A detailed guide about how Corporate Tax in the UAE works

As announced recently by the government, the UAE will be implementing Corporate Tax, which shall come into effect for fiscal year starting on or after 1st June 2023. The introduction of this new rule comes as no surprise considering that UAE has always led the world in strategic economic growth.

This announcement will undeniably bring forth major changes in the way businesses will operate in the country. To learn more about how UAE corporate tax will be implemented, continue reading.

An introduction to corporate tax in UAE

Corporate tax is also commonly referred to “Business Profits Tax” depending on the chosen jurisdiction. It is a form of tax levied on the net income or profits of a company or organisation.

UAE aims to initiate a competitive Corporate Tax policy at par with global standards. The vision is to establish UAE’s presence as a leading hub for commerce, trade, and investment, and aim to evolve while achieving its strategic goals

Most countries worldwide including GCC member states share a comprehensive tax regime. CT restates the UAE’s commitment to meet the international standards of tax transparency and prevent any unethical practices.

How corporate tax will work in the UAE

For starters, all businesses based in the UAE and commercial activities will be subject to corporate tax. However, there is an exception for companies who deal with extraction of natural resources. This is because they will be subject to emirate level corporate taxation.

The Ministry of Finance will remain as the competent authority for the purposes of bilateral/multilateral agreements as well as the international exchange of information for tax purposes. The administration, collection, and enforcement of CT in the UAE will fall under the jurisdiction of the Federal Tax Authority.

All activities taken up by a business/legal entity are deemed as business activities. This is because they will either have obtained a professional, commercial, or industrial license. Therefore, they will be considered to be within the scope of CT. It is important to note that there are still exceptions to this rule.

Any business whose financial year starts on or after the 1^st of July 2023 will be subject to corporate tax the very same year. For example, if a company’s financial year starts on 1st August 2023 and ends on 31st July 2024, it will be subject to corporate tax from August 2023. This is because it would be the first financial year for the company after the CT regime.

On the other hand, if for instance a business’ financial year starts on 1st February 2023, it will only become subject to corporate tax the following year, i.e., 1^st Feb 2024 to 31^st Jan 2025.

Exemptions for corporate tax regime in the UAE

There are several cases in which companies are exempt from the CT regime. One such case includes dividends and capital gains earned from qualifying shareholdings by a UAE company. In this case the company will be exempt from the CT rule.

A qualifying shareholding simply refers to ownership interest that meets certain conditions specified in the tax law. This is the case for both UAE and foreign companies.

Similarly, intra-group transactions as well as reorganizations which are qualified will not be subject to the CT regime provided that the stated requirements and conditions are met.

In the case of foreign companies and/or individuals, they will only be subject to this regime if they are involved in trading or conduct business in an ongoing or regular manner in the country.

Finally, free zone businesses will be subject to the CT regime. However, there will be consideration for the incentives currently being offered to free zone businesses as long as they comply with all the regulatory requirements.

However, there is no exemption for free zone companies that conduct business with mainland. A business established in free zone jurisdictions will need to register and file corporate tax returns.

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Rules and regulations involving tax and accounting are ever evolving. To keep up with it might be a hassle. Therefore, the services of our experts at Shuraa Tax are specifically catered to provide you with the best solutions for your financial needs.

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