In January 2022, the UAE Ministry of Finance announced the implementation of corporate tax across the United Arab Emirates. If you are running an organisation in the UAE, it’s time to make yourself aware of corporate tax and its role in your business.
What is Corporate Tax & How is it Implemented in the UAE?
Recently, the UAE government introduced new taxes for UAE businesses. Value-Added Tax (VAT) was introduced in 2018, followed by corporate tax in January 2022. Corporate tax is a relatively new concept in the UAE, which will only come into effect in June 2023.
Corporate tax is a direct tax levied on the net profit of an organisation. Corporate tax is also known as Corporate Income Tax or Business Profit Tax.
Which businesses are subject to UAE corporate tax? Generally, the UAE corporate tax applies to all companies, but for some exceptions:
- All businesses involved in the extraction of natural resources
- Foreign companies or individuals who run a regularised business in the UAE
Apart from these exceptions, the UAE corporate tax applies to all categories of net income and profits mentioned in financial statements prepared as per internationally accepted accounting standards.
Implementing this tax in the UAE is expected to open more foreign investment opportunities for UAE-based businesses, cementing the UAE’s position as a leader in the global economy. Acknowledging the corporate tax in UAE will also improve corporate governance and strengthen the nation's economy. Besides, businesses may find it more beneficial to pay corporate taxes rather than additional income taxes. Above all, corporate tax is set to fortify UAE’s strategic objectives and reinforce its commitment to transparent tax practices.
Details About Corporate Tax Limit & Its Applicability in the UAE
UAE’s Ministry of Finance has drafted some applicability limits for corporate tax:
- Tax-free income up to AED 375,000.
- AED 375,000 and above are subject to a 9% tax.
- Large multinationals meeting specific criteria may be taxed at a different rate (not yet specified).
The Ministry states that corporate taxes will be levied only if the net income crosses the defined threshold limit. Businesses whose net income is below the limit are exempted from corporate tax.
Applicability of Corporate Tax
According to the UAE Ministry of Finance announcement, the Federal Tax Authority (FTA) will be responsible for the administration, collection, and enforcement of the corporate tax from:
- Banking operations.
- All free zone businesses in the UAE.
- All companies and individuals running a business with a UAE commercial license.
- Foreign firms and individuals permitted to operate in the UAE on an ongoing or regular basis.
- Organisations dealing with real estate management, agency, brokerage activities, and construction.
Corporate Tax in the UAE: When Will it be Implemented?
The Ministry has announced that corporate tax will be implemented on or after June 1, 2023. The authorities have announced dates of corporate tax applicability in recognition that businesses follow different financial year start dates.
Here are the details:
- Businesses whose fiscal year starts on July 1, 2022, and ends on June 30, 2024, are subject to UAE Corporate Tax from July 1, 2023.
- Businesses whose fiscal year starts on January 1, 2023, and ends on December 31, 2022, are subject to UAE Corporate Tax from January 1, 2024.
Calculating Corporate Tax in the UAE
The following steps should be followed when calculating corporate tax:
- Find the adjusted gross income
- Find the allowed deductions to calculate the taxable income
- Evaluate the business taxable incomes using the below formula:
Taxable income = Adjusted Gross Income - Applicable Deductions
Finally, the taxable income is multiplied by the corporate tax percentage to calculate the corporation's tax liability.
According to UAE tax laws, corporate tax is calculated as 9% of net profit after subtracting all applicable deductions and excluding exempted income from the financial statements. Taxes paid on foreign earnings will also be deducted from profits shown in the financial statements. Finally, the taxable income is calculated by subtracting all deductions from the net profit.
Essential Documents Needed to File Corporate Taxes
The UAE Income Corporate Tax regime uses the accounting net profit position in a business's financial statements to determine taxable income. Taxable companies should submit the following information while filing for corporate taxes:
- Taxable incomes, including profits from product or service sales
- Capital gains
- Rental income
- Business financial reports
- Accounting books
- Details of income from interests and commissions
Corporate Tax Filing: Major Pointers to Keep in Mind
Since many UAE-based businesses will be filing their corporate taxes for the first time, here’s a “to-do” list to bear in mind:
- Provide only accurate and relevant information for documentation purposes
- Be well-versed in corporate tax implementation and court rulings on the same
- Follow the formulated law stated by UAE’s Ministry of Finance
- Consider tax planning before filing to avoid paying more than the actual taxable amount.
- Consider your business objectives, future incorporations, and changes that will be made for long-term tax benefits.
Simple Tips to Avoid Tax Burdens & Gearing Up For Corporate Tax Implementation
Your organisation could become liable for unnecessary tax burdens if you are not careful. To avoid heavy tax burdens, companies should take the following precautions:
- Claim all expenses incurred by company entities
- Invest in long-term assets
- Invest in tax-efficient investments and divert the contribution towards tax-efficient accounts
- Accelerating depreciation charges for the purchases in the firm
- Award stock options to employees and benefits for employees’ dependents
Now that you know all the essential details about implementing the corporate tax in the UAE, it is time to incorporate corporate tax into your business.
The 4-Phased Approach To Incorporating Corporate Tax
- Assess the impact of corporate tax on your business before the issuance of corporate tax laws
- After the tax laws are issued, make a detailed assessment and plan for your tax methodologies
- Ensure that all activities adhere to the guidelines
- Double-check to ensure you have submitted the first corporate tax returns post-implementation
Gear up your finance teams and business stakeholders to discuss how the new corporate tax will impact your business. It is important to note that any errors or miscalculations in corporate tax filing may result in heavy penalties leading to losses and shortfalls later.
Get Corporate Tax Guidance From Fortius
Tax planning is crucial to stay on track with corporate taxes. Get expert advice from Fortius Consulting Services to ensure correct implementation and compliance with corporate tax services in the UAE. Call us to learn more about our corporate tax services.