Federal Corporate Tax
Being a key business center point in the middle east, UAE gives huge tax reductions to capitalists. Extraordinary tax reductions are given to offer extra help to organizations get set up in UAE-free zones. Recently, UAE’s ministry of finance declared the commencement of federal corporate tax on January 31, 2022, scheduled to influence organizations’ monetary periods beginning on or after June 1, 2023. The UAE Corporate Tax framework complies with worldwide accepted procedures and rules given by OECD so the compliance cost and complexity on organizations can be limited.
Taxable Income
UAE Corporate Tax is a type of direct tax on the net profit or loss of corporations and different organizations. Federal corporate tax will be rated at 9% for taxable income above AED 375,000 and 0% for income below this threshold. Keeping this regime in light, going ahead licensees working in UAE will be expected to survey the effect of the impending regulations on their businesses and implement the compliance. On this matter, the UAE Tax Authorities have previously expressed that resistance to comply with corporate tax will draw high paces of penalties.
Corporate Tax Applicability
Clarity has been provided by the authorities regarding the income of a natural person, that it will not be taxed side by side. Hence, income earned by UAE residents and non-residents does not fall in the span of the UAE Corporate Tax regime. But there are certain individual activities on which corporate tax services will be applicable such as an individual’s business income earned under a commercial license and any income generated by activities that require a permit or a license as a legal requirement.
UAE Corporate Tax will however be applicable to all UAE companies and all individuals incorporated in UAE, when it comes to foreign legal entities, corporate tax is applicable if they have a permanent place of business or earnings sourced in UAE.
Exemptions from Corporate Tax
Federal Corporate Tax regime intends to spare certain individuals from the applicability, so naturally, income generated by these individuals, specified below, will be exempt from corporate tax:
- Government and government-owned entities
- Investment funds
- Businesses endeavoring and exploiting natural resources
- Charities and further public interest organizations listed in a Cabinet Decision
There are further exemption criteria of the above-mentioned specifications but in the gist of it all, federal and UAE government departments and entirely government-owned entities are accordingly exempted from corporate tax services. Other entities need to apply for exemption and can benefit from it only once it has been granted.
Taxable Period
The starting point of the Corporate Tax regime is set out to be accounting net profit or loss of a business as stated in the financial statements to lower the compliance cost. The utilization of accounting standards provides a common ground for the applicability of Corporate Tax and brings forward a foundation for a regime that follows international standards. Lining up the calculation of taxable income with accounting net profit or loss prevents businesses from having to maintain two different sets of records for the respective purposes.
It is vital to ensure that businesses are preparing their financial statements as per standards acceptable in UAE and their financial accounting period will be considered their annual tax period, absence of formed will result in the Gregorian calendar becoming the annual taxing period for corporate tax. Small businesses and startups are being accommodated as well, by giving acceptance room for alternate financial reporting standards other than UAE-accepted IFRS.
Free Zones
One of the principal factors for the vision of attracting foreign investments for UAE has been Freezones. Consideration will be offered regarding the existing tax incentives in Free Zones to businesses complying with all the obligations, however, all the entities falling under Free Zones are held liable for Corporate Tax regime and tax return filing obligations.
Keeping in light the initial motive behind Free Zones, a Free Zone company can still benefit from 0% Corporate tax rate if the income earned is from transactions originating outside the UAE or transactions between two free zone companies. Furthermore, Freezone company having an office in mainland UAE will be experiencing normal corporate tax rates on income generated from there and will enjoy 0% on its other income.
Preparing Documents for Corporate Tax
Documents submitted with the FTA and other financial records that elaborate the information restrained in the corporate tax return need to be maintained by the businesses. Entities exempt from the corporate tax services are still required to maintain the records for FTA to determine their exempt status. Applicable company laws and regulations will still determine if a business needs to get its financial documents audited by an attributed auditor. However, if a free zone company needs to avail of the 0% corporate tax services, they are required to have audited financial statements.