In January 2022, the Ministry of Finance of the United Arab Emirates (UAE) announced the introduction of a Federal Corporate Tax on business profits. Measures have been undertaken to incorporate the global best practices and reduce the compliance burden on the UAE businesses. The Corporate Tax is a type of direct tax placed on a corporation’s or other business’s net income or profit, and it will apply to all UAE enterprises. The UAE Corporate Tax shall be applicable from next year on the financial years beginning on or after 1 June 2023 and the Federal Tax Authority will be responsible for the administration, collection, and enforcement of UAE Corporate Tax.
Although the actual legislation and regulation are yet to be introduced, initial information points out that a standard 9% statutory tax will be applicable on businesses with net profits above AED 375,000. A 0% tax rate shall however be applicable to businesses making profits up to AED 375,000 which will ensure UAE’s commitment of continuous support towards startups and small businesses across the nation. Furthermore, a different tax rate will be applicable to large multinational enterprises.
The tax regulations which will be introduced in future laws shall aim at achieving the several objectives which are necessary for the growth of the nation. This new tax regime is designed for UAE’s alignment with global tax standards and will help the nation fulfill its commitment to the international efforts on tax transparency and countering harmful tax practices. While taxing the big businesses the policy will ensure that small and micro businesses operate hurdle-free with its 0% Corporate Tax policies for profits below AED 375,000. Only businesses that extract natural resources will continue to be subject to the Emirate corporate taxation and will be exempted from the UAE Corporate Tax. More information relating to other UAE Corporate Tax exemptions and exclusions will be provided in the comprehensive legislation to be passed in the future.
The Corporate Tax however is not to be confused with a personal income tax which is usually applicable on individuals on their salary, dividends, capital gains, or income from real estate holdings. The Corporate Tax is only applicable to the profits or income generated from the business or commercial activities undertaken by individuals. The UAE will still remain free from income tax imposed on individuals.
The Corporate Tax policy does not aim at imposing a withholding tax on domestic or cross-border transactions. Corporate Tax shall also not be imposed on capital gains and dividend distribution under certain conditions which are yet to be made clear. Free zone businesses will also be subject to UAE Corporate Tax, however the UAE Corporate Tax regime will maintain the Corporate Tax benefits currently available to free zone enterprises that meet all the regulatory criteria and do not conduct any business with mainland UAE.
The UAE Ministry of Foreign Affairs intends to release further information on the Corporate Tax regime by the middle of 2022.
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