Corporate tax in UAE is a direct tax applied on the profits of business entities.
UAE decided on this Monday that it would impose corporate taxes from next financial year stating from June 2023, so it is necessary to understand what does taxation means, and how it affects entrepreneurs and emigres in the region.
WHAT EXACTLY IS CORPORATE TAX?
A corporate tax, also called company tax, is a direct tax applied on the profit of corporations or business entities. The taxes are paid according to the company’s taxable income, which contains revenue minus general and administrative (G&A) expenses, cost of goods sold (COGS), marketing and selling, research and development, other operating costs and depreciation costs.
How does this tax help entrepreneurs and emigres?
Corporate tax is applied from June 2023 on non-residents which conduct business in the UAE through a permanent establishment. UAE authorities have confirmed that this is not a tax on individuals and their incomes.
This implies that corporate tax will not be implemented on an individual’s salary and other income received from public or private sector.
Corporate tax will also be applied on entrepreneurs or business owners of wide range of industries, mainly oil and banking industries.
Revenue earned under a freelance license/permit will be subject to tax if income is above the minimum threshold of 375,000 Dihram’s in annual profit. If individuals invest in real estate in their personal capacity should not be subject to tax if the individual is not required to carry a commercial license/permit to fulfill such activity.
How did this corporate tax come about?
Gulf economies like UAE have maintained zero or low taxes for many years to attract foreign entrepreneurs and their investment. The UAE remains an attractive place for foreign investment due to suitable tax regimes as compared to other countries in the region.
However, to create a new revenue streams a number of reforms have been underway while lowering dependency on mainstream sources of revenues. Likewise, the UAE, the several other Gulf countries, have already been announced the value-added taxes, and introduced different forms of taxes.
How is Corporate Tax is different from VAT?
Taxes are the main revenue stream for most countries throughout the entire world. Taxes help governments to generate additional revenue and public fund, there is a difference between direct taxes like corporate tax and indirect taxes like VAT and excise tax.
VAT and excise tax are indirect taxes that are collected by businesses on behalf of the government that should be borne by the final consumer. The zero or minimum corporate tax is highly attractive for businesses willing to invest in the country.
Before UAE, which other countries have this tax?
Country’s finance ministry said that “Besides from the UAE, Out of six GCC countries four countries have already corporate tax regimes, ranging from 10% in Qatar, 15% in Kuwait and Oman, to 20% in Saudi Arabia. A tax rate of 9% in the UAE makes it ‘most competitive’ in the world.
When will this start Implemented on businesses in UAE?
In UAE, Corporate tax will be applied on business profits on financial years starting on June 1, 2023.
Chirag Agarwal, founder and managing director at Dubai-based Earning Accounting & Tax Consultancy, told that:
For UAE businesses whose financial year starts from 1st January, 2023 and ends on 31 December, 2023 will be prompted to UAE corporate tax from 1st January, 2024”.
Why corporate tax is important for UAE?
The revenue collected from corporate taxes is utilized as the source of revenue for a country.
Paying corporate taxes can be more fruitful for business owners than paying additional individual income tax.
Vikas Arora, chief executive at Dubai-based service provider CXO Factor said that:
“With the assistance of double tax treaty networks (DTT), UAE will be at much better position in corporate tax rate,”
“It also strengthens the UA position in terms of transparency and tax structure”.
How do tax treaties help reduce corporate tax for Expats?
GCC countries have double taxation treaty (DTT) network to abolish double taxation, the UAE has treaties with 112 countries, Kuwait with 82 countries, Qatar with 60 countries, Saudi Arabia with 51 countries, Oman with 31 countries, and Bahrain with 44 countries.
Tax treaties play a vital role in reducing corporate tax for emigres having permanent establishments in other countries, or lowering their withholding tax in the four GCC countries.
Taxation system is rapidly transforming in GCC countries for non-oil sectors for emigres. Entrepreneurs and business owners need to prepare tax-related documentations in advance. The authorities do not allow to revise tax returns; therefore, taxpayers should be careful in tax related compliances.