In 2023, the United Arab Emirates (UAE) enacted a corporate tax law that applies a tax rate of 9% on corporate entities in the country. This step is a significant departure from the previous scenario where the UAE was widely recognized as a tax-free jurisdiction for corporations, except for foreign banks and oil and gas companies.
The corporate tax is levied on a company’s net taxable income, which includes income from both within and outside the UAE for resident persons. The calculation of net income involves the total revenue earned in a fiscal year, deducting therefrom allowable costs, expenses, and certain specified deductions.
The taxable base isn’t just confined to the core revenue generated. It also considers income from other sources, including but not limited to profits from sale of assets, interest income, rent, royalties, and other forms of income. However, it’s worth noting that the tax law offers specific provisions related to foreign branch income and the formation of tax groups, which can impact a company’s overall tax liability.
One of the key aspects of the law is that it recognizes ‘tax groups’. These are groups of companies, where one is at least 95% directly or indirectly owned by the other company, that are treated as a single taxpayer subject to the approval of the Federal Tax Authority. This aspect of the law provides an opportunity for large corporate groups to consolidate their profits and losses across different entities, potentially reducing their overall tax liability.
The new tax law, however, does not have a one-size-fit-all approach. Certain entities like free zone companies, government bodies, non-profit organizations, and qualifying investment funds are dealt with differently. Moreover, it does not supersede the specific arrangements related to oil and gas exploration companies, which continue to operate under the earlier provisions of emirate-level tax and are considered exempt from the newly elected UAE Corporate Tax Law.
The implementation of the corporate tax in the UAE is a significant shift in the nation’s fiscal policy and has widespread implications for businesses operating in the region. It underscores the importance of sound tax planning and management to ensure compliance and to optimize tax liability.
This is a general overview of the UAE Corporate Tax Law, and for a more detailed, company-specific understanding, professional tax advice should be sought. You can search anything about the UAE Corporate Tax Law on www.TaxBox.ae.