Understanding The UAE Corporate Tax 2023: An In-depth Guide

by growwthpartners

October 11, 2023

The UAE government, on January 31, 2022, announced the introduction of a new corporate tax. This announcement marks a significant shift in the UAE’s tax landscape, as the country has historically not levied taxes on the majority of corporations. However, with the new tax rules set to take effect from June 1, 2023, many companies operating in the UAE will need to adjust to the new 9% corporate tax rate. This article offers a comprehensive guide on all you need to know about the UAE corporate tax.

History of Corporate Tax in UAE

Historically, the UAE has been a low tax jurisdiction. The income of citizens isn’t taxed, and most companies haven’t had to pay any form of corporate tax. Revenues from nationalised and private fossil fuel extraction industries, which paid around a 50% tax on revenues, were the primary source of the state’s revenues. Foreign banks also paid a 20% corporate tax on operating profits while hotels and restaurants in Dubai had to pay certain taxes.

However, with the UAE trying to diversify its economy away from fossil fuels, the government introduced a VAT tax in 2018, imposing a 5% levy on all consumer purchases. Then, in January 2022, the government announced a corporate tax of 9% that would come into effect the following year. The new UAE corporate tax is designed to align the country with international norms and help tackle tax avoidance.

Understanding the UAE’s 2023 Corporate Tax

The UAE’s 2023 corporate tax is a 9% tax on the profits (revenue minus expenses) of businesses that generate over 375,000 AED (about USD $100,000). Businesses earning less than this sum will continue to pay a 0% tax rate. The new tax will take effect in the tax year beginning June 1, 2023, meaning companies will need to start setting aside money to pay their taxes from that date.

Key Features of the UAE Corporate Tax Regime

The UAE corporate tax regime includes a diverse range of policies, from tax-free zones to corporate taxes and VAT systems. Here are some notable features of the tax system:

Taxable Entities	Legal entities such as LLCs, PSCs, PJSCs, LLPs, and others will be taxed. Additionally, any foreign legal entity earning income in the UAE and is a tax resident will be charged.
Tax Rates	Businesses that earn income not exceeding AED 375,000 will be charged a 0% tax, and a 9% tax will be charged if income earned exceeds AED 375,000.
Tax Exemptions	Upon receiving dividends or selling shares of a subsidiary company, corporate tax law includes an exemption from corporate tax. Furthermore, charities, public benefit organizations, investment funds, businesses engaged in the extraction of oil and resources, along with wholly government-owned companies, are excluded from corporation taxes.
Calculating Taxable Income	Generally, the net profit or loss shown in the company’s financial statements will be used to determine the tax percentage and income.
Tax Credits	To avoid double taxation, the regime allows for a credit in parallel with foreign tax paid in a foreign jurisdiction against foreign tax income that has not been exempted.

Impact on Free Zone Companies

The impact of the new UAE corporate tax on businesses based in free zones is still unclear. According to the government announcement, free zone companies will continue to benefit from their specific free zone’s pre-agreed incentives. However, this could potentially change in the future.

Personal Income and Capital Gains Tax in Dubai

There are currently no plans to tax personal income in Dubai or the rest of the UAE. The only form of personal income tax in Dubai is the 5% VAT tax imposed on consumer goods and services. Furthermore, there are no plans to introduce a capital gains tax on dividends received in the United Arab Emirates or Dubai.

Why Start a Company in Meydan Free Zone?

Meydan Free Zone, located in central Dubai, offers a 0% tax rate on profits. This means that even when the new UAE corporate tax rate comes into effect from June 2023, companies operating in Meydan Free Zone will not be required to pay it. Furthermore, Meydan Free Zone offers several other benefits such as proximity to the central business district, airport, roads and leisure facilities, 24/7 access, high-quality internet connections, and technical support.

FAQs

Is UAE tax-free for business?

Businesses set up in the UAE mainland will be subjected to certain taxes, although free zones in Dubai, like Meydan Free Zone, allow 0% corporate and personal tax to be levied upon business profits.

Who pays corporate tax in the UAE?

All businesses operating in commercial activities and other businesses are subjected to paying corporate tax, with a few business models having exemptions.

Why was corporate tax introduced in the UAE?

A detailed and extensive corporate regime in the UAE was introduced to amplify Dubai’s global position as a hub for investment and innovative startups, with affordable registration costs, including no corporate taxes.

How much is corporate tax in the UAE?

Dubai follows a progressive corporate tax system with rates between 9% to 55%.

Final Thoughts

The introduction of the UAE corporate tax marks a pivotal moment that will affect numerous businesses in the country. Understanding these new tax regulations is paramount for businesses to adapt effectively. At Growwth Partners, we specialise in guiding businesses through such financial transitions. Our team of experienced finance professionals offers expert advice and services tailored to ensure compliance with these new regulations. Partner with us, and let’s navigate these changes together, ensuring your business thrives amidst evolving financial landscapes.

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