Companies with a net profit of more than AED 3,75,000 are subject to the proposed 9% corporate tax.
- According to the announcement, the 9% corporate tax will apply to all business activities other than any form of natural resource extraction.
- Corporate tax applies to all categories of profits, as well as other income reported under IFRS.
- Under the guidelines of the Organization for Economic Co-operation and Development (OECD), multinational companies that meet the criteria will be levied higher taxes.
Exemption from UAE corporate tax
- Small and medium enterprises with profits below AED 3,75,000 are exempt from tax.
- Multiple incentives to levy corporate tax on free zones remain in effect.
- Businesses not based in the UAE mainland will not be affected.
- Any dividends and capital gains received through equity will not be subject to any corporate tax.
- Intra-group transactions and restructurings will not be subject to corporate tax.
Impact on start-up costs
As mentioned earlier, the UAE’s new main Central Tax (CT) rate is 9% on companies with income exceeding AED 3,75,000 (US$ 102,000) in taxable income. This excludes companies based in free zones that do not do business with the mainland. Different taxation bands will be offered to companies under multinational enterprises (MNEs) with global revenues exceeding EUR 750 million (USD 795 million).
In addition to these competitive prices, the government may also reduce or eliminate fees related to permits and start-up costs. This will undoubtedly lessen the impact of the tax on profitable UAE businesses. UAE corporate taxation will shift focus from mainland to free zones to prosper. According to experts, the move will attract start-ups in the free zone.
This could even lead to free zones drastically reducing fees such as annual license fees due to competition among free zones to attract as many businesses as possible.
How should businesses gear up?
The parent company must consolidate the financial accounts of each subsidiary for the applicable tax period, calculate the taxable income of the tax group, and cease business dealings with each member of the subsidiary group.
As soon as the new UAE corporate tax law is released, companies are eager to start their audits. As a result, most tax service providers are not efficient enough to handle sudden searches in corporate tax returns. Given the necessity of internal accounting and bookkeeping for external audit and taxation, private companies should start and strengthen the consultative process.
Businesses with offshore and onshore operations in the country should contact tax advisors to ensure how this tax will affect their cross-border transactions. Ensuring they comply with the new corporate tax regime is also mandatory.
Most UAE businesses are not ready to face the 9% corporate tax, experts say. Many legal aspects, paperwork, accounting and auditing should be done. Adapting to all these changes in a large company can sometimes be time-consuming and complicated. You can always contact our tax experts to solve all your queries.
Also read: CBDT amends Rule 17CB to replace ‘trust or institution’ with ‘designated person’: Find out more
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