Taxation in Dubai: What Every Business Owner needs to know #2023
In a significant shift from its long-standing tax policy, the United Arab Emirates (UAE) announced in January 2022, introduction of a new corporate tax. This tax, set to come into effect from June 1st, 2023, marks a turning point in the UAE’s fiscal landscape, historically known for its low-tax jurisdiction.
The new corporate tax, levied at a rate of 9%, will apply to businesses generating over 375,000 AED (approximately USD $100,000) in profits. This move is part of the UAE’s broader strategy to diversify its economy, align with international tax norms, and tackle tax avoidance.
For business owners operating in the UAE, and particularly in Dubai, understanding this new tax system is crucial. It will not only impact their financial planning and business operations but also influence their strategic decisions. This blog post aims to provide a comprehensive guide to the new corporate tax in UAE, helping business owners navigate this new fiscal landscape with confidence and clarity.
The UAE’s Corporate and VAT Tax History
The United Arab Emirates has long been recognized as a low-tax jurisdiction, attracting businesses and investors from around the globe with its favourable tax environment. For many years, the UAE did not impose taxes on the profits of corporations, except for those in a few specific industries such as resource extraction and foreign banks.
However, the UAE’s tax landscape began to change in 2018 with the introduction of a Value-Added Tax (VAT). This tax, levied at a rate of 5%, was imposed on all consumer purchases, marking the first significant tax that affected a broad range of businesses and consumers in the country.
The most recent and significant development in the UAE’s tax history came in January 2022, when the government announced the introduction of a corporate tax. This tax, set at a rate of 9%, is due to come into effect in the financial year beginning on June 1st, 2023. The introduction of the corporate tax represents a major shift in the UAE’s tax policy and is expected to have a significant impact on businesses operating in the country.
The UAE’s 2023 Corporate Tax: An Overview
The UAE’s corporate tax landscape is set to undergo a significant transformation starting from June 1st, 2023. The government has announced a new corporate tax regime that will apply to businesses operating within its jurisdiction. Here’s what you need to know:
- 9% Tax on Profits:
Businesses that generate over 375,000 AED (approximately USD $100,000) in profits will be subject to a 9% corporate tax. This tax is calculated on the profits of the business, which is the revenue minus expenses. Businesses that generate less than this sum will continue to pay a 0% tax rate. This tiered approach ensures that smaller businesses are not unduly burdened.
- 15% Tax for Large Multinational Firms:
In addition to the 9% corporate tax, large multinational firms with profits of more than EUR 750 million will be subject to a higher tax rate of 15%. This is in line with the Global Minimum Corporate Tax Rate agreement, which aims to prevent tax avoidance by large multinational corporations.
- Effective Date:
The new corporate tax regime will come into effect in the tax year beginning June 1st, 2023. This means that businesses need to start preparing for this change and adjust their financial planning accordingly. It’s important to note that businesses whose tax year begins in January will not have to start paying tax on revenues generated before January 1st, 2024.
This new tax regime represents a significant shift in the UAE’s fiscal policy. Understanding these changes and their implications is crucial for businesses operating in the UAE.
Features of the Corporate Tax Regime
The new corporate tax regime in the UAE is characterized by several key features that businesses need to be aware of. Here’s a detailed look at these features:
Who Can Be Taxed?
- The tax applies to legal entities with notable legal personalities like Limited Liability Companies (LLCs), Public Shareholding Companies (PSCs), Public Joint Stock Companies (PJSCs), Limited Liability Partnerships (LLPs), and others.
- Foreign legal entities that earn income in the UAE and are tax residents will also be charged.
- Businesses operating in free zones that engage in trade activity with the mainland may also be subjected to corporate taxing policies.
- If a business earns income that doesn’t exceed AED 375,000, a 0% tax will be charged.
- A 9% tax will be charged if income earned exceeds AED 375,000.
- Larger multinational companies with different business conditions may be charged at a different tax rate.
Who is Exempted?
- Certain entities are exempted from corporate tax, including charities, public benefit organizations, investment funds, businesses engaged in the extraction of oil and resources, and wholly government-owned companies.
- Corporate tax law includes a participation exemption from corporate tax for entities receiving dividends or selling shares of a subsidiary company.
Calculating Taxable Income
- The net profit or loss shown in the company’s financial statements will generally be used to determine the tax percentage and income.
- In the case of a company loss, the business could offset the value against taxable income in future financial years up to 75%.
- A group of companies may be able to form a tax group in which they would be treated as a single taxable entity. To do so, a company or subsidiary needs to refrain from being an exempted party or being registered as a qualified free zone person.
- To avoid double taxation, the regime will allow for a credit in parallel with foreign tax paid in a foreign jurisdiction against foreign tax income which has not been exempted.
Understanding these features is crucial for businesses to effectively navigate the new tax landscape in the UAE.
Requirement for Free Zone Companies to Register and File a Corporate Tax Return:
- Free zone companies will need to register and file a corporate tax return.
- This requirement applies even though they may not have to pay any tax.
These implications underscore the importance for free zone companies to stay informed about the evolving tax landscape and to seek professional advice to ensure they comply with all regulatory requirements.
Personal Income and Capital Gains Tax in Dubai
While the UAE is introducing a new corporate tax regime, it’s important to note that there are currently no plans to introduce taxes on personal income or capital gains. Here’s what you need to know:
No Personal Income Tax:
- At present, there are no plans to tax people’s personal income in Dubai or the rest of the UAE.
- The only form of personal income tax in Dubai is the 5% VAT tax, which everyone must pay on consumer goods and services.
These tax policies contribute to the UAE’s reputation as a favourable environment for both businesses and individuals, and they play a significant role in attracting foreign investment to the country.
Corporate Tax vs VAT in UAE
Certainly, corporate tax and value-added tax (VAT) are two distinct types of taxes, each with its own unique characteristics and methods of calculation.
Corporate tax is a levy imposed on the net income or profits of companies. This tax is directly paid by the companies themselves, not by the consumers. The calculation of corporate tax is based on the profits a company makes. In Dubai, as in many other jurisdictions, corporate tax is calculated by subtracting allowable expenses, including operational costs, salaries, and other business-related expenses, from the total revenue. The remaining amount represents the profit, which is the base upon which the corporate tax is calculated.
On the other hand, value-added tax (VAT) is a consumption tax that is ultimately borne by the end consumer. It is applied to the purchase price of a product or service at each stage of the supply chain, from production to point of sale. The ‘value added’ at each stage of production or distribution is what is taxed. In essence, VAT is calculated by adding the cost added at each stage of production or distribution, which is then passed on to the consumer as a percentage of the final selling price.
In summary, while corporate tax is a direct tax paid by companies based on their profits, VAT is an indirect tax paid by consumers based on the value added to the goods or services they consume.
|Corporate Tax (CT)
|Value Added Tax (VAT)
|All businesses and individuals conducting business activities under a commercial license in the UAE, including free zone businesses, foreign entities and individuals if they conduct a trade or business in the UAE in an ongoing or regular manner, banking operations, and businesses engaged in real estate management, construction, development, agency and brokerage activities
|Most goods and services
|0% for taxable income up to AED 375,000, 9% for taxable income above AED 375,000, and a different tax rate (not yet specified) for large multinationals that meet specific criteria
|Businesses engaged in the extraction of natural resources, dividends and capital gains earned by a UAE business from its qualifying shareholdings, qualifying intra-group transactions and reorganizations provided the necessary conditions are met
|Some goods and services, such as basic food items, healthcare, and education
|All businesses and individuals conducting business activities under a commercial license in the UAE
|Mandatory for businesses with a turnover exceeding AED 375,000
|Within 9 months of the financial year
Frequently Asked Questions
u003cstrongu003eAre VAT and corporate taxes the same?u003c/strongu003e
Corporate tax and VAT in UAE are two distinct levies that are managed by HM Revenue and Customs. If your limited company makes a profit, you are legally compelled to pay corporation tax and file a corporation tax return with HM Revenue and Customs (HMRC).
u003cstrongu003eWhat is the UAE’s corporate tax rate?u003c/strongu003e
The UAE calculates corporate tax at 9% of the net profit in the business’s financial statements. Only if the taxable net profit exceeds 375,000 AED would the 9% corporate tax be applied.
u003cstrongu003eWho pays corporate tax in the UAE?u003c/strongu003e
All businesses operating in commercial activities are subject to register for corporate tax in UAE and the businesses which has profit above the threshold value 3,75000 AED are subjected to pay corporate tax in UAE.
u003cstrongu003eIs VAT deductible for corporate tax purposes?u003c/strongu003e
For firms that are VAT registered, you will use the net expense amount (minus VAT) as an admissible expense if you are registered for VAT. This is because the VAT amount is a distinct claimable amount, thus its net impact on you is not an expense.
u003cstrongu003eWhat costs are not deductible from Corporation Tax?u003c/strongu003e
Costs That Aren’t Allowable, Simple Digital Filing, legal costs associated with purchasing property or equipment. fuel costs for personal use of a vehicle. between your home and place of employment. political parties receiving payments.
u003cstrongu003eWhy is corporate tax introduced in the UAE?u003c/strongu003e
The UAE introduced a detailed and extensive corporate tax regime to enhance Dubai’s global position as a hub for investment and innovative startups. The regime includes affordable registration costs and no corporate taxes, making it attractive for businesses.
Considering the regime of new corporate tax in the UAE, understanding and navigating the tax landscape has become more crucial than ever for businesses. This is where Adam Global comes into play.
As a leading corporate services firm, Adam Global is well-equipped to guide businesses through these changes. Our team of experts can provide comprehensive tax advice, help you understand the implications of the new tax laws, and assist in strategic planning to optimize your tax position.
Whether you’re a small business concerned about crossing the new tax threshold, a multinational corporation navigating the higher tax rate, or a free zone company unsure about the new rules, Adam Global can provide the guidance and support you need.