About introduction of Corporate Tax in UAE?
As announced on 31 January 2022, the United Arab Emirates (UAE) will introduce a federal Corporate Tax (CT) on business profits at the rate of 9% that will be effective for financial years starting on or after 1 June 2023. The introduction of a federal CT regime is intended to help the UAE achieve its strategic ambitions and incentivise businesses to establish and expand their activities in the UAE.
Who Is Required to Pay Corporate Tax?
The following persons shall be subject to UAE corporate tax:
Which income shall be taxed under CT?
The UAE CT shall be levied on Business Profits earned by Natural person or legal person mentioned in point no. 2. Other incomes like Employment Income, personal income like Dividend income shall not be taxed provided it is earned in the personal capacity.
What shall be the tax period in UAE CT Law?
As per consultation paper, the law shall be effective for financial year starting from 01 June 2022. Accordingly, any person having financial year ending 31 May, then the first tax period shall be 01 June 2022 to 31 May 2023.
What will be the frequency of payment of UAE CT and filing of Tax Returns?
Each tax return and related supporting schedules will need to be submitted to the FTA within 9 months of the end of the relevant Tax Period. Payments to settle a taxpayer’s CT liability for a Tax Period will need to be made within 9 months of the end of the relevant Tax Period.
Who is Exempted from Corporate Tax?
What is the Impact on Free Zones?
Instances of Taxability on transactions as given below
S.No. |
Income generated by |
Income generated from |
Taxability on UAE CT |
1 |
Free Zone Entity |
ROW (Rest of the World) |
The income generated by FZ entity should be allowed for 0% rate of CT. The income generated by FZ entity should be allowed for 0% rate of CT. |
2 |
Free Zone Entity |
Free Zone Entity (Same or any other) |
|
3 |
Free Zone Entity |
Mainland Branch (Branch of FZ) |
The income generated by FZ entity should be taxed at 9% CT on income derived from Mainland branch of FZ entity. |
4 |
Free Zone Entity |
Mainland Entities |
The “passive” income generated through Mainland entity shall be taxed at 0% CT.
The passive income includes interest, royalties, dividend and capital gains on sale of shares held in the mainland companies.
Withholding tax at 0% to be applied as well.
|
5 |
Free Zone Entity in Designated Zone for VAT |
Mainland UAE |
Benefit of 0% CT if the import on record is Mainland UAE entity. |
6 |
Free Zone Entity |
Group Companies located in Mainland UAE |
Benefit of 0% CT to FZ Entity.
No deduction benefit to Group Companies located in Mainland while computing the business income. |
The Free Zone Entity shall be disqualified from the benefit of 0% CT if:
Where a FZ Entity is having a Mainland Source Income (other than the incomes considered to be treated as 0% CT), then the FZ Entity shall be disqualified from the benefit of 0% CT on all other income.
How to Compute Corporate Tax?
Accounting profit/loss would be the starting point for computation of taxable income on which CT shall be calculated.
The financial statements should be prepared using accounting standards and principles that are acceptable in the UAE, and businesses will use their financial accounting period as their (annual) tax period. Where a business does not have a financial accounting period, their default tax period will be the Gregorian calendar year.
Whether all expenses shall be allowed?
Expenses on account of interest payments have been limited to 30% of EBITDA and only 50% of entertainment expenses would be allowed as deduction.
Whether Losses shall be allowed to be Carried Forward?
Yes. As per the Consultation paper, it is provided to carry forward the losses up to 75% of the taxable income in each of those periods subject to fulfillment of other conditions.
What about withholding taxes?
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