After the 5% VAT introduced in 2018, it is the turn of a corporate tax to be introduced in the United Arab Emirates from June 2023. The announcement of this tax was like a bomb. This is the first time that the federal state has announced such a tax.
It should be noted that until now, Abu Dhabi had played on zero taxation to attract a large number of international companies in the UAE.
Definition of corporate tax
Corporate Tax (CT) is the English translation of what is known in France as the impôt sur les sociétés or IS.
The corporate tax is a government tax levied directly on the profits of companies operating in the country.
This tax is annual and is calculated on the basis of the profits made by a company during a given fiscal year.
Does the United Arab Emirates have a corporate income tax?
At the time of writing this article, there is no income tax in the UAE!
It is only since January 2022, that the UAE Ministry of Finance has announced the implementation of this new federal corporate tax (CIT) system that would come into effect for all financial years starting on or after June 1, 2023.
This announcement marks a real turning point in Dubai’s tax policy in the United Arab Emirates.
In simple terms, under the new corporate tax regime, companies in the 7 emirates, including Dubai, will be subject to corporate tax at a rate of 9% if their net income exceeds AED 375,000.
This tax is governed by Federal Decree-Law No. 47 of 2022.
The corporate tax rate in Dubai is 9%. It will apply to all in-scope companies with net income or taxable income of AED 375,000 or more.
This means that the tax rate will remain at 0% for small businesses with taxable income of up to AED 375,000. An individual’s labor income will remain outside the scope. However, if an individual’s income is derived from freelance activity or other activities that by law require a license or permit, and the amount exceeds the threshold of AED 375,000, such income will be subject to corporate income tax at a rate of 9%.
The objectives of the corporate tax in Dubai
The introduction of this tax aims to:
- Consolidate the UAE’s position as a leading global hub for all business as well as investment;
- Develop and accelerate the transformation of the UAE to achieve its strategic objectives;
- Reinforce their desire to reaffirm their commitment to international standards and OECD rules on tax transparency.
How is corporate income tax calculated?
Corporate income tax is calculated on the basis of the accounting net income. The latter also called net profit or net earnings is obtained
In the UAE, all profits in excess of AED 375,000 are taxed at a rate of 9%.
In order to determine the net taxable income, you will have to fill in a declaration which will take into account the total income generated by your company. To this income, you will have to deduct all the expenses incurred to generate this income. These expenses include operating expenses, interest on loans, depreciation and amortization.
Simply put, the sum of all income minus the sum of all expenses is your net income. This is also your taxable income.
You then multiply your net income by the corporate tax rate of 9% to get your corporate tax amount.
What are the exemptions to the 2023 corporate tax regime in the UAE?
Under the new tax regime, certain income will be exempt from the tax:
- Companies engaged in natural resource extraction; they will remain taxed at the emirate level;
- Large multinational companies that meet specific conditions; a different tax rate, yet to be determined, will be applied to them;
- Individuals’ labor income, unless it is derived from self-employment or from the exercise of a commercial or professional activity or any other economic activity requiring a license or approval;
- Income of individuals from real estate investments, provided that such investments are made on a personal basis and not in the context of a commercial activity requiring a license;
- Income, capital gains and dividends of individuals from personal investments in stocks and securities;
- Personal income and interest from savings and deposit accounts.
Note, however, that if your income is subject to corporate income tax, it must still exceed the AED 375,000 threshold to be taxable.
Are free zone companies exempt from the 2023 corporate tax?
The biggest question that arose when the tax was announced was the status of free zone companies in the UAE, would they be subject to the tax?
For now, it is not clear whether the new corporate tax regime will significantly affect free zone companies.
In order to remain competitive and to continue to attract foreign companies, it is likely that companies registered in the free zone that have no activity in the UAE will be exempt from this tax. This would allow them to keep the tax benefits of Dubai without being subject to the 9% tax.
However, they may also be subject to federal corporate income tax on the basis of income derived from any business activity carried out in the Emirates. Income from offshore activities may be exempt from corporate income tax.
What is the role of Ares Accounting?
Corporate tax changes in the UAE can have a significant impact on your business operations. Prepare now for the tax transition of your business.
It is highly recommended to contact an accounting firm in Dubai or any other Emirate to handle your accounting, bookkeeping, audit preparation, etc.
Our firm is ready to accompany you and facilitate the transition, contact us to get your quote support@ares-accounting.com.