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The UAE introduced corporate tax law to adhere to the new Global Minimum Tax Regime formulated by the Organization for Economic Co-Operation and Development (OECD) and accepted by more than 136 countries. This tax is effective beginning in 2023. It mandates a minimum tax rate of 15%.
Corporate Tax (CT) is a tax on the net income or net profit of a business. Value-Added Tax (VAT) is a consumption tax assessed on the end consumers, not businesses. For VAT, the business collects the tax from the buyers and send it to the government. CT is a tax assessed on and paid by the business and, thus, becomes part of the cost of doing business.
Generally, no, with exceptions. This law, as the name indicates, applies to corporations or businesses. However, if an individual is conducting business as a proprietorship or unincorporated partnership, that person will have to file and pay tax on the profit generated from the business but not on personal income. This is commonly called pass-through income tax.
Corporate tax is imposed on UAE registered corporations or foreign corporations that meet certain criteria of residency. The proposed law requires UAE corporations to report and pay taxes on their income within the UAE and in other countries.
Small businesses with net income of AED 375,000 or less will have a 0% tax rate. Businesses that generate income higher than that will be subject to a 9% flat tax rate. Multinational corporations with global net profit greater than €750 million are subject to a 15% tax rate.
A few types of income are exempt. This will include dividends received on investments from owning shares of other companies. This is commonly referred to as passive income. Additionally, when a company sells shares of subsidiaries for a profit, that profit (commonly called capital gain) is exempt from taxation.
Generally, businesses incorporated in the free zones will pay 0% tax. However, these businesses are still required to file annual corporate income tax returns. If a free zone corporation conducts business in mainland, the profit generated from such business is taxable.
As we mentioned above, UAE based corporations may be liable to pay corporate tax on global income if the key decisions concerning foreign corporations are made within the UAE. If foreign businesses pay taxes to foreign countries, then the UAE’s corporate tax law allows them to deduct it from the UAE tax.
The law will become effective for the fiscal year beginning June 1, 2023. Tax documents, also known as a tax return, will need to be filed within 9 months of the end of the previous fiscal year. For example, if a corporation’s fiscal year begins June 1st 2023, and ends May 31, 2024, this corporation has to file its tax return and pay the tax liability no later than February 28, 2025. For companies that adopt the calendar year as their fiscal year (i.e., beginning January 1 of each year), they are required to file the firs tax return no later September 30, 2024.
Corporate tax law relies on the honour system of corporations to report the correct amount of net income. However, the FTA will investigate if they have reason to or as part of their routine random audits.