To comply with international standards, the UAE will start implementing a Corporate Tax in June 2023. In this Newsletter, we will understand:
what it is?
how it is calculated?
who is concerned,
and other important information you need to know.
I just want to highlight that all sizes of businesses are concerned, even Freelancers will have to pay Corporate Tax, assuming they are not exempt. In this Newsletter, I mention the key components of Tax and what you need to know to be better prepared.
What to know about Corporate Tax?
As a business owner, it's essential to be aware of any new change. What is Corporate Tax? Corporate Tax is a form of direct tax levied on the net income of corporations and other businesses. Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions. The UAE’s 2023 corporate tax will be a 9% tax on the profits (revenue minus expenses) of all businesses which generate over 375,000 AED. Businesses that generate less than this sum of money will continue to pay a 0% tax rate. Who is subject to Corporate Tax?
UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE;
Natural persons (individuals) who conduct a Business or Business Activity in the UAE as specified in a Cabinet Decision to be issued in due course; and
Non-resident juridical persons (foreign legal entities) that have a Permanent Establishment in the UAE (which is explained under Section 8).
Juridical persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons” and will need to comply with the requirements set out in the Corporate Tax Law.
However, a Free Zone Person that meets the conditions to be considered a Qualifying Free Zone Person can benefit from a Corporate Tax rate of 0% on their Qualifying Income (the conditions are included in Section 14). Who is exempted from Corporate Tax? Article 4 of the new law states the persons exempted from the tax regime:
A government entity or an entity controlled by the government
A person engaged in Extractive or Non-Extractive Business, as specified under the law
Qualifying public benefit entities and qualifying investment funds
Public pensions and social security funds
When we will start paying Corporate Tax? The new UAE corporate tax will come into effect in the tax year beginning June 1st, 2023, and so most companies will have to start setting aside money to pay their taxes from that date. Businesses whose tax year begins in January will not have to start paying tax on revenues generated before 1st January 2024. You can ask for Small Business Relief if you follow the requirements:
Max. turnover threshold of AED3 Millions
Relief window of Max. 3 tax periods (from June 2023 until December 2026).
Must not be Qualifying Free Zone persons, non-residents, and Company pf a Multinational Enterprises Group.
Tax losses incurred in Tax Period cannot be carried forward to any subsequent Tax Periods.
How to calculate taxable income? Generally, the account net profit or loss shown in the company’s financial statements will be used to determine the tax percentage and income. In case of a company loss, the business could offset the value against taxable income in future financial years by up to 75%. i.e: If your Net Profit is AED500,000. We deduct the threshold of AED375,000, which is equal to AED125,000. From this we take 9% as Corporate Tax: AED125,000*9%= AED11,250 to be paid. In conclusion, Corporate Tax will be applied to all legal entities like LLCs, PSCs, PJSCs, LLPs…On top of that, any foreign legal entity that earns income in the UAE and is a tax resident will be charged. Although free zones will incur 0% corporate taxes in return they comply with all regulatory requirements, this is also applicable to free zone companies that engage in trade activity with the mainland. Non-residents and residents of the UAE may also be subjected to corporate taxing policies.
Corporate Tax Cheatsheet
Businesses having an income of up to AED 375,000 or below have a 0% tax rate.
Businesses having an income of more than AED 375,000 are subject to a 9% tax rate.
It is mandatory to maintain all your financial statements, even if you are not reaching the threshold amount of AED375,000.
If your financial year starts in June, you will have 9 months after the end of your financial year to register and fill out your tax return. ie from 1 June 2024 to 28 February 2025.
If your financial year starts in January, you will have from 1 January 2025 till 30 September 2025 to register and fill out your tax return.
You should keep your reports, bills, and financial documents for at least 7 years.
You can ask for Small Business Relief.
Feel free to contact us if you have any questions or want to book a free business consultation. We would be delighted to help you improve and scale up your business.