Corporate Tax In UAE
Corporate Tax – it's a term that's been buzzing around the UAE business landscape since the issuance of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. But what does it really mean, and how will it affect your business? Let's break it down.
1. What is Corporate Tax?
Corporate Tax, often referred to as Corporate Income Tax or Business Profits Tax, is a direct tax. It's imposed on the net income of corporations and various businesses.
2. Who's in the Corporate Tax Spotlight?
• UAE-based companies and other juridical persons that are incorporated or effectively managed and controlled within the UAE.
• Natural persons (individuals) engaged in Business or Business Activities in the UAE (as specified in a Cabinet Decision).
• Non-resident juridical persons (foreign legal entities) with a Permanent Establishment in the UAE.
Juridical persons in UAE Free Zones are also subject to Corporate Tax. However, those meeting specific conditions as "Qualifying Free Zone Persons" can enjoy a 0% Corporate Tax rate on their Qualifying Income.
3. How Does Corporate Tax Work for Taxable Persons?
Corporate Tax operates on both a residence and source basis, depending on the Taxable Person's classification:
A "Resident Person" is taxed on income from both domestic and foreign sources (residence basis).
A "Non-Resident Person" is taxed solely on income sourced within the UAE (source basis).
Residence, in the context of Corporate Tax, is not about where a person lives. Instead, specific criteria outlined in the Corporate Tax Law determine it. If a person doesn't meet the criteria for either a Resident or Non-Resident person, they won't be considered a Taxable Person and won't be subject to Corporate Tax.
4. What Does Corporate Tax Cover?
Corporate Tax is applied to Taxable Income earned by a Taxable Person in a Tax Period, typically assessed annually. The Taxable Person calculates and pays Corporate Tax by filing a Corporate Tax Return with the Federal Tax Authority.
To calculate Taxable Income, start with your accounting income (net profit or loss before tax) per financial statements. Adjustments are then made to determine the final Taxable Income. For instance, you might adjust for income exempt from Corporate Tax or non-deductible expenditures.
5. Exempt Income and Deductible Expenses
Certain types of income are exempt from Corporate Tax to prevent double taxation. Typically, dividends and capital gains from domestic and foreign shareholdings fall under this category. A Resident Person can choose not to consider income from a foreign Permanent Establishment for UAE Corporate Tax purposes under specific conditions.
As for expenses, legitimate business expenses incurred solely for generating Taxable Income are deductible. However, dual-purpose expenses, those for both personal and business use, need to be apportioned. Deductibility depends on the portion spent solely for the business. Some expenses may be deductible according to general accounting rules but might not be fully deductible for Corporate Tax purposes, necessitating adjustments.
6. The Corporate Tax Rate
Corporate Tax will be imposed at a headline rate of 9% on Taxable Income exceeding AED 375,000. If your Taxable Income falls below this threshold, you'll be subject to a 0% rate. Qualifying Free Zone Persons can enjoy a 0% rate on their Qualifying Income but will be taxed at 9% on non-qualifying income.
7. Withholding Tax Rate
Certain types of UAE-sourced income paid to non-residents may be subject to a 0% withholding tax. In practical terms, this means no withholding tax is due, and no related registration or filing obligations apply to UAE businesses or foreign recipients of UAE-sourced income. Transactions between UAE resident persons aren't subject to withholding tax.
8. Registering, Filing, and Paying Corporate Tax
All Taxable Persons (including Free Zone Persons) must register for Corporate Tax and obtain a Corporate Tax Registration Number. The Federal Tax Authority may request certain Exempt Persons to register for Corporate Tax.
Taxable Persons are required to file a Corporate Tax return for each Tax Period within 9 months from the period's end. This deadline also applies to the payment of any Corporate Tax owed for the corresponding Tax Period.
9. How to Prepare for Corporate Tax
To ensure your business is on the right track for Corporate Tax compliance, you need to:
• Know when to register for Corporate Tax.
• Determine your accounting/Tax Period.
• Be aware of your filing deadlines.
• Understand any elections or applications your business might need to make.
• Keep accurate financial records for Corporate Tax purposes.
In Conclusion
The introduction of Corporate Tax marks a significant development for businesses in the UAE. While the tax landscape is evolving, with the right knowledge and preparation, you can navigate it successfully. If you have questions or need assistance with Corporate Tax assessment and implementation, don't hesitate to reach out to us at finance@hicuae.com.
