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    On January 31, 2022, the Ministry of Finance (MoF) announced the implementation of a new federal corporate tax (CT) system. This system is set to take effect either on July 1, 2023, or January 1, 2024, contingent on the business’s financial year.

    What does the term “federal corporate tax” mean? 

    A federal corporate tax refers to a tax imposed on the earnings or capital of a corporation and other similar entities. These taxes are assessed on the taxable income of a business. Similar to how individuals pay income tax, corporations pay corporate taxes. Many countries have implemented such taxes on both a national and state level.

    How is the calculation of corporate tax carried out? 

    Corporate taxes are computed based on a company’s net income or taxable income. Net income is also known as net profit or net earnings. The process involves calculating all income generated from various revenue streams. Additionally, expenses, which encompass operating expenses, depreciation, amortization, interest on loans, and other costs borne by the company, must be taken into account.

    Is there a federal corporate tax applicable in the United Arab Emirates? 

    Presently, there exists no federal corporate tax in the United Arab Emirates (UAE). Corporate tax is determined based on a territorial framework and is influenced by tax decrees issued by each individual Emirate’s government. The UAE comprises seven Emirates. Corporate tax rates differ significantly, ranging from 10 percent in Qatar to 20 percent in Saudi Arabia, with rates of 15 percent in Oman and Kuwait.

    On January 31, 2022, the Ministry of Finance (MoF) announced the implementation of a new federal corporate tax (CT) system. This system is set to take effect either on July 1, 2023, or January 1, 2024, contingent on the business’s financial year. Businesses will be required to register once the Ministry of Finance announces the registration process and ongoing compliance obligations.

    What is the rate of the new corporate tax in the UAE? 

    The new corporate tax rate in the UAE is set at 9 percent, with exceptions. Businesses generating a net income or taxable income of AED 375,000 or more will be impacted by this new tax. Small businesses with taxable income not surpassing AED 375,000 will continue to maintain a 0 percent tax rate.

    What prerequisites are necessary for compliance with the new corporate tax? 

    The new corporate tax law suggests utilizing the net profit position from businesses’ financial statements as the starting point for determining taxable income. Key documents such as financial reports, financial statements, and accounting records will be pivotal for this assessment.

    Are there any exclusions to the new corporate tax? 

    While the UAE introduced a federal tax applicable to all business and commercial activities across its seven emirates, there are some exemptions, including:Businesses engaged in natural resource extraction will remain subject to the tax decrees issued by the respective Emirate.Businesses registered in Free Trade Zones are exempted provided they adhere to regulatory requirements and do not conduct Mainland UAE businesses.Individual income is excluded, unless it arises from business, commercial, professional engagement, freelancing, or any economically related activity requiring a permit or license.Income from real estate investments is excluded if conducted personally and not as a business necessitating a commercial license.Income, capital gains, and dividends from personal investments in shares and securities are also excluded.Earnings and interest from deposit and savings accounts are not subject to this tax.

    What objectives underlie the implementation of the new corporate tax? 

    The objectives of the new corporate tax in the UAE include:

  • Establishing the UAE as a global hub for business and investment.Driving development and transformation to achieve strategic goals.Reinforcing the UAE’s commitment to international tax transparency standards and the control of harmful tax practices.
  • How many different tiers are present within the corporate tax structure? 

    As per the Ministry of Finance, the new corporate tax rates are as follows:

  • 0 percent for taxable income up to AED 375,000.9 percent for taxable income exceeding AED 375,000.A separate tax rate will apply to large multinational corporations meeting specific criteria outlined in the Pillar Two of the OECD Base Erosion and Profit Shifting Project.
  • Who bears responsibility for administering the new corporate tax? 

    The administration, collection, and enforcement of the new corporate tax will be overseen by the Federal Tax Authority (FTA).

    Do foreign entities or individuals need to pay the new corporate tax?

    Foreign companies and individuals will be subject to the new corporate tax in the UAE if they conduct ongoing or regular business activities or trade in the country.

    Is income earned by foreign investors subject to the new corporate tax? 

    Income derived by foreign investors from dividends, interest, royalties, capital gains, and other investment returns will not be subject to the new corporate tax.

    What corporate tax rate applies to entities established in free zones? 

    Entities established in free zones that fulfill specific conditions will be categorized as ‘Qualifying Free Zone Persons’ and will face corporate tax rates as follows: 0 percent on qualifying Income9 percent on taxable income not meeting the qualifying income criteria.

    What is meant by the term “Tax Period”? 

    Given that corporate tax is levied on an annual basis, specifying the ‘Tax Period’ is crucial. Normally, the Tax Period aligns with the Gregorian calendar year (from January 1 to December 31), unless a business follows a different 12-month period for its financial statement preparation. For instance, if a business’s financial year begins on April 1, then the tax period will span from April 1 to March 31.

    Is it necessary to pay UAE Corporate Tax alongside VAT? 

    Businesses registered for VAT are required to pay VAT and corporate tax separately. If a business is not VAT registered, it may still be obligated to pay federal corporate tax.

    Can VAT payments be deducted from UAE Corporate Tax? 

    Only input VAT that cannot be recovered may be deductible for corporate tax purposes. Otherwise, VAT charges and expenses would not impact the calculation of taxable income.

    How can businesses prepare for the implementation of federal corporate tax in the UAE? 

    To prepare for corporate tax in the UAE, businesses can undertake the following steps:

    • Gain an understanding of corporate tax laws and supporting information available on the official websites of the Ministry of Finance and the Federal Tax Authority.

    • Evaluate corporate obligations for the business, including determining the need to register for UAE corporate tax, identifying the accounting or tax period, understanding deadlines for filing corporate tax returns, and determining necessary documents and applications.

    • Recognize how UAE corporate tax might affect the business’s commitments and liabilities under agreements with customers and suppliers.

    • Ensure the maintenance of necessary financial information and records for UAE corporate tax purposes.

    • Stay informed by regularly checking official websites for the latest information and guidelines.Educate the business team on the applicability of corporate tax and its implications.

    • Employ accounting or business software to manage business needs and corporate tax requirements.


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