Corporate Income Tax (CIT), also known as “Business Profits Tax” or abbreviated as CT (Corporate Tax), is an all-inclusive tax policy applicable to the income or profits of all corporations and legal business entities.
Recently this year, on 31st January, the MoF (Ministry of Finance) of UAE declared the regular implementation of a new regime of the corporate income tax system that will be effective for financial years starting on 1st June 2023 or later and supervised by FTA UAE (Federal Tax Authority) who will look after its administration and ensure collection.
If the company tends to adopt a fiscal year from 1 June 2023 to 31 May 2024, it would be subjected to corporate income tax beginning 1 June 2023 with the probability of the first tax return filing due towards late 2024. On the contrary, if the company opts for a fiscal year from 1 January 2023 to 31 December 2023, it would be subjected to corporate income tax beginning 1 January 2024 with the probability of the first corporate income tax filing (return) due towards mid-2025.
The Objective of Enforcement of UAE CIT
The Undersecretary of MoF, Younis Haji Al Khoori, stated, “the certainty of a competitive and best-in-class corporate tax regime, together with the UAE’s extensive double tax treaty network, will cement the UAE’s position as a world-leading hub for business and investment.”
The primary purpose of UAE CT is to get rid of harmful tax practices and put unjust tax collection to an end, along with guaranteeing international tax transparency. The corporate tax system is designed to implement best practices and stay committed to legal tax standards worldwide.
It also aims to reduce the compliance burden on industries as you will not be wasting efforts on comprehensive preparation and maintenance of updated financial statements.
Important Features to Remember
- Revenues earned from legal business activities carried out under a valid commercial license within the seven emirates are subjected to corporate tax and income tax.
- Individuals buying properties(real estate) for personal use without a business permit will not be paying CT.
- No due/unpaid tax will be collected, whether it is on the domestic level or international.
- The updated federal CIT regime is 100% applicable to banking operations in the UAE; however, every branch of foreign banks has already been subjected to a CT on an Emirate level.
- CT permits tax grouping and group relief programs– compensating tax losses among groups may be acceptable, but UAE Groups must be capable of filing consolidated tax returns.
- The necessity of documentation along with transfer pricing instructions will be implemented considering the OECD transfer pricing guiding principle.
- The CT system has mentioned some exemptions and adjustments for taxable/accounting profits.
- Upon meeting specific requirements, companies are allowed to carry forward excessive tax losses and make them used against future payable income.
- It will minimize the compliance obligations, leaving a single corporate tax return required to be filed without any constraint to pay an advance or interim payment of CT.
- A unilateral foreign tax credit will be obtainable to set domestic corporate tax liability against foreign income.
Lowest Corporate Income Tax Rates | UAE Tax Rate
One of the most significant advantages of UAE CT is that it levies the minimum rate within the region, excluding Bahrain. A tier system comprising 3 rates is:
- ZERO (0%)rate (zero corporate tax) for annual taxable profits under AED 375,000
- NINE (9%)rate for annual taxable profits more than AED 375,000
- Different CT rates for large-scale, multinational companies who successfully meet the demands/standards set under ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting initiative (BEPS) 2.0 framework.
CIT in Free Zones
Every start-up and well-established business registered in the UAE free zone is subjected to corporate tax. The company will be eligible for corporate tax incentives if it stays fully compliant with all the governing requirements and keeps itself from settling business in the mainland.
- Certain types of income are exempted from the corporate tax system:
- Revenues are generated from foreign business investors or shareholdings through dividends, capital gains, royalties, interest, or any other investment return.
- Income earned from natural resource extraction.
- Foreign entity or individual who is not currently involved in any kind of trade or business activities within UAE regularly.
- Individuals with employment salaries, no commercial license (governmental or private sector), and no income-generating activity.
- Upon fulfilling specific requirements, intragroup transactions and reorganizations are exempted.
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