Since its establishment, the UAE has maintained a tax-free business environment until corporate tax introduction, which started affecting different sectors recently. Since it has maintained a tax-free structure, the UAE enacted its first federal corporate tax in 2023, following international tax criteria. The UAE adopted this measure because it supports international tax regulations, including the OECD’s Base Erosion and Profit Shifting framework for the prevention of multinational corporations’ tax avoidance.
UAE organizations need to understand tax compliance and have financial decision-making capability for corporate tax laws. This article explores the entire tax framework for corporations in the UAE, including tax rates, exemption rules, and obligatory reporting standards.
Who is Subject to Corporate Tax?
Corporate tax falls on a variety of entities carrying out business activities in the UAE. The classes include:
- Mainland Businesses
All companies operating within the UAE mainland are subject to corporate tax provisions. This involves locally established companies, branches of foreign businesses, and any company holding a commercial license issued by a UAE authority.
- Free Zone Companies
Free zone entities qualify for a corporate tax rate of 0% if they fit the outlined criteria for qualified free zone persons. The qualifications include the business doing substantial economic activities in the free zone and generating eligible income.
- Foreign Companies
Foreign companies that have permanent establishments in the UAE or those that have income sourced in the UAE might also be subject to corporate tax. Companies that operate continuously in the UAE will be included.
UAE Corporate Tax Rates
UAE has tiered tax structures. Its tiers are:
- 0% Tax Rate: It applies to taxable income up to AED 375,000. It would sustain small businesses and start-ups as well.
- 9% Tax Rate: Applied on taxable income over AED 375,000.
- 15% Tax Rate: Multinational corporations with a global revenue above AED 3.15 billion, according to the OECD’s BEPS 2.0 framework.
This progressive tax system gives respite to small-scale businesses and aligns larger ones with the principles of taxation in the rest of the world.
Exemptions from Corporate Tax
Certain types of entities and sources of income are exempt from corporate tax, enabling businesses to minimize their tax liabilities within the bounds of the law. The following are the types of entities that qualify for exemptions:
- Natural Resource Businesses
Companies involved in extracting and selling natural resources, including oil and gas, fall under Emirate-level taxation and are not subject to the federal corporate tax framework.
- Government Entities
Government departments at the federal and Emirate levels are not subject to corporate tax.
- Public benefit organizations and investment funds
Based on eligibility determined by Corporate Tax Law, particular public-benefit organizations or investments may also benefit from corporate tax exemption.
- Small Business Relief
Based on revenue scale qualification, smaller corporations with a below-determined threshold could claim a rate as low as 0 percent, so their burdens upon them were smaller while further business development continued with minimal obstruction
Corporate Taxes Implications for Free-Zone Businesses
Tax advantages are preserved if free zone companies qualify as Qualified Free Zone Persons (QFZPs). For this, the business entities must meet all the following requirements:
- Substantial presence and economic substance within the free zone.
- Qualifying income in terms of the corporate tax legislation.
- They do not opt into the general UAE corporate tax.
Free zone entities are subject to a 0% tax rate, though they are not exempt from following transfer pricing and having audited financial records to establish their status.
Corporate Tax Registration Procedure
Corporate tax registration with the Federal Tax Authority is compulsory for all businesses that pay corporate tax. It guarantees that timely filing prevents penalties.
- The first corporate tax return is to be submitted within nine months of the close of their first accounting year by companies registered after June 1, 2023.
- For existing businesses that existed prior to the implementation of corporate tax, their registration deadline with FTA should be sought to avoid the non-compliance penalty.
Calculating Taxable Income
Taxable income is determined after net profits reported in financial statements have been adjusted for deductions that are allowable and income-exempt. Examples of deductible costs include:
- Salaries and wages paid to employees.
- Depreciation of business assets.
- Loan interest.
- Entertainment costs incurred in business.
Certain revenues, such as dividends and capital gains realized on shares held by the corporation in eligible shareholdings, are tax-free under the statute, leaving less income subject to corporate tax.
Corporate Tax Compliance
Adhering to corporate tax laws requires businesses to follow key compliance measures, including:
- Record-Keeping
Businesses must maintain financial records for at least seven years to support tax filings and audits. Proper documentation is crucial in case of an inspection by tax authorities.
- Corporate Tax Return Filing
Annual corporate tax returns must be filed with the FTA by the deadlines. Failure to file returns on time can lead to penalties.
- Rules on Transfer Pricing
Only in the case of a company that operates business transactions with a related party are transfer pricing rules applied, which guarantees all transactions have a market value and good corporate governance. At Vista UAE, we can help you with that as we offer a business advisory service.
Penalties Against Non-Compliance
Non-compliance with corporate tax regulations could result in fines and legal persecution. The penalties are imposed for:
- Registration or failure to register the corporate tax.
- Delayed submission of corporate tax returns.
- Giving wrong or misleading information to tax authorities.
- Failure to maintain proper financial records.
Keeping track of the current regulations and tax compliance on time is essential to avoid financial loss and operational interruption.
Impact of Corporate Tax on Different Industries
Corporate tax imposition impacts industries differently:
- Real Estate and Construction: Developers, property management companies, and brokers pay corporate tax on their net income.
- Banking and Financial Services: Banks, insurance companies, and financial organizations have to comply with corporate tax.
- Retail and E-Commerce: Any business selling goods or services in the UAE has to calculate taxable income based on revenue streams and their deductions.
Corporate Tax Compliance Planning
Businesses should be proactive about corporate tax compliance:
- Allowable deductions need to be identified to reduce taxable income.
- Monitor regulatory updates for compliance with tax laws.
- Seek tax experts to devise a proper tax plan.
How Vista Accounting and Tax Consultancy Can Help
Navigating the complexities of the new corporate tax laws can be challenging. At Vista Accounting and Tax Consultancy, we provide expert guidance to help businesses comply with the regulations while maximizing their tax efficiency. Our services include:
- Corporate tax registration and filing
- Tax planning and advisory
- Transfer pricing compliance
- Audit and Assurance support
- Accounting and Book keeping
Conclusion
Implementing corporate taxation in the UAE requires organizations to adopt both emerging obligations alongside international tax standards. Businesses make proper decisions and avoid penalties by understanding tax rates while comprehending compliance requirements and exemptions. By planning appropriately, companies will gain control of their tax obligations while concentrating on building sustainable growth.
Vista Accounting and Tax Consultancy serves as the professional source for corporate tax compliance support regarding the new tax structure. Tax registration help, along with deduction services and strategic planning advice, are available through our team to assist you. For more information, contact us at +971 50 312 7668 or visit our website.