impacts of corporate tax in the UAE
The UAE has recently introduced a new system of corporate tax. Both domestic and foreign businesses operating in the Emirates are liable to pay tax on their net profits every year. This will be applicable from the financial year beginning on or after June 01, 2023. The standard rate of corporate tax is 9%. However, the businesses do not pay any tax on net profits up to AED 375,000.
The taxable profits are computed after the deduction of all eligible expenses from gross profits. So the new tax regime makes it critical for businesses to focus on efficient tax planning to minimize the impacts of corporate tax in the UAE. Read on to gain better insights into the impacts of these tax reforms.
How Does Corporate Tax Affect the UAE?
The latest changes are aimed at aligning the country’s tax system with international best practices and accelerating economic growth. It will have far-reaching implications for various businesses in the UAE and the overall economy. Let’s explore the impacts of UAE corporate taxation in greater detail.
- Companies now have to pay a 9% tax on net profits exceeding AED 375,000. This is a mandatory requirement under the law and must be paid on or before the due dates every year. This short-term liability can adversely affect their working capital position. So businesses should clearly assess the impact of corporate taxes on their finances while preparing the annual budget. This would help them earmark the cash required for normal business operations
- The corporate tax rate of 9% is among the lowest in the world. The 0% tax on profits up to AED 375,000 is an attractive incentive for startups and small businesses to set up shop in the UAE
- The alignment of the tax year with the company’s financial year depends on the relevant due dates to submit the tax returns. The details shall be prescribed under the law and businesses are expected to follow the same
- Business groups operating in the UAE can now opt for single-tier tax registration. The losses of various companies can be adjusted at the group level to arrive at the consolidated net income. There is no need to compute and pay taxes for individual companies.
- Companies can carry forward their losses (if any) and set them off against future profits. This ensures that the corporate tax system is equitable and does not impose any burden on loss-making entities
- The shareholders may pass on the impact of corporate tax to their end-users in a bid to protect their profit margins. Any hike in prices may adversely affect the purchasing power of consumers and short-term demand for goods & services
- The new corporate tax system entails additional costs toward implementation, training, and legal compliance. Tax professionals are expected to be in great demand as businesses try to minimize their tax liabilities through suitable tax-planning measures
- Companies will have to evaluate their accounting systems & processes and update them to meet the compliance requirements under the new tax regime
- Companies need to get their annual financial statements audited on time. These statements are prepared in accordance with international standards and form the basis for the computation of profits. Free Zone Persons are also required to have their audited financial statements to get the benefit of 0% corporate tax
- Businesses that come under the purview of corporate tax must register with the UAE Federal Tax Authority and obtain a tax registration number. The tax returns must be filed within 9 months from the end of the relevant period. Proper records that support the information provided in the tax return should be maintained
- Foreign Direct Investment (FDI) in the UAE will not have a major impact due to the introduction of corporate tax. The 9% tax rate is highly competitive as compared to other countries. The UAE also has several double-taxation treaties with other countries to allow the repatriation of profits without suffering multiple taxation. The country will continue to attract investors as dividends and capital gains shall not be subject to tax
- Corporate tax helps the UAE government to reduce its dependence on oil and diversify its revenues to other strategic sectors. This in turn helps to stabilize public finances and boost the region’s infrastructure development
Because of these reasons, it is recommended to hire an experienced TAX consultant in UAE, for your company's TAX activities.
The introduction of corporate tax is a landmark decision by the government. The competitive tax structure, incentives, and exemptions provide a favorable business climate for local & foreign investors. The impact of corporate tax in the UAE is quite significant for the growing economy. It strengthens corporate governance standards, improves transparency, prevents adverse tax practices, stabilizes public finances, and enables long-term sustainable economic growth.