Abu Dhabi (The Union) The Ministry of Finance has announced that the United Arab Emirates will introduce a federal tax on business profits to be applied to fiscal years, starting on or after June 1, 2023.
Business in the country will be subject to corporate tax from its first fiscal year starting on or after June 1, 2023.
Read also: UAE introduces federal tax on business profits
The ministry said that the corporate tax policy adopted by the state reflects the accepted principles within the best international practices, noting that the system was developed with a view to reducing the burden of compliance on business. The following are the most prominent questions raised about corporate tax, according to the website of the Ministry of Finance.
What is corporate tax?
Corporate tax to be applied in the country is a form of direct tax levied on the net income or profit earned by businesses and other businesses. In some other countries, corporate tax is referred to as “corporate income tax”, or “business profit tax”.
What does meeting international tax standards mean?
The imposition of corporate tax based on international best practices strengthens the UAE’s position as a leading global center for business and investment, and accelerates the country’s development and transformation to achieve its strategic goals. With the introduction of the corporate tax, the state renews its commitment to meet international standards for tax transparency, and to prevent harmful tax practices.
Is the UAE the first country to introduce corporate tax?
Most countries in the world have a comprehensive corporate tax system, including most countries of the Cooperation Council for the Arab States of the Gulf.
When will corporate tax in the country become effective?
Corporate tax in the country will be applicable for fiscal years starting on or after June 1, 2023. For example: Businesses whose fiscal year begins on July 1, 2023 and ends on June 30, 2024 will be subject to corporate tax in the UAE, starting from July 1, 2023 (which is the beginning of The first fiscal year beginning on or after June 1, 2023). Businesses with a fiscal (calendar) year beginning on January 1, 2023 and ending on December 31, 2023 will be subject to state corporate tax as of January 1, 2024 (which is the start of the first fiscal year beginning on or after June 1, 2023).
Will corporate tax be applied to businesses in each emirate?
Corporate tax in the UAE is a federal tax and therefore will be applied across the Emirates. What is the role of the Federal Tax Authority? The Federal Tax Authority will be the entity responsible for managing, collecting and implementing corporate tax in the country.
What is the role of the Ministry of Finance?
The Ministry of Finance will remain the “competent authority” for the purposes of bilateral/multilateral agreements and the international exchange of information for tax purposes.
Who will be subject to corporate tax?
Corporate tax applies to all businesses and commercial activities in the country, except for natural resource extraction activities, which will remain subject to corporate taxes at the local emirate level.
How will it be determined whether a legal entity has “businesses” that fall within the scope of corporate tax? All activities undertaken by the legal entity will be considered as “business activities” and therefore these activities fall within the scope of corporate tax in the country.
How will it be determined whether an individual has “business” that falls within the scope of corporate tax?
This can generally be determined by reference to the individual who holds (or is required to obtain) a commercial license or permit to carry out a relevant commercial, industrial, or professional activity in the country.
How is the profit or business income that will be subject to corporate tax determined?
The taxable income will be the net accounting profit of the business, after making adjustments to certain items that will be determined by the country’s corporate tax law. A business’s accounting net profit is the amount disclosed in its financial statements prepared in accordance with internationally accepted accounting standards.
What is the corporate tax rate?
The corporate tax rates are as follows:
0% for taxable income up to AED 375,000.
9% for taxable income over 375,000 dirhams.
A different tax rate for large multinational companies that meet specific criteria is set according to the “Pillar Two” of the Base Erosion and Profit Shifting Project of the Organization for Economic Cooperation and Development.
What is meant by large multinational corporations?
A multinational is a company that operates in its home country, as well as in other countries through a foreign subsidiary, branch or other form of presence/registration. Earning income from outside the home country without a foreign presence or registration will not qualify the business as a multinational. In the context of the global minimum effective tax rate as proposed under Pillar Two of the OECD BEPS project, the term “large corporation” refers to a multinational corporation with combined global revenue in excess of €750 million (3.15 billion). dirhams).
Will corporate tax be levied on the salary earned from the job?
Corporate tax in the country will not be applied to an individual’s salary or other income earned from a job, whether it is received from government work, or from the private sector.
Will an individual with a business license be subject to corporate tax? Income earned by an individual with a business license will fall within the scope of the state’s corporate tax.
Is an individual who invests in real estate taxed?
Investment in real estate by individuals in their personal capacity is not subject to corporate tax in the state if individuals are not required to obtain a commercial license or permit to practice this activity in the state.
Is an individual subject to corporate tax on his investment returns?
Individuals will not be subject to corporate tax in the state on dividends, capital gains, and any other income earned by owning shares or any other securities in their personal capacity.
Will the income earned by the freelancer be subject to corporate tax?
Corporate tax is generally applied to income earned from activities carried out under the freelance trade license, but tax will not be due unless his net annual income exceeds 375,000 dirhams.
Is the income earned by an individual from bank deposits subject to corporate tax?
Interest and other income from bank deposits or individual savings programs will not be subject to state corporate tax.
If a business generates taxable income of 400,000 dirhams in a particular fiscal year, what is the amount of corporate tax payable?
The corporate tax payable will be calculated as follows:
Taxable income from 0 to 375,000 AED at 0% = 0 AED.
The share of taxable income that exceeds 375,000 dirhams (i.e. 400,000 – 375,000 = 25,000 dirhams) at a rate of 9% = 2,250 dirhams.
The corporate tax payable for the fiscal year will be 0 + 2,250 = 2,250 dirhams.
The tax payable will be reduced by the amount of any foreign taxes paid incurred on the relevant income.
Will anyone be exempt from corporate tax?
Businesses engaged in natural resource extraction activities will remain subject to corporate tax at the level of the local emirate and will be outside the scope of the federal corporate tax in the country. More information about waivers and other exceptions will be provided at a later time.
Will any income be exempt from corporate tax?
Businesses in the country will be exempt from paying corporate tax on dividends and capital gains received from their qualifying shares.
What is meant by “qualifying” shares?
Qualifying shares refer to ownership interests in a company in the country or a foreign company that meets certain conditions that are defined in the country’s corporate tax law.
Will transactions within the tax group be exempt from corporate tax?
Corporate tax in the country will not be applied to eligible transactions between companies in the same tax group and restructuring provided the necessary conditions are met.
Will corporate tax be imposed on foreign companies and foreign individuals?
Foreign companies and foreign individuals will be subject to corporate tax in the country if they conduct a continuous or regular business activity in the UAE.
Will the income earned by the foreign investor be taxed?
Corporations will generally not be taxed on a foreign investor’s income from dividends, capital gains, interest, franchises, and other investment returns.
Will businesses established in free zones be subject to tax?
Businesses established in free zones will be subject to corporate tax in the country, but the corporate tax system in the country will continue to provide corporate tax incentives currently offered to businesses established in free zones that comply with all regulatory requirements and do not conduct commercial activities in the main territory of the UAE.
Do businesses operating in free zones have to register and file corporate tax returns?
Businesses located in free zones must register for tax and file corporate tax returns. More details on compliance requirements by existing businesses in the free zone will be provided at a later time.
Will the tax treatment of corporate tax in the country be different for businesses established in the Financial Free Zone? The same tax treatment for corporate tax will be applied to all businesses established in all free zones.
Will the oil and gas sector and other extractive industries sectors be subject to corporate tax?
Companies engaged in natural resource extraction activities will remain subject to corporate tax at the level of the local emirate, and will be outside the scope of the federal corporate tax in the country.
Will the banking sector be subject to corporate tax?
Banking operations will be subject to state corporate tax.
Will the real estate sector be subject to the corporate tax system?
Companies engaged in real estate management, construction work, real estate development, real estate agencies, and real estate brokerage activities will be subject to corporate tax in the country.
Will the tax system allow the previous year’s losses to be used to reduce taxable income?
The corporate tax system will allow a business to use losses incurred (from the effective date of the corporate tax) to reduce taxable income in subsequent fiscal periods. Losses for corporate tax purposes (ie tax losses) will arise when the total deductions that the business is entitled to claim exceed the gross income for the financial period in question.
Will the excess tax losses be carried forward and used in future years?
Excess tax losses can be carried forward and used against taxable income in future years, provided specific conditions are met.
Will the group be able to benefit from the tax losses of one company within its group against the taxable income of another company within the group?
Tax losses from one company in the group can be used to deduct the taxable income of another company within the same group, provided certain conditions are met.
Will a group of companies in the country be able to form a “financial unit” for tax purposes? A group of companies in the country can apply to form a tax group and be treated as a single taxable person, provided certain conditions are met. A country tax group will be required to file only one tax return on behalf of the entire group.
What is the tax withheld at source?
Withholding tax is tax collected at source (source) by the payer on behalf of the income recipient. Withholding taxes are found in many tax systems and are widely used in connection with dividends, interest, franchises and similar payments.
What is the withholding tax rate in the corporate tax system? No withholding tax in the UAE will be applied to any type of domestic and foreign payments (ie, cross-border payments) under the country’s corporate tax system.
How will the tax treatment of foreign companies be dealt with?
The corporate tax system in the country will allow the use of foreign tax paid outside the country as a tax credit against the corporate tax payable in the country.
What are the transfer pricing rules?
Transfer pricing rules seek to ensure that transactions between related parties are carried out on the basis of the neutral price principle (ie as if the transaction were between independent parties).
Will transfer pricing rules apply to businesses in the UAE? Businesses in the UAE must comply with transfer pricing rules and documentation requirements in accordance with the OECD Transfer Pricing Guidelines. Tax Registration – Should businesses register for corporate tax purposes?
Yes, more information about registration procedures and business compliance obligations will be provided at a later time.
How often do businesses have to file a corporate tax return?
Only one tax return is required for each financial period. Businesses will not be required to file interim tax returns or make advance tax payments. The financial period is generally one year.
Will the corporate tax return need to be submitted electronically?
The corporate tax return must be submitted electronically.
Will the business have to make advance tax payments?
Businesses do not have to make advance tax payments.
Are there any consequences for not complying with the corporate tax system?
As with other taxes levied in the UAE (eg value added tax), businesses will be subject to fines for failure to comply with the new corporate tax system.