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The landscape of corporate taxation in the United Arab Emirates (UAE) is set to undergo a significant transformation with the introduction of Corporate Tax (CT). Scheduled to commence on January 1, 2023, and becoming effective for financial years starting on or after June 1, 2023, CT is a direct tax levied on the net income or profit of businesses. In this article, we will explore the key aspects of corporate tax in the UAE, including its implications, exemptions, and obligations.
Understanding Corporate Tax Rates:
The corporate tax rates in the UAE are structured as follows:
- 0% for income up to AED 375,000
- 9% for income exceeding AED 375,000
Who Falls Under the Tax Umbrella?
Corporate Tax applies to both natural persons (individuals) and legal persons (local or foreign companies). However, certain incomes for natural persons, such as employment income, dividends, rental receipts from UAE real estate investments, and investment income, may not be taxable.
Exemptions and Tax Implications for Free Zone Companies:
Certain entities are exempt from UAE CT, including federal and emirate governments, wholly government-owned UAE companies engaged in sovereign activities, and charitable organizations, among others. Free zone businesses will be subject to CT, but they can benefit from existing corporate tax incentives if they meet specific criteria, including not having a substantial economic presence in the UAE.
Taxable Income and Non-Deductible Expenses:
For residents, all incomes earned worldwide are taxable, with the ability to claim tax credits on foreign-paid taxes to avoid double taxation. Non-residents are taxed on income sourced in the UAE. Certain expenses, such as interest on debt and entertainment expenditures, have limitations on deductibility. Additionally, no deduction is allowed for specific expenses, including administrative penalties and certain donations.
Loss Relief and Group Relief:
Businesses can offset losses incurred in one period against taxable income in future periods, up to 75% of the taxable income. Large companies operating in groups can utilize group relief, allowing losses from one company to offset profits from another within the same group.
Transfer Pricing Regulations:
Transfer pricing regulations apply to both UAE mainland and free zones. Businesses must adhere to the arms-length principle, ensuring transactions with related parties are at market prices. Companies are required to formulate a transfer pricing policy and submit transactions with related parties annually.
Transitional Provisions and Necessary Requirements:
Transitional provisions, outlined in Article 61, require companies to follow the arms-length principle in accounting transactions from January 1, 2023, or earlier, depending on the first tax period. To benefit from tax reduction schemes, companies must register for corporate tax, maintain accounting records as per Article 61, and present audited financial statements.
Conclusion:
As the UAE prepares to implement Corporate Tax, businesses must navigate the evolving landscape of taxation. Understanding the rates, exemptions, and compliance requirements is crucial for a seamless transition. Stay informed, register for corporate tax, and adapt your business practices to the new era of taxation in the UAE.
