For the first time in history, UAE to levy from Corporate TAX 2023

After the 50th year of commemoration, the UAE has taken a significant historic step toward aligning with worldwide norms and practices for openness, ensuring that the nation remains a commercial magnet. The United Arab Emirates (UAE) has always been recognized as a tax-free destination for businesses. This is poised to transform with the announcement by the Ministry of Finance (MOF) that the UAE would establish a federal corporate income tax effective for financial years beginning on or after June 1, 2023.

In order to help small firms and startups, the new tax system includes a basic statutory tax rate of 9%, as well as a 0% rate for taxable earnings up to 375,000 dirhams. The shift to a 9% tax is in accordance with the country’s goal to expand budget sources and minimize dependence on oil, which has been the economy’s foundation for years. According to analysts, the decision would lay the basis for the formation of a worldwide minimum tax rate, which would impose a separate corporate tax rate to huge multinational corporations that satisfy certain conditions.

The following are the major insights from the proposed business tax structure:

1. Protection

  • Any business conducted by a legal entity
  • Activities are performed under the framework of a freelancing license/permit
  • Individuals with a commercial license who earn money from their business

2. Exemptions

  • Natural resource extraction companies and commercial activities
  • Individuals’ earnings are based on their salary or work income
  • On domestic and cross-border payments, there will be no withholding taxes
  • Dividends, capital gains, and other income produced by individuals who hold shares or other securities in their personal capacity
  • Dividends and capital gains generated by a UAE company’s qualifying shareholdings
  • Intra-group transactions and reorganizations that qualify
  • Individuals’ interest and other income from bank accounts or savings plans

3. Free zones

  • Businesses in free zones that do not conduct business onshore continue to receive tax breaks

4. Foreign Persons

  • Foreign businesses and individuals will be liable for corporate tax only if they undertake continuing or regular trade or business in the UAE
  • Furthermore, a foreign investor’s dividends, capital gains, interest, royalties, and other investment returns will not be subject to corporate tax

Facing Issues

The announcement comes as the global monetary protector ‘financial action task force’ in Paris considers whether to add the UAE to a “grey list” of nations that aren’t pushing any action to tackle money laundering and terrorism funding. Furthermore, the decision comes in the face of increasing rivalry from Saudi Arabia, which has been giving fresh benefits and increasing pressure on foreign companies to relocate their Arab World operations to the kingdom.

Conclusion

During the pandemic, the government took a number of significant steps to entice expats, who make up the bulk of the country’s population, to stay in the country indefinitely. Without a doubt, the introduction of a corporation tax for all enterprises in the UAE is a major tax reform in the UAE’s tax code. It is a positive gesture by the UAE Ministry of Finance to give taxpayers enough time to prepare for the new corporate tax structure before it comes into force.

Furthermore, international corporations with intra-group transactions must re-evaluate their current pricing policy to ensure that it complies with the standards. While additional insight from the tax administration is awaited, firms operating in the UAE should begin strategically evaluating the influence of corporate tax and transfer pricing on their operations.

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