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UAE issues law on 9% corporate tax, reveals exemptions

Tax shall be imposed on profits accrued and not on the total turnover

Published: Fri 9 Dec 2022, 7:33 PM

Updated: Sat 10 Dec 2022, 11:36 AM

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The UAE on Friday issued a corporate tax law, under which a nine per cent tax rate will be applicable on companies posting a profit of above Dh375,000.

The tax will be applicable to businesses in UAE from the financial year commencing on or after June 1, 2023.

The threshold of Dh375,000 has been included in order to support small and medium enterprises, and startups and make the economy more competitive.

It’s pertinent to note that the corporate tax shall be imposed on profits accrued and not on the total turnover of the business.

Importantly, the corporate tax will not be applied to individuals’ salaries or their income from employment. In addition, personal income earned from bank deposits or savings programmes and investments in real estate by individuals in their personal capacity are also not subject to the tax.

Corporate tax on businesses is levied in almost every country in order to diversify the revenues of the governments.

The Ministry of Finance said that the Federal Decree-Law No.47 of 2022 on the Taxation of Corporations and Businesses will help build an integrated tax regime to enhance UAE’s global economic competitiveness and support international financial systems within the framework of the UAE’s established partnerships.

Mayank Sawhney, managing director, MaxGrowth Consulting.

Mayank Sawhney, managing director, MaxGrowth Consulting.

“The effective date on which corporate tax will become applicable will vary from business to business, based on their financial year. For example, if a business follows a financial year of January 1 to December 31 – which the majority of businesses in UAE do, the UAE corporate tax will be applicable to them from the financial year commencing on January 1, 2024,” said Mayank Sawhney, managing director, MaxGrowth Consulting.

Exemption

According to the law, free zone companies in UAE which fulfil all conditions specified in the Executive Regulations of the UAE Corporate Tax Law will be exempt from corporate tax.

Natural resource extraction activities are also exempted but they’re subject to existing emirate-level taxation. Government entities, pension funds, investment funds and public benefit organisations are also beyond the scope of corporate tax.

The corporate tax shall be imposed on taxable persons which includes residents, certain non-residents and free zone persons generating profits of over Dh375,000 per annum.

The non-residents are also subject to nine per cent of tax if they have a permanent establishment in UAE as well as income from the sale of goods, provision of services etc. in the country.

All taxable persons shall be obligated to maintain records and documents for seven years following the end of the tax period.

Under the law, annual corporate tax returns will be required to be filed by all taxable persons no later than nine months from the end of the relevant tax period.

Anurag Chaturvedi, CEO, Andersen, UAE, said group companies in the country will be able to form a tax group and file a single tax return and make a single tax payment.

“Tax grouping will be allowed subject to condition with the primary condition being the parent company holds 95 per cent ownership, voting rights and right to the assets and profit of the group companies,” said Chaturvedi.

Anurag Chaturvedi, CEO, Andersen, UAE.

Anurag Chaturvedi, CEO, Andersen, UAE.

He added that tax losses are allowed to be carried forward and set off for an indefinite number of years.

“The tax losses can be set off up to 75 per cent of the taxable income of the year in which such losses are set off. Tax losses cannot be carried forward where there is a change in shareholding of more than 50 per cent other than when the same or similar business is carried out,” said Chaturvedi.

The corporate tax law has introduced general anti-abuse rules as well to curb tax avoidance measures practised by companies. “Transactions entered without valid commercial reason to obtain a tax advantage could be disregarded and brought into the ambit of tax,” said Chaturvedi.

Pankaj S Jain, Managing Director, AskPankaj Tax Advisors.

Pankaj S Jain, Managing Director, AskPankaj Tax Advisors.

The introduction of the corporate tax is a pragmatic and progressive step towards the growth of the UAE, said Pankaj S Jain, Managing Director, AskPankaj Tax Advisors. "The Decree Law is well structured. Once the relevant cabinets decision(s) are released in the public domain, the exact scope and implications could be ascertained. Companies would need to now prepare adequate, standalone financial statements for each entity for tax compliance," he added.



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