Income in UAE is Taxable W.E.F. 2023

For the first time by local legislation, a direct tax is being implemented for enterprises in the United Arab Emirates. Federal company tax has been introduced by the UAE’s Ministry of Finance, and it will go into effect for the fiscal year beginning on or after June 1, 2023.

The UAE is a confederation of seven emirates (states), including Abu Dhabi, Dubai, Sharjah, Ras Al Khaimah, Ajman, Umm Al Quwain, and Fujairah. This article examines the taxability of income in the UAE.

Applicability of Corporate Tax:

All business and commercial operations will be subject to UAE CT throughout all Emirates, except resource extraction, which will continue to be subject to Emirate-level taxes.

A business’s tax rate will be zero percent if its taxable income is less than AED 375,000. Businesses with taxable income over 375,000 will pay 9% in taxes. Large multinationals that fulfill the requirements outlined in Pillar 2 of the OECD BEPS project and have worldwide revenues of more than 750 million euros would be subject to a new tax rate (expected to be 15%). Corporate tax will be 0% for enterprises in the free zones.

Amounts Exempt from Corporate Tax:

Income from employment, real estate, savings, and other sources generated by people acting in their capacity would not be subject to taxation. Additionally, foreign investors’ dividends, capital gains, and other investment returns would not be subject to corporate tax.

Tax Deductions for Corporations:

Interest, dividends, royalties, and other domestic and international payments will not be subject to withholding tax in the UAE, and foreign tax credits will be available to offset any taxes paid by UAE enterprises on income received from sources outside the UAE.

Filing of Returns:

For each financial year, CT returns must be filed annually. For the whole organization, a single return filing facility would be accessible. According to the OECD TP recommendations, THE UAE CT system will contain transfer pricing regulations and paperwork requirements.

It will be a residence-based CT scheme, and taxes will not only be levied on non-residents’ business revenue that is derived from the UAE and not from their enterprises’ worldwide earnings. Except for business revenue produced by people who have a commercial license in the UAE, it will not apply to individuals or their income.

The UAE will not charge foreign firms and people who invest in or lend money to UAE enterprises or who otherwise make money that is unrelated to trade or commerce carried on in the UAE will corporation taxes or withholding taxes. However, foreign business will fall under the CT system if it has a permanent presence in the UAE.

The IFRS or any international financial accounting standard accepted in the UAE must be used to compile the statements. If a company is losing money, no UAE tax is due and losses can be carried forward to lower taxable revenue in future years.

Necessary expenses incurred by the business for earning taxable income would be tax deductible however expenses related to exempt income would not be deductible for UAE CT purposes. UAE may likely introduce rules on the deductibility of interest by OECD BEPS Action Plan 4.

Tax deductions are available for company costs undertaken to generate taxable income, although, for UAE CT purposes, expenses about exempt income are not deductible. According to OECD BEPS Action Plan 4, the UAE may implement regulations governing the deductibility of interest.

Conclusion:

As a result, starting in June 2023, the UAE will start taxing income, ending the tax-free status that was discussed in our article above. Businesses need to assess the UAE CT’s effects early on and make proactive plans for a seamless implementation.

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