The UAE government’s recent announcement to introduce corporate tax from 2023 will have wide implications for businesses. In this comprehensive guide, we explain everything you need to know about the new tax system in simple terms.
What is the background?
The UAE Cabinet recently approved a Federal Decree-Law on the corporate tax regulations effective from June 1, 2023. This will usher in a standard corporate tax rate of 9% on qualifying profits of businesses.
Who does it apply to?
The tax will be levied on net profits earned by all onshore companies and permanent establishments in the UAE, except for exempted industries and special economic zones.
This blog covers:
- Key aspects of the new tax system
- Tax obligations and compliances
- Relief and exemption opportunities
- Tips on working with tax advisors
Key Details about the UAE Corporate Tax
Tax rate: There will be a standard 9% corporate tax rate on annual taxable profits.
Taxable entities: All mainland UAE businesses will be taxed, excluding exempted sectors like oil & gas extraction, and firms based in free zones.
Taxable profits: Revenue less allowable deductions like expenses, depreciation, losses etc. will determine taxable net profit.
Exemptions and reliefs: Various exemptions apply based on factors like industry, business size and years of operations.
Calculating Taxable Profits
Let’s understand how taxable profits are arrived at:
Revenue: All business income from sales, services, investment activities etc.
Deductions: Operating costs, wages, facility costs, depreciation, interest expenses and more.
Losses: Any brought forward tax losses can be set off.
Capital expenditures: Equipment costs can be claimed over multiple years as depreciation.
Exemption threshold: First AED 375k profits annually are tax-free.
The balance after all eligible deductions is the taxable net profit amount.
Tax Obligations and Compliances
Businesses must fulfill important obligations:
Registration: Firms can register for tax from October 2022 onwards in preparation.
Filing requirements: Tax returns need reporting annual income by June 30th of the next year.
Payment deadlines: Total tax amount due also needs paying by this date to avoid penalties.
Record keeping: Proper accounting as per IFRS is mandatory for substantiating tax positions.
Penalties for non-compliance: These can be substantial, so timely filings are crucial.
It is essential for businesses to stay updated on their responsibilities.
Relief and Exemption Opportunities
Not all profits will face the full 9% tax rate due to available benefits:
Startup relief: 100% exemption for initial three years, then 50% for two more years.
Free zones: Profits of DIFC, ADGM and other recognized zones remain tax-free.
Small business: Under AED 375k annual profits get a 100% exemption.
Treaty relief: Tax credits may reduce double taxation as per totalization agreements.
Sector specific: Certain oil, gas and resources activities are exempt for now.
Proper evaluation can optimize tax outgo through applicable exemptions.
Why Work with Tax Advisors?
The tax laws involve complexities that in-house teams may find challenging:
- Advisory on tax planning, compliance and post-filing obligations
- Vetting deduction claims and exemption availment opportunities
- Representation in Authority inquiries, audits or disputes
- Ensuring optimizing structuring and ongoing monitoring needs
- Keeping up with frequent law changes as regulations evolve
Conclusion
While the new UAE corporate tax system marks a transition, businesses have time to prepare supported by the various reliefs. Partnering with specialist advisors helps navigate obligations efficiently. Please contact Anthropic to discuss customized support.
FAQs
Foreign business profits not attributable to a UAE establishment remain non-taxable to avoid double taxation.
No, the corporate income tax provisions are independent of the country’s VAT framework for input tax recovery.
Yes, withholding tax may apply on certain payments like dividends, interests to non-residents based on income tax treaties between the UAE and other countries.
