The Ministry of Finance in the UAE is responsible for managing and developing the financial resources of the federal government. This mission is achieved through the implementation of fiscal policies and by fostering local and international relations. These efforts aim to ensure the development, integrity, and sustainability of the fiscal system align with best practices. The ministry has recently introduced a new federal corporate tax to position the UAE as a global business and investment hub, fostering economic development and achieving strategic objectives.
**What is Federal Corporate Tax?**
Federal corporate tax is a levy on the income or capital of corporations and other business entities. Similar to how individuals pay income tax, corporations are subject to corporate tax. Many countries have these taxes at both national and state levels.
**How is Corporate Tax Calculated?**
Corporate tax is determined based on a company’s net income or taxable income. Net income, also known as net profit or net earnings, involves calculating all revenue sources and accounting for expenses, including operating costs, depreciation, amortization, loan interest, and more. Business management software like TallyPrime facilitates this calculation through readily available financial reports such as balance sheets and profit and loss accounts.
**Is There a Federal Corporate Tax in the UAE?**
As of now, the UAE does not have a federal corporate tax. Corporate taxes are calculated on a territorial basis, with individual Emirates issuing their tax decrees. The rates vary among Emirates; for instance, it’s 10 percent in Qatar, 15 percent in Oman and Kuwait, and 20 percent in Saudi Arabia.
**New Corporate Tax in the UAE**
The Ministry of Finance announced the implementation of a new federal corporate tax system, which will take effect on either July 1, 2023, or January 1, 2024, depending on a business’s financial year. Businesses will be required to register once the Ministry of Finance announces the registration process and ongoing compliance obligations.
**Corporate Tax Rate**
The new corporate tax rate in the UAE will be 9 percent, with exceptions. Businesses with a net income or taxable income of AED 375,000 or more will be subject to this tax, while small businesses with taxable income below AED 375,000 will have a 0% tax rate.
**New Corporate Tax Requirements**
The new corporate tax law starts with the accounting net profit position in businesses’ financial statements to determine taxable income. Thus, financial reports, statements, and accounting records are crucial for this assessment.
**Exceptions to the New Corporate Tax**
While the federal tax applies to most businesses and commercial activities in the UAE, there are exceptions:
– Businesses in the natural resources extraction industry follow tax decrees of their respective Emirate.
– Businesses registered in Free Trade Zones are exempt if they meet regulatory requirements and do not operate in Mainland UAE.
– Individual income, unless derived from business or professional activities, freelancing, or licensed economic activities.
– Individual income from personal investments in shares, securities, real estate, and interest from deposit and savings accounts.
**Objectives of the New Corporate Tax**
The new corporate tax in the UAE aims to:
– Establish the UAE as a leading global business and investment hub.
– Drive development and achieve strategic objectives.
– Ensure compliance with international tax transparency standards and control harmful tax practices.
**Corporate Tax Levels**
According to the Ministry of Finance, the new corporate tax rates are as follows:
– No taxes on income up to AED 375,000.
– 9 percent for taxable income above AED 375,000.
– Large multinationals meeting specific criteria under the OECD Base Erosion and Profit Shifting Project will have a different tax rate.
**Administration of the New Corporate Tax**
The Federal Tax Authority (FTA) will administer, collect, and enforce the new corporate tax.
**Foreign Companies and Individuals**
Foreign companies and individuals conducting business or trade regularly in the UAE will be subject to the new corporate tax.
**Tax on Foreign Investors**
Foreign investors’ income from dividends, interest, royalties, capital gains, and other investments will not be subject to the new corporate tax.
**Tax Rates for Entities in Free Zones**
Entities meeting specific conditions in Free Zones are subject to corporate tax at the rates of 0% on qualifying income and 9% on taxable income that does not meet the qualifying income definition.
**Tax Period**
The tax period typically follows the Gregorian calendar year (January 1 to December 31) but may vary if a business uses a different 12-month period for its financial statements.
**VAT and Corporate Tax**
If your business is registered for VAT, you must pay VAT and corporate tax separately. If not registered for VAT, you may still be liable for federal corporate tax.
**Deductibility of VAT for Corporate Tax**
Only irrecoverable input VAT is deductible for corporate tax purposes; VAT on sales and purchases will not affect taxable income.
**Preparing for Federal Corporate Tax in the UAE**
To prepare for corporate tax in the UAE, businesses should:
– Familiarize themselves with the corporate tax law and supporting information available on the Ministry of Finance and Federal Tax Authority websites.
– Assess corporate tax obligations, including registration, tax period, filing requirements, and necessary documents and applications.
– Understand how corporate tax may impact contractual obligations with customers and suppliers.
– Maintain financial records and information for corporate tax purposes.
– Stay updated through official websites.
– Educate their teams about corporate tax applicability and business implications.
– Use accounting or business software to manage corporate tax requirements.
You can also Register Corporate Tax Registration in our website:
https://thevatconsultant.com/
