The income tax system in the United Arab Emirates (UAE) operates differently depending on the level of government. Under the Emirate-level tax decrees, income tax follows a progressive rate structure, with rates reaching up to 55%.
However, in practice, these tax decrees have not been implemented. Instead, branches of foreign banks are subject to a flat income tax rate of 20% under separate Emirate-level bank decrees.
Companies involved in UAE oil and gas and petrochemical activities are required to pay income tax at rates of 55% or higher, as stipulated in their individual UAE concession agreements or fiscal letters.
UAE Federal corporate tax 2023
To promote tax transparency and combat harmful tax practices, the UAE Ministry of Finance (MoF) has introduced the Federal corporate tax in the UAE.
The UAE Corporate Tax (CT) law will come into effect for financial years starting from June 1, 2023, with a headline tax rate of 9%, making it one of the most competitive tax rates globally.
While some details are still pending clarification, the UAE MoF has released 158 Frequently Asked Questions (FAQs) to supplement the law and provide explanations on its scope, applicability, and various issues.
For business owners, it is crucial to have a comprehensive understanding of the tax laws and regulations in the UAE, with corporate tax being a particularly important aspect when conducting business in the country.
But before diving into the UAE’s 2023 corporate tax, let’s have a quick retrospective look at the UAE’s tax regime.
The UAE’s corporate tax history
For an extended period, the United Arab Emirates (UAE) functioned as a jurisdiction with very low taxes. Income tax was non-existent for citizens, and most companies were not required to pay any form of corporate tax.
The majority of the state’s revenue was derived from nationalized and private industries involved in fossil fuel extraction, which were subject to approximately 50% taxation on their revenues.
Foreign banks, on the other hand, have long been subject to a 20% corporate tax on their operating profits, and certain taxes were also imposed on hotels and restaurants in Dubai.
However, in recent years, the UAE has embarked on an effort to diversify its economy away from reliance on fossil fuels. This has resulted in a growing number of businesses that currently enjoy tax exemption.
With diminishing potential revenue from fossil fuels and a rapidly expanding economy, it becomes logical for the government to impose taxes on business revenues in order to facilitate further investments in infrastructure, education, and healthcare.
The UAE initially introduced a Value Added Tax (VAT) in 2018, which imposed a 5% levy on all consumer purchases. Subsequently, in January 2022, the government announced the implementation of a 9% corporate tax, which would become effective the following year.
Another significant reason for the introduction of the new UAE corporate tax is to align the country with international standards and address tax avoidance.
Most advanced economies worldwide impose taxes on business profits, and the 9% tax rate on UAE companies remains considerably lower than the typical rates in other developed countries, which usually hover around 20%.
The new corporate tax in the UAE will also serve as a deterrent for foreign businesses attempting to utilize the country as a base to evade taxes in their home nations.
What is the UAE’s 2023 corporate tax?
Businesses in the UAE are gearing up for the newly implemented federal corporate tax. The corporate tax rate for 2023 in the UAE will be 9% applied to the profits (revenue minus expenses) of all businesses that generate over 375,000 AED (approximately USD $100,000).
Businesses generating less than this threshold will continue to be taxed at a 0% rate. Alongside the corporate tax, the UAE has also announced that large multinational companies with profits exceeding EUR 750 million will be subject to a 15% tax, aligning with the Global Minimum Corporate Tax Rate agreement.
The new UAE corporate tax will take effect in the tax year starting on June 1, 2023. Consequently, most companies will need to allocate funds to meet their tax obligations from that date. However, businesses whose tax year begins in January will not be required to pay tax on revenues generated before January 1, 2024.
Dubai’s corporate tax framework encompasses a range of policies, including tax-free zones, corporate taxes, VAT systems, and the absence of federal income tax. To discover more about notable features of the tax system, please continue reading.
• Which entities are subject to taxation?
Entities with significant legal personalities such as LLCs, PSCs, PJSCs, LLPs, and similar legal entities will be liable to pay taxes. Additionally, any foreign legal entity that generates income within the UAE and qualifies as a tax resident will be obligated to pay taxes. While free zones generally enjoy a 0% corporate tax rate when they adhere to regulatory obligations, this also applies to free zone companies involved in trading activities with the mainland. Both non-residents and residents of the UAE may be subject to corporate tax regulations.
• What are the applicable tax rates?
For businesses with income not exceeding AED 375,000, there will be no tax charged (0% rate), while a 9% tax rate will apply if the income exceeds AED 375,000. Different tax rates will be applicable to larger multinational companies based on their specific business circumstances.
• Who qualifies for tax exemptions?
Under the corporate tax law, a participation exemption from corporate tax will be granted when receiving dividends or selling shares of a subsidiary company. Additionally, certain entities such as charities, public benefit organizations, investment funds, businesses involved in oil and resource extraction, and wholly government-owned companies are exempt from corporate taxes.
• How to determine taxable income?
Typically, the net profit or loss reported in the company’s financial statements serves as the basis for calculating the applicable tax rate and taxable income. In the event of a company loss, the business has the opportunity to offset this amount against taxable income in subsequent financial years, up to a maximum of 75%.
• Why form tax groups?
A cluster of companies has the potential to establish a tax group, enabling them to be treated as a single taxable entity. To qualify for this arrangement, a company or subsidiary must not be classified as an exempted entity or registered within a free zone.
• How to get tax credits?
To prevent double taxation, the tax system will facilitate the offsetting of foreign taxes paid in another jurisdiction against foreign income that is not exempted, through a parallel credit mechanism.
What are UAE corporate tax 2023 exemptions?
Starting from June 1, 2023, the Federal UAE CT Law will be in force and will apply to all business and commercial activities throughout the Emirates. However, there are certain individuals who will be exempt from this law, subject to specific conditions.
1. UAE Government Entity
2. UAE Government Controlled Entity
3. Person engaged in an Extractive Business in the UAE
4. Person engaged in a Non-Extractive Natural Resource Business in the UAE
5. Qualifying Public Benefit Entity
6. Qualifying Investment Fund
7. Public pension or social security fund, or a private pension or social security fund that is subject to regulatory oversight of the competent authority in the State and that meets any other conditions that may be prescribed by the Minister
8. Juridical person incorporated in the State that is wholly owned and controlled by certain Exempt Persons, and
9. Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister