Recently, the UAE authorities announced the implementation of corporate tax on June 1, 2023. This law states that a taxable business or individual will be imposed with a 9% corporate tax from the onset of their first financial year, starting on or after June 1, 2023. This brand-new policy created a buzz among tax professionals and companies. The UAE is now the 4th nation among the GCC countries to implement the federal corporate tax.
The introduction of the tax strives to further solidify the UAE’s position as a top-notch investment and commercial hub. It will also boost the clever aim of transformation and development. Moreover, the income tax in Dubai 2023 fulfills the global standards for tax transparency and prevents harmful tax practices.
Under the new regime, companies will be labeled as exempt, taxable, or qualifying free zone persons. Plus, they must assess which category they belong to and register for corporate tax accordingly. Some exempt entities must still apply and obtain approval.
Below, we will go over these three groups and how they are influenced by the new corporate tax regime.
Qualifying Free Zone Person (QFZP)
This individual should fulfill the below conditions to take advantage of the 0% Corporate Tax rate:
- Obeys the transfer pricing provisions as applicable.
- Maintain sufficient substance in the country.
- Has not elected to be imposed with the 9% corporate tax rate.
- Obtains qualifying income (to be mentioned in a cabinet decision yet to be determined)
The qualifying free zone people that meet the above conditions will have to pay tax at these rates:
- 9% on taxable income that does not fulfill the qualifying income definition
- 0% on qualifying income
Taxable Persons can be either non-resident or resident people. A non-resident individual has a nexus in the state, according to the Cabinet Decision. On the other hand, residents are legal individuals known in the state, including a person from foreign jurisdiction or a free zone person that is controlled in the state. Residents are also free to operate a business in the state. A branch in the state of a person is treated as one and the same taxable individual.
Some exclusions are automatically made through an application or cabinet decision, as follows:
Exempt, if allowed by the Federal Tax Authority:
- Completely owned and monitored UAE subsidiaries of exempt individuals
- Qualifying investment funds
- Private or public social security and pension funds.
- If listed in a future Cabinet Decision: Qualifying Public Benefit Entities.
- Government-monitored entities and government entities to be mentioned in a cabinet decision.
- Exempt after being notified by the UAE Ministry of Finance for non-extractive and extractive natural resource businesses.
The income tax in Dubai 2023 is calculated at 9% of the net profit showcased in the business’s financial statements. The flat 9% corporate tax rate is only imposed if the taxable net profit goes beyond AED 375,000. Simply put, the net profit up to this income threshold is taxed at 0%.
Incomes and Businesses that are Beyond the Scope of Corporate Tax:
As per the profit threshold of AED 3,75,000, any company that generates more profit will have to pay corporate tax. But specific categories of income or business are excluded from this rate. Here is a list of businesses or incomes that will not pay the corporate tax:
- Not applicable to qualifying restructurings or intragroup transactions.
- People are not subject to the tax. Resultantly, any income from investment in shares, real estate, employment, or any other personal income not related to Emirati business or trade will be excluded from the tax.
- Dividends and capital gains gained from the UAE companies from the qualifying shareholdings are excluded from the tax.
- Corporate tax is not applicable to international investors who do not operate a UAE business.
- Corporate tax incentives are presently being given to free zone companies that follow all regulatory requirements.
As the UAE introduces corporate tax in 2023, understanding its implications for different entities is vital. From qualifying free zone individuals to taxable persons and exemptions, staying informed is key to exploring this evolving business environment. Adopting these changes equips individuals and businesses to seize opportunities and succeed within the UAE’s new tax framework.