Exemptions to the UAE Corporate Tax

You already know that on 31st January 2022, it was announced that the federal corporate tax (CT) will be effective starting 1st June 2023. You probably also know that the tax is at 9% but like most of us in the United Arab Emirates, a tax-free commerce hub for a long time, the recent news about tax brings more questions than answers. Let’s dive in to understand the purpose, process, and also exemptions of the UAE corporate tax.

The term ‘tax’ receives a lot of flak but it is an important tool that helps in funding and planning for the future of the UAE. According to the Ministry of Finance, the objectives behind the corporate tax are threefold:?

1. To affirm the UAE's position as a leading global hub for business and investment
2. To hasten the country's development to achieve its strategic goals
3. To reiterate the UAE's commitment to meet international tax standards and prevent unfair tax practices?

‘As per the current guidelines the CT will be levied on the accounting net profit reported in the financial statements of businesses. UAE will impose a tax rate of 9% on business profits exceeding 375,000 UAE dirhams ($102,000) and a 0% tax rate on taxable income up to this amount.’ Additionally, a different tax rate, which is yet to be specified, will be levied on large multinational corporations that meet specific criteria, in accordance with 'Pillar two' of the OECD Base Erosion and Profit Shifting project. ‘We are also waiting to learn more about how companies in the UAE can form a tax group and file a tax document for the entire group. This would apply to a lot of residents who have been living here for decades and have multiple businesses.’

The UAE's Federal Tax Authority (FTA) will collect and enforce the new corporate tax. The FTA announced that it will publish additional information and guidelines regarding the CT in due time.?

UAE's Ministry of Finance has drafted a list of cases on which it intends to impose corporate tax:?

• Income earned by all businesses and individuals engaged in business activities under the UAE's commercial license.
• Income earned by free-zone businesses operating on the UAE mainland.
• Income earned by foreign entities and individuals who engage in business activities in the UAE regularly.
• Income earned by businesses through banking operations.
• Income earned by businesses involved in real estate, construction, development agencies, and brokerage activities.

True to UAE’s passion to support the growth of small businesses, the current bar supports small businesses and startups, as the UAE Corporate Tax regime is the most competitive in the world. To ensure that the economy thrives with the new CT’s support, the Ministry of Finance has also published several cases that are exempted from their tax policy:?

• Income from businesses that extract natural resources are exempt from corporate tax but is subject to the existing Emirate level corporate tax.?
• Business earnings as dividends and capital gains from shareholders.
• If requirements to be specified in the CT law are fulfilled, income is earned through intra-group transactions and reorganizations.

All business owners must do an audit of their financial books as a preparedness exercise for June 2023; however, there are many cases where the CT will not be applicable. Here’s a list you can refer to before planning your taxes for the next year:

• Companies operating in the free zones do not fall under the scope of the new tax regime. In UAE free zones, foreign companies can efficiently manage, and foreign investors take 100% ownership. Being outside the mainland and not doing direct business with the mainland means that the tax won’t impact the companies in the free zones.
• Individuals' income, received from the public or private sector that comes from employment, real estate, equity investments, and other personal income unrelated to the UAE's trade or business will not be included.
• Individuals' income earned domestically as interest from bank deposits or other saving schemes shall also not be taxable under the Corporate Tax.?
• Foreign investors' income earned as dividends, capital gains, interest, and other investment returns will also be exempted from the UAE Corporate Tax.
• Individuals' income earned as investment returns from real estate won’t be considered for Corporate Tax.
• Individuals' income earned as dividends and capital gains by holding shares or other securities in a personal capacity is also not in the preview of the Corporate Tax.?

Clarity on the law is awaited?

Although the UAE's new tax policy is new to the region, policymakers contend that this strategy is not shocking. As the world prepares for a sustainable global economy, independent of petroleum and other non-renewable fuel sources, the UAE is preparing for a reliable income source away from its hydrocarbon revenue.?

This drastic measure will be well-received by global and Middle Eastern business owners engaged in business activities in the UAE as it lends credibility and alignment to global standards. Moreover, since the minimum income subject to taxation is low, the UAE's decision will not affect small to medium-sized businesses.

Also, since the UAE's tax rate is competitive compared to its neighbors, countries including Egypt, Jordan, Oman, and Saudi Arabia charge corporate tax between 10% to 35%. Because of this, the UAE maintains its competitive edge as a tax haven in the Middle East.?

Information on the new policy can be accessed through the government website as more details about the specifics are released the SA blog will also publish insights. Companies and individuals have almost a year to prepare to adapt to the new policy and it’s best to seek a consultation to discuss and plan the same.?

Disclaimer:

The information in this blog post is meant to provide an initial introduction to the UAE Corporate Tax regime. As the relevant legislation is finalized, the blog will also be updated. By way of this information, SA consultants do not comprehensively address all possible aspects of the UAE Corporate Tax regime or provide definitive answers and should not be used for individual or business decisions as it does not represent the final legislation. Further information on the technical details and other specifics of the UAE Corporate Tax regime will be made available in due course as per the UAE government’s official information. Meanwhile, contact SA Consultants for any queries, and we will be happy to walk you through the ways to be fully prepared for upcoming changes.?