The United Arab Emirates (UAE) has been recognized as a prime investment destination, attracting businesses and investors from all over the world. With its strategic location, advanced infrastructure, and stable political environment, the country has become a hub for international trade and commerce over the years. However, the UAE is not resting on its laurels and is taking steps to enhance its competitiveness around the globe. One of these steps is the introduction of a federal corporate tax law.
The United Arab Emirates (UAE) has declared that from 1st June 2023, all businesses except small firms will have to pay a corporate tax of 9% on taxable profits that exceed AED 375,000 ($102,000). This comes after the government released the long-awaited Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, also known as the Corporate Tax Law.
The law is aligned with the best practices and is considered one of the most competitive in the world. It reinforces the UAE's position as a leading destination for businesses and investors. The corporate tax concept also aligns with the country's commitment to meeting international standards for tax transparency and avoiding harmful tax practices.
Who Is Affected by the New Corporate Tax?
The corporate tax applies to all businesses whose taxable profits exceed AED 375,000. The tax is not levied on salaries or personal income from employment, as well as earnings from bank deposits, savings schemes, and real estate investments made by individuals. Businesses that do not meet the income threshold of AED 375,000 will not be subject to the tax to support small businesses and start-ups.
Natural resource extraction activities in the UAE are excluded from corporate tax coverage. However, entities engaged in these activities are still subject to existing local taxation. Other organizations, including government entities, pension funds, investment funds, public benefit organizations, and entities in free trade zones, will also be exempted. Free trade zone entities will be eligible for a zero-tax rate.
What Is the Rate of Corporate Tax in the UAE?
The corporate tax rate in the UAE is set at 9% of taxable profits. For small businesses and start-ups whose taxable profits are less than or equal to AED 375,000, the corporate tax rate is 0%.
When Will the Corporate Tax Law Take Effect?
The corporate tax will be charged on earnings for financial years starting on or after 1st June 2023. An entity with a financial year starting on 1st July 2023 and ending on 30th June 2024 will be subject to corporate tax from 1st July 2023. A business with a financial year starting on 1st January 2023 and ending on 31st December 2023 will be subject to taxation from 1st January 2024.
Implications of the New Corporate Tax
The introduction of corporate tax is a significant landmark in developing an integrated tax regime that supports the nation's strategic objectives and enhances its status. According to experts, the tax regime could have some implications for businesses operating in the UAE. However, the tax is expected to help cement the nation’s position as a global center for trade and investment.
One of the implications of the new corporate tax is that it could increase the cost of doing business in the UAE. However, the tax is expected to generate revenue for the government, which could be used to support infrastructure development, improve social services and provide better public amenities.
The corporate tax may also result in a shift in business strategy for some companies. Businesses may need to restructure their operations to reduce the impact of the tax. They may also need to adopt new tax planning strategies to optimize their positions.
The introduction of the federal corporate tax in the UAE is a significant milestone expected to boost the country's position as a global business and financial hub. While some companies may experience an increase in the cost of doing business, the tax is expected to generate revenue that can be used to support infrastructure development, improve social services, and provide better public amenities. As the old saying goes, "you have to spend money to make money," and the UAE is investing in its future.