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An introduction to the UAE Corporate Tax (CT) law

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Staff Writer, TLR

Published on July 14, 2023, 17:41:00


UAE, Corporate Tax, Law, sectors , free zone companies

Corporate tax is a tax on the profit of the business not on the sale value. The UAE Corporate tax regime will become effective for financial years starting on or after 1 June 2023. For example, if your financial year is January to December, you will come under tax purview from January 2024. 

What is the difference between VAT and CT?

VAT is a consumption tax to be paid by the “Consumer”. VAT is collected from customers and paid to the Government. So. it is not a tax on your income. Whereas CT is to be paid only if you earn. So to summarize 
• VAT to be paid when you SPEND
• CT to be paid when you EARN

Applicability of Corporate Tax:

UAE CT will apply to all UAE businesses and commercial activities alike, except for the extraction of natural resources, which will remain subject to Emirate-level corporate taxation. All activities undertaken by a legal entity will be deemed “business activities” and hence be within the scope of UAE CT

Is CT applicable to foreign companies?

Yes. They are only applicable if they conduct a trade or business in the UAE in an ongoing or regular manner.

Is it applicable to Individuals?

Not applicable to individuals who 
 Are earning Salaries
 earn dividends, capital gains, income from shares, etc.
 who invest in real estate in their individual capacity

Any business sector is exempted from Corporate Tax?

Businesses engaged in the extraction of natural resources will remain subject to Emirate level corporate taxation and be outside the scope of the UAE CT.

Rate of Corporate Tax:

The CT rates are calculated on Adjusted profits and are as follows.
• 0% for taxable income up to AED 375,000 (Net profit)
• 9% for taxable income above AED 375,000; and 
a different tax rate for large multinationals that meet specific criteria set with reference to 'Pillar Two' of the OECD Base Erosion and Profit Shifting project

How Adjusted Profits are calculated?

Profit for the purpose of Corporate Tax is, as reported in the financial statements, that are prepared in accordance with Internationally accepted accounting standards.
Many clarifications are awaited from the government. However, typically the following adjustments are made in any Tax regime (illustrative purpose only)
1. Shareholder’s/Partner’s salaries & benefits (beyond limits if any set by the government) 
2. Certain entertainment expenses
3. Deprecation expenses beyond eligible rates
4. Expenses not incurred but provisions made (for example, provision for Bad debts)

What if there is a loss?

The businesses are allowed to carry forward the losses and setoff against subsequent year’s profits

Tax for free zone companies

Free zones that do not conduct business with Mainland are exempt from tax (including Financial free zones). It means Free zones that conduct business with the mainland will be subject to tax.
Free zones companies that are exempt from tax, are also required to register and file the returns
If a free zone conducts business partly with mainland companies and partly within the free zone, is the income taxed proportionately?  Clarification is awaited on this point. 

Do we have a lot of time to prepare ourselves?

It is to be noted any review of financial performance or results are compared with earlier periods. Any significant variations from earlier years may draw the attention of authorities and may result in investigations or scrutiny. Any unexplained entries may be treated as income by authorities. There will be a requirement to file returns annually and it is the responsibility to ensure the accuracy, truth, and fairness of declared figures. 

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