Corporate tax is a kind of tax imposed on the profits earned by corporations or businesses and is usually calculated as a percentage of the company’s net income or profits after deducting allowable expenses and deductions. For governments across the globe, corporate tax is one of the main sources of revenue and is used to fund public services and infrastructure projects. The rate of corporate tax varies from country to country, and some countries have more complex tax systems than others. Many times, businesses employ the help of corporate lawyers to understand tax implications and work accordingly to keep their business functioning.
The tax economy in the UAE is unique compared to many other countries. As of 2023 March, UAE does not impose federal income tax on individuals or corporations, which means that businesses operating in the country can enjoy a more favorable tax environment. The UAE also has several free zones, where companies can operate without paying corporate income tax. These free zones offer tax incentives and other benefits to businesses, making them an attractive destination for foreign investment.
With that said, the country is soon set to introduce corporate taxes. Businesses will become subject to UAE Corporate Tax from the beginning of their first financial year that starts on or after 1 June 2023, according to the UAE Federal Decree-Law No. 47 of 2022 on taxation of corporations and businesses or the “Corporate Tax Law”.
In this article, our business lawyers will dive into the details of UAE’s corporate tax laws and help you understand the expectations.
Understanding UAE corporate tax
Up until now, corporate tax in the UAE was not imposed at the federal level; as a result companies operating in the UAE are not subject to corporate income tax on their profits. Additionally, the UAE had signed double taxation agreements with several countries to avoid the double taxation of income. These agreements helped to promote investment and prevent tax evasion between countries. This tax-free environment has made the UAE an attractive destination for businesses looking to invest in the region.
However, the UAE tax laws are gearing for a paradigm shift, giving the country a powerful economic advantage. The government has decided to introduce a federal tax on corporate revenues for the financial year starting on or after June 2023, where companies have to pay a standard statutory tax rate of 9%. This applies only when the income tops Dh375,000 or $100,000 and will concern all economic activity in the UAE mainland. Exclusions include natural resource exploration and businesses operating solely inside the free zones.
Industry and financial experts including our corporate lawyers believe that through this new corporate tax regime, the UAE’s position as a global commercial and investment center will be catapulted to new heights. The introduction of corporate taxes can accelerate the country’s development, by aligning itself to global markets, achieving international tax transparency. Additionally, this will also reinforce the country’s stance on avoiding fraudulent practices.
At the same time, personal income from work, real estate and other diversified investments apart from any kind of licensed commercial activity will remain tax-free. Here are some of the key takeaways of the new tax law-
- Freezone companies that work according to the compliances will be immune to corporate taxes
- Businesses engaged in natural resource extraction such as oil and gas production are exempted from corporate tax
- Foreign investors who do not conduct business in the country can continue enjoying tax exemption
- Capital gains and dividends people may earn from a UAE firm from qualified shares will not be subjected to corporate tax
- Foreign tax will now be credited against the corporate tax due in the UAE
- Companies need to submit only one corporate tax return every fiscal year and will not be subjected to prior tax payments or provisional tax filings
- The country offers generous loss transfer and utilization rules for businesses and their subsequent taxation
- Transfer pricing and documentation procedures for UAE enterprises will be based on OECD transfer pricing principles
In a nutshell, this new tax regime will help the country meet international standards through economic diversification. As the reliance on crude oil reduces, the UAE aims to compete with other world economies encouraging foreign investments and business opportunities in its land.
How can business lawyers help you with corporate taxes?
Corporate lawyers can provide valuable assistance to businesses in managing their corporate taxes in the UAE, ensuring compliance with applicable laws, and minimizing their tax liabilities. This includes-
Tax Planning: Business lawyers can assist businesses in planning their tax strategy to ensure that they comply with the applicable laws and regulations. They can help identify tax-saving opportunities and minimize the risk of non-compliance.
Tax Dispute Resolution: In case of a tax dispute with the UAE tax authorities, working with a law firm can ensure your business with representation and guidance. They can help businesses negotiate with the tax authorities and resolve disputes through alternative dispute resolution methods such as mediation or arbitration.
Tax Compliance: Business lawyers can assist businesses in complying with the tax laws and regulations in the UAE. They can help businesses prepare and file tax returns, maintain proper records, and ensure that they are meeting their tax obligations.
Tax Due Diligence: Lawyers can also perform tax due diligence on behalf of businesses to identify any potential tax issues that may arise in mergers and acquisitions or other business transactions. This can help businesses assess the tax implications of such transactions and make informed decisions.
Keeping Up with Changes: Working with a trusty law firm can help businesses stay up-to-date with changes in tax laws and regulations in the country. They can provide advice on how to adjust their tax strategy to accommodate any new changes and minimize their tax liabilities.
In summary, the tax economy in the UAE is evolving. With the introduction of new taxes and regulations aimed at diversifying the government’s revenue streams, companies need to be prepared for the changes, following all the necessary compliances. In this changing scenario, it’s prudent to avail the services of a law firm to help your business operate transparently and responsibly.
Reach out to our corporate lawyers at Fichte & Co for more information and assistance.