On January 31, 2022, the Ministry of Finance UAE implemented a federal Corporate Tax (CT) on corporate income in the United Arab Emirates. This federal Corporate Tax scheme will go into operation on June 1, 2023, for fiscal years beginning on or after that date. This regime has not yet been finished, and preparation is still being done to ensure that the plan functions well for both companies and the state when it is completed. The goal of initiating this effort prior to the actual launch of the corporate tax in UAE is to contact companies in the UAE since their comments can assist in improving the efficacy of corporate tax legislation in the United Arab Emirates.

The introduction of the new CT law will levy the corporate tax on the profits earned by UAE businesses. The natural question that arises is- What large businesses does the corporate tax apply on and which businesses are completely exempt. Our article answers this in detail or you can visit website https://corporatetaxuae.com/

Corporation Tax on Larger Industries

According to the new CT regime introduced by the Ministry of Finance, larger businesses can be referred to as Legal Persons. These large business industries can include public joint-stock companies, private shareholding companies, limited liability companies, etc. All these large businesses can be called Legal Persons whether they are executing business on mainland or free zones UAE. Following is all the detail that the new CT regime has given about large businesses;

  • Corporate tax in UAE will be applicable to all large businesses or legal persons in the UAE that are registered as separate entities in the UAE and execute business inside the UAE.
  • Foreign large businesses that execute in the UAE will only be subject to the corporate tax UAE if their income is UAE sourced or they have PE (Permanent Establishment) in the UAE.
  • UAE businesses that are incorporated in foreign countries but are managed from the UAE will be subject to corporate tax just like companies incorporated in the UAE.
  • Large businesses that are associations, joint ventures, or partnerships will fall under the ‘transparent’ category of the corporate tax regime. It means that such large companies will not be taxed as a whole but will be taxed in the ‘flow through’ process i.e, on part of members or partners. The ‘flow through’ process of taxation is internationally accepted and encouraged.
  • Unincorporated partnership companies of large scale and cross-border context will be taxed in the similar way the foreign jurisdiction taxes them. Since such partnerships create difficulties because in a cross-border context one country treats the business in one way and the other country treats the business in the other way of taxation. To avoid such confusion, the corporate tax regime has suggested treating such companies in accordance with the legislation of the other country.
  • Large companies that are limited liability partnerships in which no partner is unlimited liability will fall under the scope of corporate tax in UAE and will be treated in the same way as other large companies in the UAE.
  • Large businesses that are involved in real estate management, construction, agency and brokerage activities will also be subject to UAE corporate tax.

Large Companies That Are Explicitly Exempt from CT UAE

  • All federal authorities and government authorities in the UAE will not fall under the scope of corporate tax in UAE. Similarly, public institutions of all kinds will also remain exempt from CT in UAE.
  • Large companies that perform sovereign activities and are completely owned by the government authorities will also remain exempt from corporate tax in Dubai, UAE.
  • Large business industries that are already taxed on the emirate level such as industries that are involved in managing natural resources of the United Arab Emirates will also remain outside the scope of corporate tax UAE.
  • Large business industries that are involved solely in public benefits such as charities will also remain exempt from corporate tax UAE.

Large Businesses in the Free Zone UAE

  • Large companies that are incorporated in the UAE free zones will fall under the scope of corporate tax UAE and will be required to perform tax return obligations. However, the new CT regime will respect the tax incentives currently being given to large business industries in the free zones UAE.
  • Although the large businesses in the free zones fall under the scope of CT, these businesses will enjoy a 0 percent tax rate incentive for all business transactions performed with other businesses whether inside or outside the UAE.
  • Large free zone businesses that have branches on the mainland will not enjoy a 0 percent tax rate for these branches.
  • Large free zone businesses that are foreign businesses will enjoy a zero percent tax rate only if they earn UAE-sourced income or have a permanent establishment in the UAE free zones. 

Are There Any Applicable Rates of CT?

Yes, there are rates that decide how much corporate tax a business needs to pay as per the new CT regime. According to the new corporate tax regime, a business whose annual taxable income does not exceed 375,000 AED will pay 0 percent corporate tax. However, a business whose annual taxable income exceeds 375,000 AED will pay 9 percent corporate tax.

Which Business Profit/Income will be subject to corporate tax?

The accounting net profit of a business, after certain adjustments have been made for certain items as will be stated in CT law of UAE will be subject to corporate tax.

Accounting net profit of a business is the amount that is reported in the financial statements that are prepared based on internationally accepted accounting practices.

Who Will Be the Government Authority Responsible for CT in UAE?

The administration, collection as well the compliance of the corporate tax in the UAE will be authorized by the Federal Tax Authority (FTA)

Conclusion:

The implementation of corporate tax is going to have a major impact on the way the large businesses operate, their structures as well as decisions on any future mergers and acquisitions in the UAE.

The objectives of implementing the corporate tax in UAE are clear- streamlining the existing tax system and ensure it in tandem with international best practices while also diversifying the UAE economy.

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