What is Corporate Tax?
It was officially announced by the UAE’s Ministry of Finance, on the 31st of January 2022, that UAE will be introducing a corporate tax (CT) regime, which will be effective from 1st June, 2023.
Corporate tax will be compulsory for business & commercial entities as well as for individuals who derive income as freelancers.
Under this latest policy, all activities performed by corporate/legal entities are considered eligible for corporate tax.
Accordingly, even if an individual who has a registered entity, liable for the purpose of carrying out business, is considered eligible for corporate tax.
The corporate tax system is expected to be extended even for business corporations which are functioned in Free zones. However, the application of the corporate tax policy will be subject to the governing law of each free zone, respectively.
The Ministry of Finance (MoF) has stated that the proposed federal CT law will also be applicable for banking operations in the UAE (although branches of foreign banks are already subject to a CIT regime at an Emirate-level).
The Federal Corporate Tax rate
Three different rates of corporate income tax are proposed to apply, as follows:
- 0% rate on taxable income up to AED 375,000 (c. USD 102,000)
- 9% rate on taxable income above AED 375,000; and
- A different rate (which has not been announced yet) for large multinationals that generate consolidated global revenues above EUR 750m (c. AED 3.15 bn) in line with the Pillar Two of the OECD Base Erosion and Profit Shifting (BEPS) project.
Taxability of Free Zone Entities
A 0% tax has been proposed for companies and branches registered in Free zones on the following incomes:
- Income from businesses outside UAE
- Income from trading with other Free zone entities
- Income from regulated financial services directed at foreign markets
Free zone entities would be permitted to carry on following activities in mainland without forfeiting their 0% tax rate:
- Having branch in mainland (profits of the branch taxable at 9%)
- Earning passive income from mainland entities (e.g., interest, royalties, dividends)
- Transactions with mainland group companies (however payments to Free zone entities will not be deductible for mainland companies)
- Sale of goods to mainland businesses by entities in designated Free zones
Any other income earned by a Free zone entity from mainland will disqualify Free zone entities from the 0% CT regime.
Free zone entities will also have an irrevocable option to move to the regular tax regime.
- Corporate Tax will not be applicable for the employment income of an individual including the salary.
- Any investment concerning real estate carried out by an individual will be exempted unless such an individual is required to obtain a commercial or corporate license in relation to activities involved with the investment concerning such real estate activities.
- Individuals who would gain from their investments in corporations such as dividends gained from their shareholding will be exempted as far as it is gained from the individual’s personal capacity.
- Any income earned through bank deposits, or any other income earned through such bank deposits by an individual is excepted from the proposed corporate tax.
- Any business which is engaged with the extraction of natural resources will be exempted from the corporate tax regime and a different scheme of corporate tax will be in application depending on the governing law of such matters in each Emirate.
Calculation of CT liability
- CT Rates
As outlined in the announcement issued in January, the CT rates are as follows:
– 0% for net profit not exceeding AED 375,000;
– 9% for net profit exceeding AED 375,000;
- Withholding tax
A 0% (zero percent) withholding tax will apply on domestic & cross-border payments made by UAE businesses.
Further, there will be no obligation to file withholding tax returns.
- Foreign tax credits applicability
Since UAE resident companies will be subject to CT on their worldwide income, in order to avoid double taxation, a foreign tax credit will be permitted in UAE which will be the lower of:
– The amount of tax paid in the foreign jurisdiction
– UAE CT payable on foreign-sourced income
It should be noted that tax credits which are not utilized, cannot be carried forward nor will the FTA refund such credits.
Set-off & carry forward of losses
Businesses will be allowed to utilize prior period losses (from the effective date onward) to offset up to a maximum of 75% of the taxable income.
Tax losses can be carried forward indefinitely. In case of change in ownership of more than 50%, tax losses can be carried forward provided the same business is continued.
The UAE CT regulations will permit group of companies to form a tax group & file a single tax return for the entire group, subjective to the below mentioned conditions:
- Common parent company holding 95% of share capital in the group companies;
- Parent/subsidiary are not exempt persons or in Free zone consuming benefits of 0% CT rate;
- All group members must use the same financial year
Registration & Deregistration
- A business subject to CT will need to register with the FTA and obtain a Tax Registration Number within a prescribed period. The FTA can also automatically register a business for CT purposes if the person does not voluntarily do so.
- Where a business ceases to be subject to the CT (e.g., due to cessation or liquidation of the business), it will be required to apply to the FTA to be de-registered for CT purposes within 3 months from the date of cessation.
- The FTA will only de register a person where the FTA is satisfied that the person has filed CT returns and settled all CT liabilities and penalties (if any) due for all periods up to and including the date of cessation.
- Where a person does not apply for de-registration within the time limits or comply with the payment and filing obligations, the FTA may de register the person based on available information.
Filing, Payment & Refund
- To avoid the administrative burden on taxpayers, a business will only be required to prepare & file one tax return & other related supporting schedules with the FTA for each tax period. There will be no obligation for a business to file a provisional CT return & make advance payments of CT.
- Each tax return & 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 required within 9 months of the end of the relevant Tax Period. Where a taxpayer can demonstrate that a CT refund may be due, the taxpayer can apply to the FTA to request a refund.
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