2023, Dubai: The UAE Corporate Tax, Significant Impact of this Tax

The recent introduction of Corporate Tax in Dubai, also known as corporate tax in Dubai, has marked a significant upheaval in the tax landscape of this dynamic metropolis. This recent tax reform has raised numerous questions among companies and entrepreneurs operating in the area. We have prepared an article outlining the most important points of the Corporate Income Tax (CIT).

Impact of Corporate Tax on Businesses: What Tax Rates?

One of the key elements of Corporate Tax lies in the variation of tax rates, an essential dimension to consider. It’s worth noting that in the United Arab Emirates, there are two categories of taxpayers: individuals and legal entities. The tax rates are detailed as follows for these two categories:

0% for taxable income up to AED 375,000.
9% for taxable income exceeding AED 375,000.

Individuals qualified as qualifying free zone persons are subject to a 9% tax rate on taxable income that does not meet the definition of eligible income.

To better understand the income tax calculation, let’s take the example of a company that has earned taxable income of AED 1,000,000. Here is how the income tax amount would be determined:

Taxable income of AED 375,000 subject to 0% income tax: 375,000 AED x 0% = 0 AED Taxable income exceeding AED 375,000 subject to 9% income tax: (1,000,000 AED – 375,000 AED) = 625,000 AED x 9% = 56,250 AED

Thus, in this situation, the company would owe a total of AED 56,250 in income tax.

Understanding Taxpayers and Taxable Base

We can list 3 types of taxable profiles under CIT:

Legal entities registered in the UAE, including in Free Zones, subject to comprehensive taxation of their income.
Foreign legal entities effectively managed and controlled from the UAE (according to the concept of Place Of Effective Management – POEM), subject to comprehensive taxation of their income.
Individuals conducting business activities in the UAE, taxed on their worldwide income related to that activity.

Recipients of Corporate Tax Exemption

Just as there are profiles subject to CIT, there are 4 eligible for CIT exemption:

Government entities and those under their control.
Individuals involved in sectors such as resource extraction and activities related to non-extractive natural resources.
Investment funds and public utility entities that meet eligibility criteria.
Pension funds and social security programs regulated by competent authorities.

Also, there is a tax relief for companies that do not exceed AED 3 million during each fiscal year. Article 21 of the UAE Corporate Tax Law addresses the issue of tax reduction for small businesses.

Taxes in the Heart of Free Zones: Key Points to Know

Corporate Tax mainly concerns Mainland businesses and businesses established in Free Zones (some Free Zones may qualify for exemptions under certain conditions).

For a company in a Free Zone to qualify for tax exemption, it must:

Maintain a significant presence in the United Arab Emirates.
Determine the “eligible income.”
Abstain from opting for standard corporate tax rates.
Follow the principle of fair competition and provide justifications for financial transactions.

Qualifying Activities for Free Zone Companies

For Free Zones that may benefit from an exemption, the first condition is to have economic substance in the UAE and engage in the following activities:

(a) Manufacturing of goods or materials.
(b) Processing of goods or materials.
(c) Holding of shares and other securities.
(d) Ownership, management, and operation of ships.
(e) Reinsurance services.
(f) Fund management and public utility services.
(g) Wealth and investment management services.
(h) Headquarter services for related parties.
(i) Treasury and financing services for related parties.
(j) Financing and leasing of aircraft, including engines and reusable components.
(k) Distribution of goods or materials in a designated area to a customer who resells these goods or materials, or processes or modifies them for sale or resale.
(l) Logistic services.

Exempt Income from Corporate Tax

There are types of income and related expenses that are not included in the calculation of taxable income, here they are:

Dividends or profit distributions from resident companies in the UAE.
Dividends or profit distributions from holdings in foreign companies (with exemption for holdings).
Any other income arising from holdings.
Income generated by a permanent establishment abroad (to avoid double taxation). Income from the operation of aircraft or ships by non-residents in international transport.

Non-deductible expenses: an obstacle to profits

After the audit report is prepared, it is up to the General Assembly of shareholders to take over.

A general assembly is a formal meeting bringing together members of an organization to discuss, make decisions, and vote on important issues. It is a key governance mechanism that allows members to participate in making crucial decisions for the entity.

Among the non-deductible expenses are various items such as donations, grants, gifts, fines, bribes, unjustified dividends, expenses unrelated to business activities, and losses not related to taxable activities.

Payments to Related Persons: Guidelines and Limitations

Payments made to related individuals are allowed, but they must adhere to specific guidelines. There are three categories of payments:

Payments to owners: A payment or benefit granted by an entity to a person related to it can only be deducted if it equals the market value and is exclusively related to the entity’s activity.
Directors/Officers: The principle of fair competition, as well as rules and documents related to transfer pricing, apply to determine the fair value of the service.
Related party of an owner, director, or officer: In this case, any excess payment that does not correspond to the market value cannot be counted as a deductible expense.

Combatting Tax Abuse: Rules in Place

The legislation has introduced general provisions to prevent tax abuse and discourage attempts at tax evasion.

These guidelines apply to transactions or agreements entered into without valid business justification, solely for the purpose of taking advantage of tax benefits. Several criteria are considered to assess whether a transaction or agreement was designed to benefit from these tax incentives. Measures of the General Anti-Abuse Rule (GAAR) are implemented to oversee such operations.

Preparation of Tax Returns

Filing tax returns and paying taxes must be done within nine months from the close of the respective fiscal period. This obligation also extends to companies operating in Free Zones and subject to corporate tax unless they benefit from specific tax incentives.

It is important to know that all taxpayers, whether they have made profits or not, are required to submit their tax returns. This step is crucial, especially for taxpayers who have incurred tax losses, as it allows the use of these losses to reduce taxable income in future fiscal years.

Publication of Financial Statements: Various categories of taxpayers are required to create and maintain financial statements, to be submitted for audit or certification (with specific details to be defined by competent authorities). The tax entity may also request the taxpayer to provide these financial statements to determine taxable income. For the year 2023, financial statements as of December 31 must be prepared in accordance with the arm’s length principle, as stipulated in Article 34 – Transitional Rules.

Document Archiving: It is essential to keep all receipts and documents related to corporate tax for a period of seven years from the close of the relevant fiscal year, even for companies benefiting from tax exemptions.

The introduction of Corporate Tax in the United Arab Emirates marks a significant step in the evolution of the country’s tax system. Seeking assistance from an experienced accounting firm can play a crucial role in managing tax compliance and maximizing tax benefits for businesses operating in the UAE.

For professional advice and expert support on Corporate Tax, contact ARES Accounting: support@ares.tax.