Understanding Corporate Taxation in the UAE: Key Considerations

UAE is a popular jurisdiction for crypto business and that is why we are writing about its taxation. On February 7, 2023, Dubai finally adopted crypto regulation.

Accordingly, today there is a regulator called VARA, which enables companies to obtain licenses and issue tokens under their strict control. Considering the fact that Dubai is actually today also a hub for development, in particular, for NFT marketplaces and metaverse service providers.

And, in general, as a company in the field of developing solutions for blockchain, we have come to the conclusion that this jurisdiction is interesting not only from the point of view of regulation, but also from the point of view of taxation. The tax has appeared, we are ready to talk about it and share with the business interesting insights that we learned after studying the legislation.

The United Arab Emirates (UAE) stands as an economic powerhouse in the Middle East, renowned for its rapid development and thriving business environment. A key driver of its success is the favorable tax regime, which has lured countless domestic and international businesses to its shores. As an integral part of the Gulf Cooperation Council (GCC), the UAE has continually adapted its corporate tax policies to align with global economic trends while preserving its reputation as a tax-friendly jurisdiction. In this comprehensive article, we delve into the intricate world of UAE corporate taxation, offering invaluable insights into the tax structure, regulations, incentives, and the ever-evolving landscape that businesses need to navigate to thrive in this dynamic economy. 

Introducing Corporate Taxation in the UAE

In January 2022, the Ministry of Finance disclosed its intention to implement a federal Corporate Tax (CT) on the earnings generated by businesses. In accordance with UAE Federal Decree-Law No. 47 of 2022 on taxation of corporations and businesses (the “Corporate Tax Law”), businesses will become subject to UAE Corporate Tax from the beginning of their first financial year that starts on or after 1 June 2023. The CT will be enforced uniformly across all emirates.

By implementing Corporate Tax (CT) in the UAE seeks to:

  • Strengthen its status as a prominent global center for business and investment.
  • Expedite its progress and transition towards accomplishing strategic goals.
  • Reiterate its dedication to complying with international tax transparency standards and preventing detrimental tax practices.

Scope of CT Application

Corporate tax represents a direct taxation mechanism imposed on the net income or earnings generated by corporations and various other entities as a result of their business activities. According to the recent legislative updates, CT will apply to:

  1. all businesses and individuals conducting business activities under a commercial license in the UAE
  2. free zone businesses (The UAE CT regime will continue to honor the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business set up in the UAE’s mainland.)
  3. Foreign entities and individuals only if they conduct a trade or business in the UAE in an ongoing or regular manner
  4. Banking operations
  5. Businesses engaged in real estate management, construction, development, agency and brokerage activities.

Exemptions from CT

Below are the rules regarding  corporate tax exemptions: 

  • Businesses engaged in the extraction of natural resources are exempt from CT as these businesses will remain subject to the current Emirate level corporate taxation.
  • Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from CT.
  • Qualifying intra-group transactions and reorganizations will not be subject to CT, provided the necessary conditions are met.

Furthermore, Corporate Tax (CT) will not be applicable to:

  • an individual earnings salary and other employment income, whether received from the public or the private sector
  • interest and other income earned by an individual from bank deposits or saving schemes
  • a foreign investor’s income earned from dividends, capital gains, interest, royalties and other investment returns
  • investment in real estate by individuals in their personal capacity
  • dividends, capital gains and other income earned by individuals from owning shares or other securities in their personal capacity.

CT Rate

According to the Ministry of Finance, the corporate tax rates stand as follows:

  • 0 per cent for taxable income up to AED 375,000 (EUR 96,440)
  • 9 per cent for taxable income above AED 375,000  (EUR 96,440) and
  • a different tax rate (not yet specified) for large multinationals that meet specific criteria set with reference to ‘Pillar two’ of the OECD Base Erosion and Profit Shifting Project.

Federal Tax Authority (FTA) will oversee the administration, collection and enforcement of the CT. FTA  offers additional resources and instructional materials regarding  corporate tax , as well as instructions on registration and filing tax returns, accessible on its website. 

Taxation Basis Classification and Conditions for Corporate Taxation

In accordance with the tax regimes observed in most nations, the Corporate Tax Law imposes taxes based on both residence and source criteria. The applicable tax basis hinges on the categorization of the Taxable Person.

A “Resident Person” is liable for taxation on income originating from both domestic and foreign sources (i.e., residence basis). Conversely, a “Non-Resident Person” is subject to taxation solely on income generated from sources within the UAE (i.e., source basis).

Residency for Corporate Tax purposes is not ascertained by an individual’s actual place of residence or domicile; rather, it is determined by specific criteria outlined in the Corporate Tax Law. If an individual fails to meet the prerequisites for classification as either a Resident or a Non-Resident person, they will not be considered a Taxable Person and, consequently, will not be subject to Corporate Tax.

What is the purpose and scope of the new corporate tax regime?

The recent news signifies a significant change in the UAE’s taxation landscape, which has long been a magnet for global businesses due to its tax-free status. Here is key takeaways for businesses to consider:

Tax Rates and Thresholds: The UAE’s new corporate tax regime sets the statutory tax rate at 9% for taxable income exceeding 375,000 UAE dirhams (approximately $102,000). However, businesses with taxable income below this threshold will not be taxed. This exemption is designed to support small businesses and startups, reflecting the government’s commitment to fostering entrepreneurship. The Ministry of Finance has asserted that this tax framework will position the UAE’s corporate tax system among the most competitive in the world.

Exemptions for Foreign Investors: Notably, the corporate tax will not be imposed on foreign investors who do not engage in business activities within the country. This move ensures that international investors who use the UAE as a regional hub for their global operations will not be affected by the new tax.

Continued Benefits for Free Zone Businesses: Thousands of businesses currently operate within the UAE’s free zones, which have traditionally enjoyed benefits such as zero taxes and full foreign ownership. The Ministry of Finance has indicated that these free zone businesses can still enjoy corporate tax incentives, provided they meet the necessary requirements. However, specific details about these requirements were not elaborated upon.

Compliance and Transparency: The government aims to make the corporate tax system business-friendly by aligning it with global best practices and minimizing compliance burdens. Corporate tax will be applied based on the profits reported in the financial statements of UAE businesses, following internationally accepted accounting standards. There will be limited exceptions and adjustments, with the primary focus on fairness and transparency.

Impact on SMEs and Startups: While the introduction of corporate tax is not surprising given international trends, some SMEs and startups may be concerned about the potential impact. Some business owners have pointed out that the tax may deter entrepreneurs, especially due to the upfront fees and the prospect of taxation once the business becomes profitable. However, it’s worth noting that the proposed tax rate remains relatively low compared to other low-tax jurisdictions worldwide.

Global Alignment and Digitalization: The UAE government’s decision to introduce corporate tax is motivated by its desire to align with global efforts to combat tax avoidance. Additionally, it aims to address challenges arising from the digitalization of the global economy. Notably, the UAE does not levy personal income taxes, and this corporate tax is seen as a way to contribute to international tax compliance while maintaining the attractiveness of the UAE as a business destination.

In summary, the UAE’s decision to implement a corporate tax represents a significant shift in its economic policies. While it may raise concerns among some businesses, especially SMEs and startups, it is part of the UAE’s commitment to international tax standards and efforts to adapt to the evolving global economic landscape. The country’s move towards taxation underscores the need for businesses to carefully assess their financial strategies and long-term plans in the changing business environment.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.

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