01 September 2023
The implementation of this tax scheme not only increases governmental revenues but also decreases dependence on oil-derived income.
The motivation for implementing a corporation tax in the UAE goes beyond simple revenue generating. This transformation serves as a pivotal mechanism to facilitate the country's transition from a hydrocarbon-centric economy to a multifaceted one. The UAE government is laying the groundwork for a more sustainable economic future by encouraging technical developments and embracing innovation. Corporate taxation establishes a solid platform for diversifying revenue streams and limiting sensitivity to swings in oil prices.
The newly implemented corporate tax covers a wide range of commercial and business activities throughout the UAE. There are, however, several exceptions:
Free Zone Enterprises: Businesses operating in free zones are exempt from federal taxes, retaining their competitive advantage and attraction to overseas investors.
Natural Resource Extraction: Natural resource extraction entities are subject to the tax requirements established by the individual emirates.
Individual Earnings: Personal earnings, including salaries and investment gains, remain exempt from corporate tax obligations.
Additional exemptions available under the corporation tax regime include:
Intra-Group Transactions: Profits derived from intra-corporate transactions are exempt.
Group Re-organization: Profits resulting from group re-organization are not subject to corporate tax.
Dividend Income: Dividends received from both UAE and overseas corporations are tax-free.
Corporate Tax Rates: The following tax rates are proposed under the new corporation tax framework:
0% Tax Rate: For taxable income up to AED 375,000.
9% Tax Rate: is levied on taxable income in excess of AED 375,000.
MNEs that come under Pillar 2 of the BEPS 2.0 framework will follow the OECD Base Erosion and Profit-Sharing Rules as prescribed by competent authorities.
Value Added Tax (VAT), unlike corporation tax, is a consumption-based fee centered on the consumption of goods and services. VAT, which has been adopted by over 150 countries worldwide, was implemented in the UAE on January 1, 2018. VAT is a ubiquitous consumption tax applied at 5% on the majority of goods and service transactions.
Certain industries and activities are VAT-free:
Financial Services: Certain financial services are exempt, as specified in the VAT legislation.
Residential Properties: The supply of residential properties is exempt from VAT.
Bare Land: Transactions involving bare land are VAT-exempt.
Local Passenger Transport: Local passenger transport services are exempt from VAT.
There are some key distinctions between corporate tax and VAT:
The nature of the tax: Profit is the focus of corporate taxation, whereas consumption is the focus of VAT.
Payment and Taxpayer: Corporate tax is carried out and paid by businesses. VAT, on the other hand, is borne by the final consumers of products and services.
Calculation: VAT entails cumulative value addition at each stage of manufacturing, whereas corporate tax is computed on earnings.
Filing and Payment: Companies file and pay corporate earnings taxes, whereas VAT-registered entities collect and remit VAT to the appropriate authority.
The implementation of Value Added Tax (VAT) and Corporate Tax (CT) in the UAE resulted in significant changes in the corporate landscape. While VAT was the UAE's first comprehensive corporate tax, Corporate Tax quickly followed, with its own set of characteristics.
The implementation of VAT was an important moment in the UAE's tax structure. VAT, unlike previous taxes on oil, gas and banking, had a broad influence on the whole business community.
Understanding and Impact: Businesses struggled to understand the implications of VAT and its impact on their operations.
Behavioral Change: Because VAT was a novel concept, it required a behavioral shift from businesses to people who were not used to paying taxes.
The establishment of corporate tax, on the other hand, profited from an atmosphere in which the concept of taxes was already familiar. Businesses had learned the value of compliance, precise record-keeping, and openness, easing the transition to a new tax framework.
Short vs. Long Duration: VAT implementation was swift, with the announcement in late 2016 and the legislation released in October/November 2017. Businesses had only one month to comprehend the new law and make any necessary changes.
Implementation of Corporate Taxation: In comparison, the timing for corporate taxation varied greatly. The announcement came far sooner than expected, and the primary statute was passed by December 2022. Businesses had a longer period to research the law and assure compliance, beginning with fiscal years beginning on or after June 1, 2023. This extended timescale is especially beneficial to businesses with calendar year finishes.
The Widespread Impact of VAT: VAT spreads a broad net, affecting a wide range of industries, including both products and services. Businesses had to assess their operations, determine whether VAT was applicable, and modify their pricing, invoicing, and accounting processes.
Targeted Impact of Corporate Tax: On the contrary, the corporation tax is more detailed, focusing on a company's income and financial statements. It has a noticeably narrower impact than VAT.
VAT's Administrative Challenges:
VAT's implementation imposed substantial administrative burdens, especially in its initial stages. Businesses set aside funds for VAT returns, employee training, and new accounting and reporting systems. Ongoing compliance duties, such as the prompt filing and payment of VAT returns by accounting firms in UAE, increased the administrative burden.
While corporation tax requires rigorous tax planning and reporting, it may not have the same amount of continuing administrative complexity as VAT. Corporate tax has a lower day-to-day administrative load because there are no interim payments and only one annual filing nine months after the fiscal year ends.
A thorough understanding of the UAE's various tax systems is required for efficient corporate operations. Corporate taxes are aimed at profit, whereas value-added taxes are aimed at consumer use of products and services. This shift in the UAE's tax structure reflects a strategic shift towards economic diversification, increasing state income, and putting the country on a path of continuous prosperity and innovation.