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Everything You Need to Know About Corporate Tax

In January 2022, the UAE Ministry of Finance announced the introduction of Corporate Tax across the United Arab Emirates. This tax law will take effect from June 1, 2023, impacting businesses based on their financial year. Corporate Income Tax is a direct tax applied to business income. While the UAE joins other nations like the US, India, France, Oman, Kuwait, and Qatar in implementing Corporate Tax, it maintains the lowest rate at 9%.

The Federal Tax Authority will oversee the administration, collection, and enforcement of UAE Corporate Tax, while the Ministry of Finance will handle bilateral or multilateral agreements and international tax information exchange.

Corporate Tax implementation is expected to bolster the UAE’s economy, improve corporate governance, and drive strategic economic transformation. It aims to solidify the UAE’s status as a global business and investment hub, spur national development, and uphold international tax transparency standards while preventing unauthorized tax practices.

What are the businesses or incomes that are not subject to corporate tax?

  1. Individual income from employment, real estate, share investments, or other personal sources unrelated to business activities in the UAE.
  2. Foreign investors who do not operate businesses within the UAE.
  3. Free zone businesses meeting regulatory requirements continue to enjoy corporate tax advantages.
  4. Capital gains and dividends earned by UAE businesses from qualifying shareholdings are exempt from tax, excluding certain intragroup transactions and restructurings.

Who should pay corporate tax in the UAE?

Corporate tax in the UAE is applicable to businesses with a taxable net profit exceeding 375,000 AED. This includes UAE-incorporated or managed and controlled companies, as well as certain entities operating within free zones. Small firms and startups benefit from a 0% corporate tax rate if their net profit remains below 375,000 AED.

Certain categories are exempt from Corporate Tax in the UAE:

  1. Natural resource extraction enterprises, as they remain subject to existing Emirate-level corporate taxation.
  2. Dividends and capital gains derived by a UAE company from its qualifying shareholdings are not subject to Corporate Tax.
  3. Qualifying intra-group transactions and reorganizations meeting specific conditions are exempt from Corporate Tax.
  4. Salary and other employment income received by individuals, regardless of the source (public or private).
  5. Interest and other income from bank accounts or savings plans received by individuals.
  6. Income earned by foreign investors from dividends, capital gains, interest, royalties, and other investments.
  7. Real estate investments made directly by individuals on their behalf.
  8. Individuals receiving dividends, capital gains, and other income from shares or other securities they own personally.

Expenses that can be deducted while calculating the corporate tax

Certain expenses are added back to accounting income when calculating corporate tax. These expenses, falling under general accounting rules, are not eligible for tax deduction. Here are some examples:

  1. Depreciation or amortization expenses related to capital assets.
  2. Business setup, license renewal, and other government fees and charges incurred in the course of business operations.
  3. Value-added tax (VAT) that cannot be recovered under VAT legislation.
  4. 50% of leisure costs incurred for clients.
  5. Interest costs on debt funding, limited to 30%.
  6. Deductibility of loans to related parties is contingent upon serving a legitimate business purpose.
  7. Payments to a mainland branch of a Free Zone entity may be deductible.

Expenses that cannot be deducted while calculating the corporate tax

Certain expenses are not deductible when calculating corporate tax in the UAE. These restrictions aim to prevent abuse or excessive deductions, ensuring that only necessary expenditures for generating taxable income are eligible for relief. Here are the expenses that cannot be deducted from a taxable person’s taxable income accrued during a taxable period:

  1. Expenses not incurred in the course of the taxable person’s business.
  2. Expenses incurred to earn exempt income.
  3. Losses not directly related to or incurred as a consequence of the taxable person’s business activities.
  4. Additional spending authorized by a Cabinet decision following a minister’s recommendation.

Businesses operating in the UAE must maintain accurate financial records to ensure compliance with corporate tax regulations. These records should elucidate the information disclosed in the corporate tax return and must be submitted to the Federal Tax Authority (FTA). Even entities exempt from UAE corporate tax must maintain records for the FTA to verify their exempt status.

For corporate tax registration in the UAE, businesses need to furnish certain documents, including:

  • Copies of valid trade licenses.
  • Photocopies of passports of license owners/partners (valid).
  • Emirates ID cards of license owners/partners (valid).
  • Power of Attorney (or Memorandum of Association).
  • Contact information (mobile number and email).
  • Company contact details (address and P.O. Box).
  • Annual financial audit report.

 

Under UAE corporate tax regulations, a group of companies can elect to form a tax group, treated as a single taxable entity, if specific criteria are met. A tax group only needs to file a single tax return for the entire group. Additionally, foreign investors can offset foreign corporate tax paid on UAE taxable income against their UAE corporate tax liability.

Corporate tax filings are conducted annually, with no provisions for advance tax filing under the UAE corporate tax regime. Returns must be filed electronically, as per the Ministry of Finance, and no advance tax payments are required.

Furthermore, excess tax losses can be carried forward and applied against future taxable income, subject to certain conditions. This provision extends to tax groups, allowing tax losses from one company to offset taxable income from another within the group.

How can SIAA help?

Square International Auditing & Advisory  is a well-known accounting & audit firm in Dubai,UAE that prides itself on offering individual services to its clients.

We offers high-quality services:

 

We constantly ready to help clients with their financial concerns, such as compliance requirements, auditing requirements, bookkeeping, and so on. So, if you want to learn more about Square International, contact us.