28 Apr New UAE Tax Regulations: Ultimate Guide
This article highlights recent tax regulation changes in the UAE. For the most current information on taxes, please consult a local tax professional.
Since its inception, the United Arab Emirates has been known for its low tax policies. Most companies have been exempt from paying corporate tax. Instead, the government’s primary source of revenue came from the nationalized and private fossil fuel extraction industries, which were subject to a high tax on revenues.
However, as the UAE seeks to diversify its economy away from fossil fuels, an increasing number of businesses are not subject to any taxation. This, coupled with the need for more revenue to support investments in infrastructure, has led to the introduction of a 9% corporate tax effective from 2023. Alongside the rest of the GCC, the government already introduced a 5% VAT tax in 2018.
One of the reasons for introducing the new corporate tax is to align the UAE with international tax norms and to combat tax avoidance. Most developed countries impose taxes on business profits, with rates typically around 20%, and the 9% tax in the UAE is still significantly lower than the average.
New Tax Rules
Starting from June 1st, 2023, the United Arab Emirates will implement a 9% corporate tax on the profits of all businesses that generate over 375,000 AED annually. Companies that generate less profit than this amount will remain exempt from the tax.
Moreover, the UAE government has stated that large multinational firms with profits exceeding EUR 750 million will have to pay a 15% tax, which aligns with the Global Minimum Corporate Tax Rate agreement. Most companies will need to allocate funds to pay the new UAE corporate tax, as it will become effective beginning on June 1st, 2023.
Understand the New Tax System
Dubai’s corporate tax system is composed of various policies, including tax-free zones, VAT systems, etc. The following are notable features of the tax system:
- Legal entities such as LLCs will be subject to tax. Additionally, any foreign legal entity that earns income in the UAE and is a tax resident will be taxed. However, free zones are exempt from corporate taxes if they comply with regulatory requirements. Nevertheless, free zone companies engaged in trade with the mainland must pay taxes.
- A group of companies can form a tax group that is treated as a single taxable entity. To do so, a company or subsidiary must not be an exempted party or registered in a free zone.
- Larger multinational companies with different business conditions will be subject to different tax rates. The regime allows for a credit against foreign tax paid in a foreign jurisdiction on foreign tax income that has not been exempted to avoid double taxation.
- The participation exemption in corporate tax law exempts corporate tax on dividends received or shares sold by a subsidiary company. In addition, charities, public benefit organizations, investment funds, and wholly government-owned companies are exempt from corporate taxes.
- Taxable income is generally determined by the net profit or loss indicated in the company’s financial statements. In the case of a company loss, the business can offset the value against taxable income up to 75% in the future.
What About Taxation for Free Zone Companies?
Companies in free zones will continue to enjoy the benefits of the incentives agreed upon in their respective zone charters. Nonetheless, free zones may opt to alter their regulations in the future, which could lead to the implementation of taxes.
How to Prepare for the New Tax Regime?
All entities subject to the corporate tax must register for it and obtain a Corporate Tax Registration Number. In addition, businesses must prepare and submit a corporate tax return with supporting records for every tax period. Companies are not required to make advance corporate tax payments in the UAE. The Federal Tax Authority (FTA) administers, collects, and enforces the UAE’s corporate tax. Before June 2023, the FTA will publish guidelines for registering and filing corporate tax returns on its website.
Many countries allow companies to pay taxes, including corporate tax, in multiple payments. The FTA has not yet established specific guidelines for paying and filing UAE corporate tax. However, it is conceivable that companies may have the option to pay corporate tax in installments, subject to the FTA’s future regulations.
Are Personal Income Taxes on the Horizon?
With the introduction of VAT in 2018 and general corporate taxes in 2023, it’s no wonder many UAE residents wonder if a personal income tax is next. The FTA has not provided any information that alludes to the introduction of personal income tax across the UAE.
One reason why the UAE does not have an income tax is because of its primarily foreign workforce. The UAE has made a conscious effort to create an expat-friendly environment that attracts talent from across the globe, and a zero personal income tax rate can be a significant draw for people.
Speak to a Tax Professional
Let’s face it, nobody loves taxes, but that doesn’t mean you should forget about them until it’s time to file your return. Right now, the best course of action would be to speak to a local tax professional to understand your potential tax liability and ensure you are compliant and aware of all the critical deadlines. You can use the time between now and when the tax is in place to ensure that your financial accounting is done most tax efficiently. If you need assistance, one of our consultants can put you in touch with a local tax professional.