For organizations that have a permanent establishment in UAE, the Government has introduced a Corporate Tax of 9% starting from 1 June 2023. Companies having a net profit of AED 375,000 and above are subject to Corporate Tax in UAE.
UAE Corporate Tax is a type of direct tax levied on the net profits of companies by the Government. It is a source of income for the Government to carry out developmental activities. In UAE, the net profit threshold for levying Corporate Tax is AED 375,000. It means a company operating in UAE that have sales transaction with a UAE mainland company will be subject to 9% Tax on their net profits that are above the threshold value.
The Gulf Region remains an attractive jurisdiction for foreign investment due to favorable tax regimes. Corporate Tax in UAE will pave way for a new income stream and reduce the dependence on mainstream revenues.
What is the difference between Corporate Tax and Value Added Tax?
Taxes are the main source of revenue for most countries globally. It helps in earning additional revenue for the country. Corporate Tax is applicable on the net profits of a company operating in a country.
There is a significant difference between direct and indirect tax. Value-Added Tax (VAT) and Excise Taxes are indirect taxes the business collect on behalf of the government. The tax is borne by the end customer during the point of sale.
Corporate Tax in UAE – Updates from Federal Tax Authority
As per the Federal Tax Authority, there are certain exemptions and incentives for companies operating across various sectors. Using the incentives and deductions the companies will not be paying the statutory UAE Corporate Tax rate of 9% and it could be a lesser percentage in actuality.
Also, the UAE’s Corporate Tax updates indicate that the startups incurring costs and losses in the initial years can carry forward their losses indefinitely and set off their profits over the coming years.
Furthermore, companies with a threshold below the defined figure are exempt from UAE’s corporate tax. AED 375,000 is the minimum threshold of net profit for a company to fall under the Corporate Tax regime.
Businesses operating in strategic sectors such as natural resources, electricity generation, investment funds, etc., have several exemptions. Also, Free Zone companies are exempt from the Corporate Tax in UAE upon meeting certain conditions.
Importance of Corporate Tax for GCC Economies
Corporate Tax is a source of a new income stream for countries. Four out of six GCC countries have corporate tax regimes ranging from 10 % in Qatar, 15 % in Kuwait & Oman, and 20% in Saudi Arabia.
The Tax varies by country and UAE is a Tax Haven due to the low rates. The introduction of Corporate Tax in UAE is to fund the developmental activities of the country and provide better infrastructure for the residents.
Who Can be Categorized as Qualifying Group and Tax Group
Setting up a company in UAE is easy with the Free Zones offering low-cost packages and requiring minimum documentation. This makes UAE a hub for foreign investors.
However, with the Corporate Tax Laws in UAE, large companies must have clarity on their shareholding structure. Many large companies create holding companies and subsidiaries for tax saving and profit/loss distribution.
Until now the tax status of individual companies in the holding company did not matter. For VAT calculations, holding companies had VAT grouping options, and holding companies remained VAT neutral.
However, with corporate tax, the holding company in UAE must evaluate the grouping options. To reduce excessive tax outflow through group companies, the holding company must follow the corporate tax guidelines.
There are two groups in Corporate Tax – Qualifying Group and Tax Group
1. Qualifying Group
Two or more companies/individuals can form a Qualifying Group if the owner of the company has direct or indirect ownership of at least 75% of each of the companies. There is no formal approval required from FTA to create a Qualifying Group.
Transfer of assets and liabilities across Qualifying Groups will not result in any gain/loss for tax purposes. Each member of a Qualifying Group will calculate their profit or loss and must comply with tax regimes.
2. Tax Group
For creating a Tax Group there must be two or more groups of companies or individuals. Each shareholder must be owning at least 95 percent of voting rights in the company. To form a Tax Group, there must be prior approval from the FTA Authorities.
The Tax Group is treated as a single taxable person. The taxable income of the Tax Group will be the aggregate of the net income/loss of all group members. The group will pay Corporate Tax on the net income of the entire group.
Tax Restructuring and Anti-Abuse Rules
A Qualifying Group must have at least one shareholder owning 75 percent of the company assets. Similarly, in the case of a tax group, the owner must have 95% ownership.
With Corporate Tax around the corner, business owners must restructure their ownership structures to avail the tax group benefits. If 75% ownership of a company is shared by multiple shareholders, then consolidating it to a single owner to take benefit of the qualifying group may require to be conducted.
It should be noted that any transaction done for the sole purpose of tax saving is considered against the anti-abuse rules. The transaction must be having a commercial reason to be qualified as a genuine transaction for the Corporate Tax regime.
FAQs – Tax in UAE
Here are few of the questions global investors have regarding the Corporate Tax Regime in UAE. To know more specific details about the latest updates on Corporate Tax, connect with our expert Business Consultants at email@example.com
1. What is the Impact of Corporate Tax on Expats?
Non-residents who own businesses through a permanent establishment in UAE are subject to corporate tax. UAE has one of the lowest corporate taxes of 9% when compared with the tax rates of other GCC Countries.
Expats having a Free Zone Company in UAE will have exemptions depending on their business operations. Subsequently, for a foreign entity having a branch or establishment in UAE, the Corporate Tax will be only applicable to the net profits from the UAE entity and not on the whole income of the parent company.
2. How Tax Treaties Mitigate Corporate Tax for Non-Residents?
GCC countries have a Double Taxation Treaty (DTT) with most foreign countries. It is to eliminate double taxation. It plays a major role in mitigating corporate tax for non-residents forming a permanent establishment in other countries.
3. How do Countries monitor Corporate Tax?
There are tax compliances set by various countries. The Governments have developed a software application to easily submit company documents. The organizations can submit Business contracts, tax returns, and declarations online via the Government’s portal.
Thereby, the Tax Authorities can cross-verify the information easily and initiate tax audits depending on any discrepancies found in the records.
4. Are Free Zones Exempted from Corporate Tax?
There are certain compliance obligations the Free Zone company or individual must meet to be qualified for the corporate tax exemption. The Ministry will be sharing the guidelines in detail soon.
As per sources, any income generated by the Free Zone by trading within the same Free Zone or any Free Zone in the country may be considered as a qualifying income and no tax will be applied.
5. What are the Prerequisites for Tax Payers?
- The taxpayers must register for Corporate Tax with FTA and obtain a Tax Registration Number (TRN)
- Prepare the financial statements in compliance with the accounting standards accepted in UAE
- Conduct an audit of the financial statements and get certification from a third-party financial auditor
- Maintain all the records and documents relating to the tax returns for at least seven years.
- There is a 9-month deadline for filing the return and paying the tax.
- There will be penalties if the taxpayer does not comply with the Corporate Tax rules in UAE
6. Should New Businesses consider separate licenses for Free Zone, Mainland Operations?
With UAE-based businesses coming under the tax ambit, new companies must consider whether should they go for two business licenses for Free Zone and Mainland.
So, a dual licensing scheme could be the best way to handle corporate tax obligations. The Tax classification of ‘Qualifying Income’ is the factor that determines the rate of Corporate Tax that will be applicable.
A Free Zone-based company would have a Zero Percent Tax and on Mainland, it could be 9% if the company has significant net profits above the set criteria. So for example, an export company having a mainland retail operation and a Free Zone company for overseas trading operations must keep the operations separate.
They must manage a separate book of accounts for Free Zone and Mainland Company in UAE. Establishing a holding company in the Free Zone is another option if the company is dealing with large revenues.
The investor must have a significant shareholding in such a structure and must have ample cash reserves in the company.
7. Will Free Zone Special Purpose Vehicles Help in Corporate Tax Savings?
As per the Corporate Tax regime, the Free Zones are tax-free jurisdictions and companies operating in the Free Zone qualify for tax exemption if they only conduct business with Free Zones or overseas and not with UAE Mainland.
More details regarding Qualifying Income and subsequent legislation will follow soon. Hence, the Tax Treatment for SPVs that have operations in the mainland depends on how they will be defined under the Corporate Tax rules.
What is Small Business Relief?
Small Business Relief is intended to support start-ups and other small and micro businesses by reducing their corporate tax burden and compliance costs. Following are the revenue threshold and conditions for a taxable person to elect for Small Business Relief.
- The revenue threshold for the purpose of small business relief as per Article 21 is set at AED 3 Million
- The Threshold applies from 1st June 2023 to 31st Dec 2026. It must be checked during the tax years and can be opted out accordingly.
- A Qualifying Free Zone Person and a Constituent Entity of a Multi-National Enterprise with Revenue exceeding AED 3.15 Billion is not eligible for Small Business Relief.
- Businesses claiming the small business relief cannot carry forward their tax losses and net interest expenditure to the next year.
Also, the small business must not restructure the company to qualify for corporate tax exemptions. For valid business reasons, corporate-level restructuring is possible, but the management must be able to provide proof that it is not for corporate tax advantages.
How Aurion Business Consultants can guide investors to register for Corporate Tax?
Our expert Tax Consultants will guide investors to prepare for Corporate Tax registration. Aurion will assist in getting all the prerequisites ready for the companies within the specified date of 1 June 2023.
Also, depending on the business sector and activity, the Corporate Tax exemptions and incentives must be calculated in the right way to avoid any penalty. Hence, it is best advised to proceed with the Corporate Tax Registration after seeking the assistance of an experienced Business Consultant such as AURION.
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