Since its initial introduction, Corporate Tax has been the talk of the UAE with laws, guides, ministerial decisions and quite a few workshops all happening within the short space of a few months. This blog will help break down everything we know about it thus far as it is important for (almost) all businesses in the UAE!
Corporate tax is a tax that is levied on the taxable income of businesses and corporations and it came into effect for businesses whose financial year started on or after 1st of June 2023. There is a statutory rate of 9% on the portion of taxable income that exceeds AED 375,000.
Portion is important to note as this tax is not charged on every bit of income for the year, the first AED 375,000 is subject to 0% however any income left after that will be subject to the standard 9%. As an example, if your income for the year after deducting your business expenses is a total of AED 500,000 then you will only pay a total of AED 11,250 (500,000 – 375,000 x 9% = 11,250).
As mentioned previously the starting date has already passed therefore it is crucial to know that if your financial year started in June 2023, once the year is over, you have no more than 9 months to file the tax return. You are then required to keep the record for at least 7 years from the end of the tax period so don’t just file it and throw it away! There are fines that will be implemented should these conditions not be followed, find out more about what they are in our other blog post.
The tax base for Corporate tax is a taxable person’s taxable income, but what exactly does that mean?
- Businesses resident in the UAE are subject to Corporate tax on their income from both inside and outside the UAE.
- Businesses that are non-residents in the UAE with a Permanent Establishment or a nexus in the UAE are subject to Corporate tax on income attributable to that Permanent Establishment or nexus. If the Non-Resident does not have a Permanent Establishment or a nexus in the UAE but derives income from the UAE, that income would be subject to withholding tax at the rate of 0%.
- Natural persons are only subject to Corporate Tax on the Taxable Income of their Business or Business Activity derived from the UAE, or from outside the UAE if it is connected to the Business or Business Activity being carried out in the UAE.
Additionally, a taxable persons accounting income needs to be adjusted in order to determine the correct taxable income that will be subject to corporate tax, these adjustments include:
- Unrealized gains or losses
- Exempt Income
- Deductions
- Reliefs for specific transaction types
- Transfer pricing adjustments relating to transactions between Related Parties or Connected Persons
- Tax Losses
As one may expect this does require some additional work and can be an overwhelming task for many companies, but especially small businesses. Therefore the UAE has provided Small Business Relief to remove the burden of having to calculate and pay Corporate tax. Those who can apply for this relief are UAE resident companies with revenues below AED 3,000,000 for each relevant tax year. This applies to tax periods starting on or after June 2023 and will only continue to apply to subsequent tax periods that end before or on 31st December 2026. Those eligible will not be obliged to calculate their taxable income or file for any complete tax returns and are not required to maintain transfer pricing documentation, if applicable. However, even if your revenues are below the AED 3 million, as a taxable person applying for small business relief you must not be a Constituent Company of a Multinational Enterprise that is required to prepare a Country-by-Country Report under the UAE’s Country-by-Country Reporting legislation.
There are many laws and regulations that differ for businesses within the free zones, and Corporate tax is no exception to that. It is only when a free zone person meets certain conditions that they will be considered a “Qualifying Free Zone Person” and will be eligible to the 0% on their qualifying income. In order to be considered as such, the free zone person must meet the following requirements:
- Derive Qualifying Income from relevant transactions
- Maintain adequate substance in the UAE
- Satisfy the de minimis requirement
- Have not elected to be subject to Corporate Tax
- Comply with the transfer pricing rules and documentation requirements under the Corporate Tax Law
- Prepare and maintain audited Financial Statements for the purposes of the Corporate Tax Law.
If the above requirements are not met then the standard 9% rate will be applicable to all taxable income. In addition to this, a qualifying free zone person is not eligible for small business relief even if they meet the criteria. However, those who are not qualifying free zone persons and are just free zone persons are able to apply for small business relief on the condition that their revenue does not exceed AED 3,000,000 in the relevant tax period and all previous tax periods.
Finally, there are a few exemptions to Corporate tax as a whole but this is only for certain exempt persons and that includes:
- A government entity (automatically exempt)
- Government controlled entity (if they have notified the Ministry of Finance and met the relevant conditions)
- A person engaged in an extractive or non-extractive natural resources business (if they have notified the Ministry of Finance and met the relevant conditions)
- A non-resident person that derives only state sourced income and that does not have a permanent establishment in the state
- Public and private pension or social security funds and Qualifying Investment Funds (only exempt upon application and approval of such by the FTA)
The implementation of Corporate tax means that it is extremely important for businesses to have their finances well organized and their financial statements as accurate as ever! If you are in need of some assistance with this, whether it be registering or helping you file for Corporate tax we are here to help!
By working with our Bespoke Accounting team you can save both time and money while having the reassurance and peace of mind that you’re making sound business decisions for your future. Have a look at how we have been helping our clients. If you have any questions, simply book your free 30 minute consultation.
Image from Gulf News.
