The UAE government has implemented a federal tax imposed on the net profits made by companies in the UAE at a rate of 9% (nine percent). This type of tax is known by several names such as corporation tax, income tax, or business profits tax. However, the official name is Corporate tax (CT).
This tax does not replace other types of federal taxes, as the corporate tax in the UAE and other taxes applied by the state (VAT and Excise tax) are different types of taxes, and will be applied together in the country. The corporate tax in UAE entered into force starting from June 1, 2023. Therefore, if you own a company in UAE, your company is considered subject to registration for the tax without any exception, but you may be eligible not to pay any tax, and therefore we advise you to read this article. It’s a full guide with FAQs.
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Is Your Business Subjected to Corporate Tax in UAE
All Businesses founded within the UAE, entities under state management, and those with a permanent presence in the UAE are categorized as entities subjected to corporate tax. Ownership by citizens of the country, citizens of the GCC countries, or residents does not alter this. Regarding individuals, they will be subjected to income tax solely if their aggregate income surpasses one million UAE dirhams in a calendar year. However, earnings derived from specific activities are exempt from this calculation, namely:
- The reward.
- Private investment income.
- Real estate investment income.
Starting from June 1, 2023, all companies in UAE must register for corporate tax, but not all companies must pay the tax at a rate of 9%.
Corporate Tax Rate in UAE
The tax law stipulates the imposition of corporate tax with the following rates:
- (0%) on income not exceeding AED 375,000.
- (9%) on income exceeding AED 375,000.
That means you will pay (9 percent) on income exceeding AED 375,000, if your business doesn’t exceed this amount, You won’t pay tax, but you still have to register for the tax and file your tax return by the end of every tax period.
Corporate Tax Rate on Free Zone Companies
As for free zone companies, they enjoy a preferential rate of (0%) upon meeting the qualifying income, while the rate is (9%) if their realized income is not qualifying income.
Qualifying income is income earned by businesses that meet the following conditions:
- Maintaining a realistic and adequate presence in the free zones.
- Earning qualifying income.
- Not choosing to be subject to corporate tax according to the normal rates.
- Preparing and maintaining audited financial statements.
Frequently Asked Questions in Corporate Tax
Can a Company be Subject to Corporate Tax and VAT at the Same Time?
Yes, it is possible, given that the tax base for both taxes is different, and therefore companies registered for VAT purposes will have to pay both VAT and corporate tax separately.
Will I be Obligated to Pay Fees to the Federal and local Governments, or does Corporate Tax Replace that?
Fee obligations to the federal and local governments remain outstanding and payable, bearing in mind that fees and other expenses incurred exclusively for business purposes will be deductible expenses when calculating taxable income.
What are Deductible Expenses?
Deductible expenses are legitimate expenses that businesses incur to generate taxable income.
Are there Non-Deductible Expenses?
Yes, these expenses include bribes, administrative fines, financial penalties, expenses incurred to generate exempt income, and losses not resulting from the actions of the taxable person.
How will Companies Residing in the Country be Subject to Corporate Tax?
It will be subject to corporate tax on its income generated from inside and outside the country.
How will Non-Resident Companies in the Country be Subject to Corporate Tax?
Companies that are not registered in the country will be subject to corporate tax only on their income generated in the country from their permanent establishments or income arising in the country.
What does Corporate Taxable Income Mean?
Taxable income is the net accounting profit or loss for a given tax period after adjustments for certain items specified in the Corporation Tax Act.
What is the Tax Period?
The tax period is the calendar year, meaning it begins on January 1 and ends on December 31, and companies can prepare their financial statements during a different (12) month period.
Who are the People Exempt from Corporate Tax?
The Corporate Tax Law stipulates that some entities are exempted from corporate tax in the Emirates, either automatically or by submitting a request to do so:
- Government agencies and their affiliates.
- Qualified public benefit entities.
- Eligible investment funds.
- Public or private pension or social insurance funds.
- Legal persons wholly owned and controlled by certain entities are exempt from tax.
- Extractive works.
- Non-extractive natural resources business.
Are there Types of Income that are Exempt from Corporate Tax?
Yes, there are types of income that are exempt from tax. Below is a list of that:
- Dividends on shares or shares and other dividends received from legal persons established or residing in the country.
- Dividends on shares or shares and other profit distributions collected from participation shares with a foreign legal person.
- Income generated from a foreign branch or foreign permanent establishment.
- Income earned by a non-resident person through operating or leasing aircraft or ships in international traffic.
- Other types of income such as capital gains, foreign exchange gains or losses and impairment gains or losses on participation interests.
How often do I have to File a Tax Return for Corporation Tax Purposes?
You must submit one tax return for each tax period, and the law sets a deadline of nine months from the end of the relevant tax period for taxable persons to submit their tax returns. This is not related to achieving a specific income, as the return is submitted regardless of the level of income achieved or the status of the company.
When do I have to Pay Corporate Tax?
You must pay the corporation tax payable before the end of nine months from the end date of the relevant tax period.
How do Tax Losses Arise?
A tax loss arises for the purposes of the UAE corporate tax law when the total deductions claimed by the business are greater than the total taxable income during the relevant tax period, giving rise to negative income for the taxable person.
Do Corporate Tax Rules Allow Tax Losses Realized in the Previous Year to be Taken into Account to Reduce Taxable Income?
Yes, this is according to certain conditions, as tax losses can be deducted from taxable income during subsequent periods at a rate of up to (75%) of taxable income for each of those subsequent periods, and the unused surplus of tax losses can be carried forward and used for the purposes of reducing Income subject to tax in subsequent periods and indefinitely.
Can tax Losses be Transferred Between Group Companies?
Yes, as any of the group companies’ resident in the country can use those losses to deduct the taxable income of another company in the group, as long as there is joint ownership of 75% or more.
The transfer of tax losses does not apply to companies that are exempt from tax or benefit from the corporate tax system in the free zone at a rate of (0%).
What is the Tax Withheld at Source?
Withholding tax at source is a form of corporate tax in the UAE that is collected at source from the payer on behalf of the recipient of the income. This type of tax is usually applied in relation to international payments related to dividends, shares, interest, royalties and other types of income.
How will Tax be Implemented at Source in the Corporate Tax System?
This tax is applied at a rate of (0%) on specific types of income arising in the country paid to non-residents, and as long as the rate applied to it is (0%), there will be no obligations related to paying the due tax, registering for the tax, or submitting business tax returns. Resident in the country or foreigners who receive income generated in the country.
Can Foreign Tax Paid on Income also Subject to Corporate Tax be Deducted?
Yes, this is possible provided that the value of the foreign tax credit does not exceed the value of the corporate tax payable on the income in question. It must be noted here that it is not possible to carry over any surplus from the foreign tax credit to any of the previous or subsequent tax periods alike.
Which Companies can Form a Tax Group for the Purposes of the Corporation Tax Law?
Only resident companies can form a tax group provided that the parent company residing in the country owns, directly or indirectly, at least 95% of the capital and voting rights of each of the companies composing the tax group.
Does the Corporate Tax System in UAE Allow Foreign Entities to Join a Tax Group?
No, except if the foreign entity is managed and controlled within the country and is considered a resident entity in the country for corporate tax purposes.
How does Tax Group Formation Affect Tax Liabilities?
The tax group is treated as a single taxable person, with the parent company being responsible for managing the tax aspect of the group, performing the tax payable and submitting tax returns on behalf of the group.
What Obligations do Tax Group Members have?
The parent company and each subsidiary company shall be jointly and severally responsible for the group’s tax obligations, and joint and several liability may be limited to one or more member companies of the group, provided that the Federal Tax Authority approves this.
To seamlessly meet corporate tax requirements and ensure compliance, Taxable Persons are advised to seek the expert services of top Tax Consultants in UAE. Thus, contact us today and we shall be glad to assist you.