UAE corporate tax clarifications – Introduction
The United Arab Emirates (UAE) recently introduced its first-ever corporate tax system, and as companies gear up to comply, the UAE government has been issuing public clarifications to help businesses understand the new rules.
These clarifications provide much-needed guidance on how to calculate taxes, report income, and claim exemptions.
In this article, we’ll explore the latest public clarifications and what they mean for businesses operating in the UAE.
What Is UAE Corporate Tax?
The UAE introduced a federal corporate tax on business profits, effective from June 1, 2023. This marks a significant shift for a country known for its zero-tax environment.
The new corporate tax is set at a rate of 9%, applying to both local and foreign businesses that generate profits exceeding AED 375,000 (about $102,000).
However, businesses with profits below this threshold remain exempt.
The aim of the tax is to diversify the UAE’s revenue sources and align its tax policies with global standards, such as those proposed by the OECD’s global minimum tax framework.
Key Public Clarifications
1. Who Is Exempt?
One of the most important clarifications involves which entities are exempt from the corporate tax.
The government has confirmed that government entities, investment funds, charities, and certain public benefit organizations are exempt from paying corporate tax.
Additionally, businesses operating in free zones will also remain exempt as long as they don’t conduct business with the mainland UAE.
This is critical for companies based in Dubai, Abu Dhabi, and other key free zones.
The FTA’s guide around Exempt Persons can be found here.
2. How To Calculate Profits?
The government has also clarified how companies should calculate their profits for corporate tax purposes.
Profits will be based on International Financial Reporting Standards (IFRS), which many businesses are already using for their financial reporting.
However, certain adjustments may need to be made, such as adding back non-deductible expenses.
The FTA’s guide on determining income can be found here.
3. Tax Groups
The UAE allows companies to form tax groups.
This means that a parent company and its subsidiaries can be treated as a single entity for tax purposes, simplifying the tax reporting process.
However, to qualify, the parent company must hold at least 95% of the shares in its subsidiaries, and all group members must be UAE residents.
The FTA’s guide on tax groups can be found here.
4. Withholding Tax
Another key clarification involves withholding taxes.
The UAE has confirmed that it will not introduce withholding tax on dividends, interest, royalties, or other cross-border payments.
This is a significant benefit for international investors, as it ensures that the UAE remains an attractive destination for foreign investment.
Impact on Businesses
The introduction of corporate tax and these clarifications mean that businesses in the UAE need to adapt quickly.
Companies must ensure that they have the right systems in place to calculate and report their profits accurately.
This might involve hiring tax professionals, updating accounting software, or training existing staff.
For multinational companies, the UAE remains an attractive destination for investment thanks to the relatively low tax rate and exemptions for free zones.
However, businesses that trade with the mainland UAE from free zones will need to pay close attention to the rules to avoid tax penalties.
UAE corporate tax clarifications – Conclusion
The UAE’s new corporate tax system is a significant change, and the recent public clarifications provide businesses with the guidance they need to comply.
Whether you are a local business or a multinational operating in the UAE, understanding these clarifications is key to navigating the new tax landscape.
Final Thoughts
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