The UAE is a very attractive country with a favorable tax policy for companies. The reason is that there is no type of tax on income, capital gains, or wealth. However, this may change, as the government announced the introduction of the corporate tax in UAE. The objective of this is to increase public revenue and diversify the country’s economy. This tax will affect all legal entities that carry out their activities in the UAE, both foreign and national. In addition, it will have financial, fiscal, and administrative implications for taxpayers.
In this article, we will offer an overview of the new corporate tax in UAE. The idea is to explain its definition, its main characteristics, its scope of application, its exemptions and deductions. In addition, it shows how to register corporate tax in UAE, the deductions, formal obligations, and their sanctions. We will also analyze the impact this tax will have on the economy, business, and many other aspects of the UAE. Do not miss this article to discover everything you need to know about this new tax in the country.
What is corporate tax in UAE 2024?
Previously, for many years, the UAE operated as a very low tax jurisdiction. It is not mandatory for citizens to pay taxes on their income. Furthermore, most companies do not have to pay any type of corporate tax in UAE. Much of the state’s revenue comes from domestic and private fossil fuel extraction industries. These industries are required to pay a tax of around 50% on their income.
On the other hand, foreign banks have long had to pay a corporate tax in UAE. This is 20% of operating profits. Furthermore, restaurants and hotels in Dubai also have to pay some taxes. It is important to know that all these industries had to learn how to register for corporate tax in UAE.
However, currently, the UAE intends to diversify its economy without depending on fossil fuels. That is to say, there are a large number of companies that do not pay taxes. With less potential revenue from fossil fuels and a growing economy, it makes sense that the government would want to implement more taxes on businesses. Thus, greater investment in education, infrastructure, and healthcare can be allowed.
This is why the idea of the corporate tax in UAE for the year 2024 arises. In short, this is a 9% tax on profits. That is income minus expenses of all companies, specifically, those that generate more than 375,000 AED. Companies that do not have this amount of income continue to pay a 0% tax rate.
In addition, to the corporate tax in UAE, large multinational companies with profits of more than 150 million euros have to pay a 15% tax. This measure is in line with the agreement on the global minimum corporate tax rate.
Corporate Tax on Free Zones in UAE
Surely, you are wondering how the corporate tax will be applied in UAE for free zone. The truth is that the answer to this question is not entirely clear. According to the government announcement, free zone companies can still count on the benefits of taxes. That is, with the specific pre-agreed incentives for the free zones.
However, you have to keep in mind that, in the future, free zones could decide to change this regulation. In other words, decide to introduce a corporate tax in UAE.
On the other hand, if companies in the free zone do business with companies from the continent, they will have to pay the corporate tax in UAE. This is about the income that is accessed by this particular business. Additionally, free zone companies have to register and file a corporate tax return. This is even though they have no obligation to pay taxes.
How to Calculated the Corporate Tax in UAE?
First step: The first thing you have to know is the basis for calculating taxable income. The corporate tax regime in UAE proposes to use the accounting net profit as indicated in the financial statements of a company. That is, use that amount as a starting point to determine your taxable income after making any necessary adjustments.
Second step: Subsequently, you have to calculate the deductible expenses. In particular, there are three types of deductible expenses.
- Entertainment expenses (50% allowed): That is, expenses concerning the entertainment of customers, suppliers, shareholders, and other business partners. For instance, accommodation, transportation, meals, facilities, and more.
- Interest expense (30% of EBIDA): This amount will depend on the deduction according to interest limitation rules.
- Expenses are 100% non-deductible.
Third step: On the other hand, companies can offset tax losses with Taxable Income from tax periods. This is all after calculating the taxable income for that period. Compensation during any period cannot exceed 75% of taxable income.
Fourth step: It is necessary to calculate unrealized gains or losses that result from changes in the value of a company’s assets or liabilities; but, without carrying out any transaction to generate loss or gain. For instance, when a commercial property increases in value, but the property does not sell you do not have access to the profits. It is necessary to document any profits or losses for accounting purposes.
Fifth step: You have to calculate the exempt income. Resident companies are subject to corporate tax in UAE on their worldwide income. For instance, capital gains. However, to avoid cases of double taxation, the tax regime will exempt some forms of income from taxation.
Impact of Implementing New Corporate Tax in UAE
After many years of enjoying corporate tax exemption in the UAE, the government reaches an important milestone. This is for the start of implementing a new tax regime in 2024. This innovative development witnessed the introduction of a 9% corporate tax on companies. As a result, we are witnessing a transcendental change in the country’s fiscal policy.
Below, you will see some of the most relevant aspects of the impact of this new policy in the country.
For some time, the United Arab Emirates has been heavily dependent on oil as its main source of income. As a result, the country suffers from vulnerability to fluctuations in the global oil market. With the imposition of the new tax regime, the government can diversify its revenue streams. This way, you can reduce your dependence on oil and generate a more stable source of income.
Additionally, this will provide the government with an additional source of revenue that can be used for different purposes. For instance, critical public services, infrastructure, and other initiatives that can contribute to economic growth. On the other hand, the new corporate tax in UAE will help promote the country’s image as a stable business environment.
Business Operations and Strategies
Thanks to the introduction of a corporate tax in UAE, different impacts can be had on companies operating in the UAE. Additionally, companies making taxable profits/income exceeding AED 375,000; are now subject to a Dubai Company tax rate of 9%. In this way, your profits can potentially be reduced.
However, it is worth noting that the UAE has one of the lowest corporate tax rates in the world. On the other hand, thanks to the new corporate tax in UAE 2024, since they must consider this factor when setting the prices of their services or products.
Foreign Direct Investment (FDI)
The introduction of the UAE corporate tax will not have a very significant impact on foreign direct investment. This is because the rate is highly competitive compared to other countries in the world. In addition, the UAE government has double taxation treaties so that investors can repatriate profits without having to pay taxes again.
Furthermore, both dividends and capital gains are not subject to corporate tax. Therefore, it will continue to be attractive to investors. In this way, people who want to start a business in the UAE as foreigners or invest in the country will be able to continue enjoying the benefits of the highly competitive rate.
Legal and Regulatory Compliance
Thanks to the new law, companies with taxable income of up to AED 375,000 are exempt from paying the UAE corporate income tax. In this way, startups and startups will be encouraged to set up new businesses in the UAE. Now, the alignment of the fiscal year with the financial year will be announced in law and/or regulations and companies will have to act accordingly.
Introducing the Corporate tax system in Dubai will require substantial implementation, compliance, and training costs. However, business owners should focus on minimizing their taxes through tax planning. In this way, the demand for professional tax accountants will increase.
For this reason, shareholders will most likely make an effort to maintain their profit margins; transferring the impact of this corporate tax to its clients/end users. Thanks to this, they will have to increase the prices of their services or products. In this way, the purchasing power of customers will be affected and may have an impact on demand in the short term.
Employment and Talent Attraction
For governments around the world, taxes are their main source of income. Therefore, the government uses this money to provide its citizens with services and improve their quality of life. Like VAT, this corporate tax will become another source of revenue for the UAE government.
Thanks to this new stream of income, the government will be able to invest in other things. Among these, you can find first-class infrastructure, roads, hospitals, and medical facilities. In addition, they will be able to reduce dependence on income generated by oil.
This would lead to diversified sources of funding for the UAE government. In this way, a healthier and more mature economy is obtained.
The UAE corporate tax law will be applied to all entities. This ranges from free zones to companies holding commercial licenses. Additionally, companies subject to corporate tax will have to register and obtain their tax registration number. This new corporate tax law will become effective on June 1, 2024.
This law also establishes the minimum profit threshold for UAE corporate tax. In this way, this new UAE law is a very significant change for the country’s fiscal policy. Thanks to this law, it is expected that tax transparency will be improved and the UAE’s tax standards can be aligned with those of other countries in the world.
Furthermore, it is expected that this corporate tax can drive sustainable economic growth and encourage investment in the UAE. For this reason, it is important to know everything about this new law and make sure you comply with everything established in it.
On the other hand, if you want to take advantage of the best business opportunities in the UAE, you should not ignore this law. This way, you can avoid any kind of tax-related problems in UAE.