For many years, the government of the UAE has not imposed many taxes on corporate profits. On January 31, 2022, the government announced a new corporate tax that became functional from the financial year starting on June 1, 2023. Now companies have to pay a new 9% corporate tax rate. There are many things that you need to know about the new corporate tax, such as it won’t affect every business, and not everybody has to pay the tax. In this article, we will cover corporate tax 2023 in detail.
The History of UAE’s Corporate Tax
Over the course of many years, the United Arab Emirates functioned as a very low-tax jurisdiction. Many companies and citizens lived and enjoyed a tax-free life, paying no taxes on their incomes. The majority of the revenue used to come from private and nationalized fossil fuel extraction industries that used to pay about 50% tax on their revenues. Restaurants and Hotels also paid certain taxes, and foreign banks paid a 20% corporate tax on operating profits. In recent years, the country has decided to diversify its economy and generate more income away from fossil fuels. Many businesses have come into play during the tax-free times, resulting in the fastest-growing economy.
Governments have seen the potential and tax revenues from different businesses to further enable the majority of investments in education, infrastructure, and healthcare. In 2018, the government introduced a VAT tax to impose a 5% levy on all consumer purchases, and then in January 2022, it imposed a corporate tax of 9% that was implemented this year.
There are many reasons why the UAE implemented a cand one of them is to bring the country in line with international norms and tackle tax avoidance. The 9% tax rate is still lower than that of other countries.
The Corporate Tax 2023 – What is it?
The Corporate Tax 2023 highlights that there will be a 9% tax on the profits of all businesses that generate about USD $100,000 (AED 375,000). The 0% tax rate will be applied to businesses that generate less than this sum of profit. The UAE corporate tax 2023 came into play on June 1st, 2023. For companies whose tax year starts in January, they will start paying the tax in the next year.
Things You Need To Know About the Corporate Tax Regime
A diverse range of policies is included in the corporate tax regime, such as tax-free zones, corporate taxes, absence of federal income tax, and VAT systems.
- Many legal entities with notable legal personalities like LLPs, PJSCs, and LLCs are levied with tax. Foreign legal entities that earn income in the emirate and are tax residents have to pay the tax.
- Companies earning more than AED 375,000 have to pay the tax. If they are earning less than that, 0% has to be paid.
- Many companies are exempted from corporate taxes, such as charities, investment funds, and public benefit organizations.
- The payment percentage and income will be calculated based on the amount of net profit or loss shown in the financial statement of the company.
- A tax group can be formed by different groups of companies to be treated as a sole taxable entity.
Will This Corporate Tax be Applied to Free Zone Companies?
According to UAE government announcements, free zone companies will still continue to enjoy the benefits of free zones. It is possible that in the future, free zones may decide to change rules and introduce the tax. When a free zone company works with a mainland company, they normally have to pay the corporate tax on the revenue generated by working with the company.
Will Personal Income be Taxed in Dubai under the New Corporate Tax?
No, currently, no personal income is taxed in Dubai or the rest of the emirate. Only a 5% VAT tax is applied to the purchase of consumer goods and services.
What are Free Zones in the UAE?
Free zones are the areas where no tax is applied to companies. Meydan Free Zone is located in central Dubai and is considered quite popular. If you open a business in a free zone, no tax shall be applied to your profits.
Conclusion
The UAE’s decision to introduce a new corporate tax is a big change. This tax, which is 9% for businesses making more than $100,000, is meant to make things fair and follow global rules. Even with this new corporate tax, the UAE still has lower taxes compared to many other countries. This change is part of a plan to make the economy stronger by relying less on fossil fuels and encouraging different types of businesses. The UAE will still support special areas where no tax is charged, called free zones. The Meydan Free Zone is quite popular. This new tax will help the UAE have more money for important things like schools, roads, and healthcare. Overall, the UAE is taking steps to make its economy better and more stable, while still offering good opportunities for businesses to grow.
