In an announcement that may have significant consequences for the business setup in Dubai and the rest of the United Arab Emirates, the Ministry of Finance announced on 31 January 2022 that it shall levy a 9% federal level corporate tax in the UAE on or after 1 June 2023. With specific exemptions and conditions, the corporate tax will apply to the income obtained by legal entities and individuals engaged in business/commercial/professional or any other economic activities for which a business license or a permit is required.
The imposition of the federal level corporate tax in the UAE signals the end of the era when most businesses in the UAE do not pay tax on their business income. However, the 9% corporate tax rate is still considerably low by global standards, ensuring that the UAE will remain attractive to foreign investors.
The following are answers to common corporate tax UAE FAQs.
What is corporate tax in the UAE?
Most of the businesses in the UAE do not pay corporate taxes. Free zone companies also generally enjoy a renewable, 50-year moratorium on corporate taxes. However, beginning 1 June 2023, all of the businesses in the UAE will have to pay corporate income taxes subject to exemptions.
The UAE corporate tax rate is 9%. It will apply to all the in-scope businesses that register a net income or a taxable income of AED 375,000 or more. This means the rate of tax will remain at 0% for small businesses whose taxable income does not exceed AED 375,000. Employment income earned by an individual will remain out of scope. However, if an individual’s income is from freelancing and other activities that the law requires must be licensed or have a permit, and the amount exceeds the AED 375,000 threshold, then that income would be subject to corporate income tax at 9%.
Does the UAE have corporate income tax?
Until the new corporate income tax regime is implemented, the UAE does not have corporate income tax. However, on or after 1 June 2023, a new corporate income tax regime will be implemented. In this new corporate tax regime, the federal government will impose a 9% corporate tax on net business income if it exceeds AED 375,000.
How much is the corporate tax rate?
The UAE corporate tax rate is 9%. This applies to all businesses in the UAE. However, there are a few exemptions, and more exemptions might be declared when the new corporate income tax regime finally takes effect. For instance, the 0% income tax rate will remain applicable to businesses whose taxable income is less than or equal to AED 375,000. A different tax rate will also apply to large multinational companies that satisfy criteria. Finally, emirate-level taxation will remain for businesses involved in extracting natural resources.
The 9% corporate tax in Dubai and the rest of the UAE emirates remains one of the lowest corporate tax rates globally. According to data from the Tax Foundation, the UAE corporate tax rate is the same as Montenegro and Hungary and just a bit higher than the rate in Turkmenistan (8%), Uzbekistan (7.5%) and Barbados (5.5%). It is also lower than most economies at the low end of the global corporate tax spectrum. The countries with 10% corporate tax include Andorra, Bulgaria, the Republic of Kosovo, Bosnia and Herzegovina, Kyrgyzstan, Paraguay, Qatar, and Timor-Leste.
Does Dubai have corporate tax?
There are no corporate taxes in Dubai except those that the Dubai government imposes on certain corporations, particularly those involved in natural resource extraction. However, this will change on or after 1 June 2023, when the UAE government implements the new corporate income tax regime that the Ministry of Finance announced on 31 January 2022. Under the new corporate income tax regime, the businesses in all emirates, including Dubai, will be subject to a 9% corporate tax if net income exceeds AED 375,000.
How is corporate tax calculated?
Corporate taxes are computed based on accounting net income. To arrive at the net income, which is also called net profit or net earnings, you need to take into account all the income from all the revenue streams. You also need to calculate your expenses incurred to earn such incomes, which include operating expenses, interest on loans, depreciation, and amortization expenses, among others.
The sum of all income diminished by the sum of all expenses is your net income. That is also your taxable income. Multiply your net income by the 9% UAE corporate tax rate to arrive at your corporate tax liability. It shall also be noted that the accounting net income (subject to certain adjustments) shall be in accordance with the internationally accepted accounting principles.
What is federal corporate tax?
Federal corporate tax refers to the tax levied by a federal government on resident businesses in its jurisdiction. The federal tax rate can vary from one country to another. For instance, the federal government of the United States of America charges a 21% federal corporate tax.
In the UAE, the federal corporate tax rate will be a flat rate of 9% for businesses whose taxable incomes exceed AED 375,000. However, this blanket rate does not apply to enterprises engaged in extracting natural resources. For such companies, the determination of corporate taxes will remain the purview of the emirate government instead of the federal government.
Does the UAE have corporate tax?
The UAE currently has no corporate tax except for emirate level corporate tax levied on the foreign bank branches and entities engaged in extraction of natural resources. This will change, however, on or after 1 June 2023 when the new corporate income tax regime takes effect. Under the new corporate tax regime, all the businesses (except for entities engaged in extraction of natural resources) domiciled in the UAE will be subject to 9% corporate tax if their net income exceeds AED 375,000.
Do corporations pay taxes in Dubai?
For the greater part, corporations in Dubai do not pay corporate taxes. Free zone companies also do not pay corporate taxes as they enjoy a 50-year renewable exemption to corporate taxes. However, some corporations that are in the business of extracting natural resources or foreign bank branches may be paying corporate tax under respective decree law.
However, on or after 1 June 2023, the federal government will begin imposing a 9% corporate tax on all businesses in the UAE, including those domiciled in Dubai. However, the corporate income tax will only apply if the business has a net income greater than AED 375,000. Moreover, Dubai corporations engaged in natural resources extraction will remain taxed at the rate determined by the Dubai government.
What exemptions are there to the UAE corporate tax 2023 scheme?
The following are exemptions to the 9% corporate income tax that will be implemented on or after 1 June 2023 in the UAE:
- Enterprises in the business of extracting natural resources; they will remain taxed at the emirate level
- Large multinational corporations that meet specific conditions; a different, yet-to-be-determined tax rate will apply to them
- Individuals’ employment income, unless the income comes from freelancing or from being engaged in business/commercial/professional or any other economic activities that must be licensed or must have a permit
- Individuals’ income from real estate investments, as long as such investments are made in a personal capacity and not as a business that requires a commercial license
- Individuals’ income, capital gains and dividends from personal investments in shares and securities
- Individuals’ income and interest earned from savings and deposit accounts
When income qualifies for corporate income taxation, it must still exceed the AED 375,000 threshold to be taxable.
Are free zone companies exempt from the 2023 corporate tax?
At the moment, it is unclear if the new corporate tax scheme significantly affects free zone companies. Based on early reports, free zone companies may be subject to the federal corporate tax on income earned from any business done in the UAE. Income from offshore activities may be exempt from corporate tax.
The UAE corporate tax changes may significantly impact your business operations. Prepare for the transition now by consulting a tax consulting company. UAE businesses would do well to talk to their corporate tax accountant so they can initiate a comprehensive federal tax authority or FTA audit.
We can help. Talk to our corporate tax specialists now and start preparing for the imposition of the new corporate tax in the UAE.