VIshnu Geetha Prem UAE Tax Updates 26 Apr 2023

UAE Corporate Tax: What You Need To Know When Planning Company Formation In Dubai

The UAE offers regulations that are ideal for company formation in Dubai. These rules have enabled the city to advance in areas that have experienced continual growth and innovation. The majority of the city’s most recent reforms aim to raise living standards and improve quality of life. The city is always open to businessmen who want to begin company formation in Dubai. The tax system was a true blessing for them. However, most recent changes to the tax code have raised the tax rates for bigger businesses. This undoubtedly aids in the rapid development of the entire UAE.

On Friday, the United Arab Emirates published its federal corporate tax code, which would impose a top rate of 9 percent on taxable income exceeding DH375,000 ($102,000). A well-established corporation is now required to comply with this requirement due to company formation in Dubai.

The company tax rate on taxable profits that fall below the aforementioned level is zero percent. The 56-page regulation, which was posted on the Ministry of Finance website on Friday, states that no corporate tax would be levied on wages or other types of personal income earned via employment, whether in the public, semi-public, or private sectors.

As per previously stated regulation at the beginning of this year, businesses will be liable for the UAE corporation tax beginning with their first fiscal year that begins on or after June 1, 2023.

What is corporate tax?

The cost of corporate tax is deducted from business profits. It is frequently calculated as a percentage of taxable revenue for a company. Corporate tax is a direct tax that is paid by the company on its earnings, as opposed to an indirect tax like VAT that is paid by the final consumer.

Who will be affected by the new corporate tax law?

Regardless of size or industry, all businesses operating in the UAE will be impacted by the new corporate tax law. Companies do need to be aware of specific exemptions and rules, regardless.

What constitutes onshore business?

Businesses that transact with an onshore legal entity, an individual, or a legal person, as defined by the decree-law, are considered to have onshore business activities. This is a special warning for the e-commerce industry.

There are certain specifically designated industries that are exempt from the tax, but for the most part, the aforementioned is applicable.

What about GCC trading?

The value-added tax (VAT) law in the United Arab Emirates included three levels of regulation. A GCC framework, federal decree legislation, and executive rules are all in place. There is no hint of a GCC-wide strategy at this time. This implies that doing business with a Saudi corporation, whether onshore or offshore, does not automatically subject the entity to corporate tax.

A third layer of executive rules won’t exist either. Alternatively, such information may be provided in a Cabinet decision.

Trading inside the GCC is unlikely to be significantly impacted by the UAE’s adoption of corporation tax. It may, however, cause some changes in the area’s economic environment as enterprises examine the impact of the new tax regime on their operations and contemplate relocation or growth possibilities.

Exemptions and provisions

• Small businesses: Companies with an annual turnover of less than Dh3.75 million ($1 million) will be exempt from the corporate tax.
• Free zone companies: Companies operating in free zones will be exempt from the corporate tax if they do not conduct business outside of the free zone.
• Special economic zones: Companies operating in special economic zones will be subject to a reduced rate of 3%.
• Capital gains: Capital gains from the sale of shares, bonds, and other financial instruments will be exempt from the corporate tax.
• Tax losses: Companies will be allowed to carry forward tax losses for up to five years, which can be used to offset future profits.
• Transfer pricing: The law includes provisions to prevent transfer pricing, which is the practice of artificially inflating or deflating the price of goods or services in order to reduce tax liabilities.

What are the implications of the new corporate tax law for companies operating in the UAE?

Company setup in UAE will be significantly impacted by the implementation of the new corporate tax law.

You should keep the following consequences in mind as you proceed with company formation in Dubai:

• Increased costs: Corporate tax expenses will need to be taken into account by businesses, which might have an effect on their revenue.
• Administrative burden: To manage their tax responsibilities, businesses will need to build up systems and procedures, which might add administrative duties.
• Compliance: To prevent fines and legal problems, businesses must make sure they adhere to all applicable tax rules and regulations.
• Competition: The introduction of a corporate tax could level the playing field for companies operating in the UAE, as previously, there was no corporate tax, giving companies a competitive advantage.

The Ministry of Finance’s messaging has been constant. Its goal is to ensure that corporate taxes do not include any surprises. It will display the very finest international standards. It will try to make things less unclear. The procedure will work to make interactions with it as easy and pleasant as possible.

Our findings don’t necessarily imply that these are the pressing problems they must resolve. The modifications have already been clearly explained. Small firms are unaffected by any of these effects because they are not subject to corporation tax; only the bigger, more profitable enterprises are. The UAE government actually has a forward-thinking notion with this one. Company formation in Dubai won’t be financially impacted since greater revenues will just need to be aware of this since the tax is solely designed for the country’s continued growth. The finest decision you can still make is to register a company setup in Dubai, so never hold back if that’s what you’re seeking to accomplish.

It’s time to follow company formation in Dubai, step up, and work together to ensure compliance with the rules.