First time a direct tax is being introduced for businesses in the UAE as earlier there was no tax as per the laws of the country. Ministry of Finance of UAE has introduced Federal corporate tax which will be effective for financial year starting on or after 1st June 2023. In this post is discussed the taxability of income in UAE which is a federation of seven emirates (states): Abu Dhabi, Dubai, Sharjah, Ras Al Khaimah, Ajman, Umm Al Quwain, and Fujairah.
Applicability of corporate tax
UAE CT will be applicable across all Emirates and will be applicable to all business and commercial activities except for the extraction of natural resources which continues to be taxed under Emirate level.
For businesses with taxable income of less than AED 375,000 will have 0% tax rate. For businesses having taxable income more than 375,000 will have a tax rate of 9%. A different tax rate (likely to be 15%) would be applicable to large multinationals that meet specific criteria set with reference to Pillar 2 of the OECD BEPS project which have a global revenue in excess of 750 million euro. In the free zone businesses corporate tax will be at the rate of 0%.
Exclusions from corporate tax
Employment income real estate income, income from savings and other income earned by individuals in their personal capacity would not taxable. Also dividends, capital gains and other investment returns earned by foreign investors would also outside the purview of Corporate Tax.
Exemptions from corporate tax
Domestic and cross border payments of interest, dividends, royalties and other payments will not attract withholding tax in UAE and foreign tax credits will be available for taxation incurred by UAE business on income earned outside the UAE.
Filing of returns
CT returns will have to be filed on a yearly basis for each financial year. A single return filing facility would be available for the entire group. UAE CT regime will have Transfer Pricing rules and documentation requirements in line with the OECD TP guidelines.
It shall be a residence based CT regime and taxes would be applicable on worldwide profits of UAE resident businesses and only UAE sourced business income of non residents. It will not apply to individuals and their personal income with the exception of business income earned by individuals who hold a commercial license in the UAE.
UAE will not impose corporate tax or withholding tax on foreign companies and individuals that invest in or make loans to UAE businesses or who otherwise earn income that is not related to a trade or business conducted in the UAE. However if the foreign company has a permanent establishment in UAE, it shall be covered under the CT regime. Statements will have to be prepared in accordance with the IFRS or other International Financial accounting standards recognized in the UAE. Where the business is loss making no UAE tax would be payable and losses can be carried forward to offset taxable income in subsequent years. Necessary expenses incurred by business for earning of taxable income would be tax deductible however expenses related to exempt income would not be deductible for UAE CT purposes. It is likely that UAE may introduce rules on deductibility of interest in accordance with OECD BEPS Action Plan 4.
Conclusion
Therefore with effect from June 2023 income in UAE would be taxed by the country and it will no longer be a tax free country which has been covered in our article above. It is imperative that the businesses evaluate the impact of the introduction of UAE CT early and proactively plan for a smooth implementation. Have you planned taxation of your income earned in UAE ?
*****
The author is a practicing Chartered Accountant, Senior Partner in Kohli Chitkara & Co. LLP and can be contacted at sandeep@kcccas.com. Any comments or queries are welcome.
Disclaimer: The information provided in this article is for general informational purposes only. All efforts have been made to provide accurate information in this document, however it should not be perceived as a professional or legal advice. Reader should consult a professional before making any decision based upon this document. Under no circumstance author or the publisher shall have any liability to you for any loss or damage of any kind incurred as a result of the use of this information.
Author Bio
