Taxation in UAE 2023

Introduction:

Taxation in UAE 2023: In a significant shift from its traditional tax policy, the United Arab Emirates (UAE) announced a new corporate tax in January 2022. This new tax, set to take effect from June 1st, 2023, marks a change in the UAE’s approach to taxes, known for its low-tax status. The corporate tax, set at 9%, will apply to businesses with profits exceeding 375,000 AED (about USD $100,000). This move is part of the UAE’s strategy to diversify its economy, align with global tax norms, and address tax avoidance.

Table of Contents

The UAE’s Tax History:

For a long time, the UAE has been recognized as a place with low taxes, attracting businesses and investors worldwide. Initially, the UAE didn’t impose taxes on corporate profits, except for specific industries like resource extraction and foreign banks. However, things began to change in 2018 when a Value-Added Tax (VAT) of 5% was introduced on consumer purchases, affecting a wide range of businesses and consumers.

In January 2022, a significant change happened with the introduction of corporate tax at a rate of 9%. This tax is set to begin from June 1st, 2023, marking a major shift in the UAE’s tax policy and impacting businesses in the country.

The New Corporate Tax Regime:

Starting from June 1st, 2023, the UAE’s corporate tax landscape will undergo a transformation. Here’s what you need to know about the new corporate tax system:

9% Tax on Profits: Businesses making profits beyond 375,000 AED will be subject to a 9% corporate tax. This tax is calculated based on a business’s profits, which is the revenue minus expenses. Businesses with profits below this amount will continue to have a 0% tax rate, ensuring smaller businesses are not overly burdened.
15% Tax for Large Multinational Firms: Additionally, large multinational firms with profits exceeding EUR 750 million will have a higher tax rate of 15%. This aligns with the Global Minimum Corporate Tax Rate agreement, aimed at preventing tax avoidance by big corporations.
Effective Date: The new corporate tax will begin on June 1st, 2023. Businesses should prepare for this change and adjust their financial planning. It’s important to note that businesses starting their tax year in January won’t pay tax on revenues generated before January 1st, 2024.

Features of the Corporate Tax Regime:

The new corporate tax system comes with important features that businesses need to know:

Who Can Be Taxed: Legal entities like Limited Liability Companies (LLCs), Public Shareholding Companies (PSCs), and others are subject to tax. Foreign legal entities earning income in the UAE and businesses in free zones engaged in trade with the mainland may also be taxed.
Tax Rates: Businesses earning up to 375,000 AED face a 0% tax. Beyond that, the rate is 9%. Large multinational companies may have a different rate based on their conditions.
Exemptions: Certain entities like charities, investment funds, and government-owned companies are exempt. Dividends and capital gains from qualifying shareholdings may also be exempt.
Calculating Taxable Income: Tax is based on the net profit or loss in a company’s financial statements. Losses can be offset against future taxable income up to 75%.
Tax Groups: A group of companies can form a tax group, treated as one entity, subject to certain conditions.
Tax Credits: To avoid double taxation, a credit can be applied against foreign tax paid in another jurisdiction.

Understanding these features is crucial for businesses to navigate the new tax system effectively.

Conclusion:

With the introduction of corporate tax in the UAE in 2023, understanding the tax landscape becomes vital for businesses. As the UAE aims to balance its economy and align with international norms, staying informed and seeking professional guidance is crucial. Whether you’re a small business concerned about the new tax threshold or a multinational corporation adjusting to the new rates, understanding these changes will help you make informed decisions and optimize your financial position.

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