The announcement of a new corporate tax in the UAE was a game changer for the offshore industry. What looked like the perfect destination in the Middle East suddenly decided to change rules, forcing companies across numerous industries to handle a new reality.
While initially, it came as bad news (we covered all of its potential meanings and workarounds at that time), things are settled now, so we can finally figure out what to do next. Understanding and complying with these new laws is no longer an option, but mandatory.
With all these, there’s still a decent chance for things to change in the future, so just because things look clear now, it doesn’t mean everything has been clarified. Like every such major change, it takes quite a few years for everything to be crystal clear.
These being said, let’s take a look at what the new corporate tax introduced for financial years starting on and after the 1st of June, 2023 actually means for businesses.
What’s the UAE Corporate Tax?
The UAE corporate tax is basically a tax imposed on the actual profits of different corporations and other types of companies. Introduced on the 1st of June, 2023, it changed the business landscape for UAE companies, which have enjoyed tax-free benefits for years.While blamed by companies, the tax actually helps the UAE. It’s not necessarily about money, but about UAE’s reputation in the financial industry. Simply put, this is only a gimmick to make the UAE look more transparent, especially when it comes to adhering to global practices.
Imposed on net profits, the tax doesn’t make the UAE completely avoidable, but it’s still worth considering it.
- Companies with an income of AED 375,000 (around $100,000) or less will pay 0% tax.
- Companies with an income higher than AED 375,000 will pay 9% tax.
Who Has to Pay Corporate Tax in UAE
The new UAE corporate tax applies to a series of business entities. All mainland companies registered in the country are subject to it.At the same time, the tax also covers free zone entities. However, there’s an exception. Some entities could be considered qualifying free zone persons, meaning they’re not affected by the tax.
Last, but not least, foreign legal entities are also affected by the UAE corporate tax, but only if they have a permanent establishment within the country’s boundaries or they earn income from the UAE.
Who Doesn’t Have to Pay Corporate Tax in UAE
The UAE corporate tax doesn’t apply to everyone, as there are a few exceptions mentioned in the new regulation.Governmental entities are exempt from paying the corporate tax, as well as entities (and this could include actual companies) controlled by the government.
Furthermore, entities that can prove they exist for the public benefit will also qualify for an exemption, not to mention certain investment funds. Only qualifying investment funds can avoid the tax though.
To qualify, an investment fund or the manager must be included in the legal oversight of a competent authority in the country. There are also fund ownership conditions, such as trading interests in the fund on a reputable stock exchange, among others.
Then, social security and pension funds don’t have to pay corporate tax in UAE either, not to mention entities dealing with the extraction of natural resources. Such entities already have the Emirate level taxation to worry about.
Understanding How the Corporate Tax Works in the UAE
Use case scenarios are probably the best ways to understand how the corporate tax works in the UAE.Imagine running a company in Dubai. You run an online shop or perhaps a consulting firm. Your income for the taxable year is AED 500,000.
For the first AED 375,000, you don’t have to pay anything. The tax applies to what’s over this limit. In this particular case, you’ll have to pay 9% corporate tax for AED 125,000. A simple math operation showcases the necessity to pay AED 11,250 in tax.
It’s a very simple tax to understand. It also offers a progressive structure. Small and medium businesses will most likely be unaffected, yet this tax ensures large companies contribute in a fair manner.
What to Do If You Have to Pay Corporate Tax in UAE
Unless you can avoid the corporate tax in UAE with your business setup and eligibility, you’ll have to follow a few simple steps.
Register
First of all, you’ll need to register for corporate tax. Companies or business entities won’t just be added automatically. You’ll need to conduct the registration yourself. And if you think you can just avoid it, consequences can be pretty harsh, so authorities count on people doing it by the book.You can register online on the FTA (Federal Tax Authority) portal in UAE.
File
Second, you need to file the corporate tax return on a yearly basis. The timeframe gives you plenty of time to do it. Make sure you do it within nine months from the end of the financial year. It’s a long timeframe, giving businesspeople time to do it without feeling pressured.For instance, if your financial year ended on the 31st of December, 2024, you have time to do it until the 30th of September, 2025. If your financial year ended on the 31st of March, you have until the last day of 2025 to do it.
Paperwork
Despite having nine months to file, there are people who’ll still struggle due to failing to understand documents and requirements. From this point of view, it’s highly recommended to maintain all financial records throughout the year in cause, only to be able to support your tax filings.According to the Federal Tax Authority in UAE, failing to file will most likely lead to administrative consequences and penalties.
The Concept of Free Zones Explained
It’s important to understand that while the corporate tax is now active in UAE, free zones still exist. And on top of this, companies in free zones can still benefit from no tax whatsoever, but only if their income qualified. On the same note, there are some direct conditions business owners need to consider.For instance, having adequate substance in the UAE is one of the top requirements. Other than that, to qualify for 0% tax, a business needs to get income from certain activities. There are more activities listed, but trading between free zones is usually the most important one.
Not being taxed as a mainland entity can also help businesses enjoy the 0% tax. Once again, all mainland entities will be subject to the new corporate tax, so how your company is registered makes a big difference in the process.
Remember that even if some of your income qualifies, the one not qualifying can still be exposed to the 9% corporate tax in UAE.
Misconceptions and Myths Regarding the New Corporate Tax in UAE
Compared to corporate taxes in other countries, the one in UAE is straightforward and easy to understand. You don’t need a specialist to make it clear. However, there are still a series of misconceptions about it and unfortunately, they don’t always make sense.Free Zone Myths
You might think you’re lucky if your company is registered in a free zone. That means nothing. A free zone doesn’t mean a free tax zone. Sure, your company could be established in a free zone and qualify for no tax, but that’s because of other conditions and not because of the location.No Tax Myths
You’re probably thinking the tax won’t affect you if you normally make less than AED 375,000 a year. Most people see it this way, yet it doesn’t mean you can ignore it completely. The authorities won’t just take your word for it and let you get away with it. Instead, you’ll need to prove it.In other words, make sure you don’t ignore the registration or filing process, even if your income is much under the limit and you won’t have to pay tax. You still need to go through all the procedures and showcase why you don’t need to pay tax.
Last, but not least, another potential issue could be with financials that don’t comply with the requirements released by IFRS or UAE. Filing such financials is a mistake that could get you in trouble.
Useful Tips
Here are a few useful ideas to make the registration and filing procedures easier when the time comes.- Consider your income. The most important thing to do is determine if your business gets over AED 375,000 in taxable income. You’ll have to file either way, but assessing this will help you make quicker decisions later.
- Keep statements. No matter what kind of papers, invoices or statements you get, make sure to keep them. Audited financial statements are probably the most important ones in the process if you have them.
- Register early. Don’t wait until the last moment to register with the FTA. The agency has an online portal for electronic services. You may experience issues with the registration if you’re not tech savvy, hence the necessity of doing it way before the deadline.
- Count profits and deductions. Based on the industry, you might face some deductions, which will inevitably reduce the tax too, maybe even put you under the limit. As you calculate your taxable profits, double check the deductions as well.
The UAE has made a pretty clear statement, by showcasing its shift towards a more transparent approach in terms of taxation. Once again, this isn’t about money or bringing more money to the government, as the country is among the wealthiest in the world.
Instead, it’s mainly a move to gain a better image. It’s a move about compliance and extra benefits associated with other financial standards. To comply, make sure you understand all the obligations associated with this tax, but also execute them accordingly.
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