UAE has long been deemed as the perfect tax-free haven for businesses and companies all over the world. Many international business owners have business setup in Dubai or moved their company headquarters to the UAE only for lack of taxation on the income. The recent announcement of a new corporate tax that will be levied from the new financial year starting from June 2023 on all corporations in the UAE has come as a shocker to many companies and caused a lot of apprehension in the business sector in the UAE region. As often, changes are difficult to process and face certain resistance in public; the same feeling currently prevails in the business community. The question arises whether the region will still maintain its place as one of the most attractive business hubs globally and how this taxation affects the existing companies in the area. Businesses must understand the scope and exemptions of the new corporate tax before jumping the gun. Let's look at the important facets of the new tax regime starting soon.
The Inner Workings of Federal Tax in the UAE
The CIT will be applied to all the trading companies working within the UAE. The rate of the tax has been kept at 9% for the companies that have made a net profit of over 375,000 Aed. Foreign companies and professionals who conduct regular business in the UAE will be subjected to corporate tax. Companies that make a net profit of less than 375,000 will not have to pay any tax: this is to support the startups and new entrepreneurs. The tax will apply to the adjusted net profit in the accounting. The Ministry of Finance has capped the tax rate at 9%, and there is no withholding tax involved.
Exclusion and Exemption to the Business Tax
- Freezone companies can enjoy tax incentives if they fulfill the regulations and do not carry out business activities in the Mainland Dubai area.
- Companies that work to extract natural resources (Oil and Petroleum) are relieved from the new taxation.
- The tax will be applied to the net profits of the company fiscal year and will not include the capital funds acquired and earnings on shareholdings
- No corporation tax for intra-group financial proceedings
- Foreign tax credits can be adjusted against the corporate tax in the UAE.
- No payable tax on the salary or any income generated from the investments in different sectors, including the real estate
Impacts of the New Income Tax Application
Considering the importance of the UAE being tax-free for so long and a sudden shift in the business atmosphere with the application of income tax for corporations, the long-term effects of these changes will be very consequential. The key factor is the taxation rate of 9%, which is considerably very low compared to the other countries in the world. This low value of income tax rate should keep UAE in the race for the top business centers globally.
One should not forget to analyze the positive sides of this taxation regime. UAE's government income is largely dependent on the Oil and Petroleum sector. However, in the rapidly changing world where sustainable energy resources are being adopted, and the hydrocarbon market has become extremely fickle, it has become unavoidable to shift the financial dependency.
The taxation law will encourage companies to audit and book their financial records, which is not a common practice in the region. This recordkeeping will provide an insight into the economy of businesses in the UAE and help them make better decisions and investments.
To sum it all up, the introduction of business income tax in the UAE is not all bad. It will allow the government to have more funds for better infrastructure and organization. Also, the tax percentage is still on the lower side, which does not discourage the companies from establishing their businesses in the UAE.