With the onset of 2023, the corporate tax regime in the United Arab Emirates (UAE) has witnessed a significant evolution, primarily directed towards mainland companies. The amendments in the tax policies have introduced fresh opportunities and challenges for businesses operating in the region. This piece aims to delve into the nuances of the UAE corporate tax for mainland companies and guide entrepreneurs through the new terrain.
Understanding the UAE Corporate Tax
Corporations in the UAE face a mandatory fiscal duty, the corporate tax on profits. Notably, there’s no federal corporate tax system in the UAE, providing a tax-exempt environment for companies. This significantly shapes the business landscape, creating a favorable atmosphere for operations.
The Pre-2018 Tax Scenario
Historically, the UAE did not impose a corporate tax, providing a tax-free haven for businesses. This tax exemption was a significant factor making the UAE a desirable destination for companies worldwide. However, a decline in oil revenues prompted the government to introduce a value-added tax (VAT) in 2018, signaling the first shift in the UAE’s tax landscape.
Introduction of VAT in 2018
The implementation of VAT marked a crucial transformation in the UAE’s fiscal policy. Initiated in 2018, the VAT was applicable to all businesses, including those functioning in the free zones. Applying to most goods and services at a standard rate of 5%, the VAT played a pivotal role in diversifying the UAE’s income sources.
The Shift Towards Corporate Tax
In 2023, the UAE government announced a new corporate tax regime, marking another significant stride in the region’s tax landscape. According to this new system, mainland companies with a specific annual profit will be liable to pay corporate taxes. This taxation system aims to generate substantial revenue for the country and establish an equitable business terrain between local businesses and multinational corporations operating within the UAE.
Tax Exemptions: Who’s Excluded?
Even with the implementation of a new corporate tax system, the Ministry of Finance (MOF) has specified exemptions for certain entities. If your mainland venture falls under one of these exemptions, you won’t need to file a tax report or pay taxes.
Entities Exempt from Corporate Tax:
Government and Public Entities: These organizations are exempt from the new corporate tax requirements.
Charitable Organizations: Registered social or charity organizations can be exempt from corporate tax if they obtain clearance from the relevant authorities.
Mining Businesses: Companies involved in extracting or mining natural resources within the UAE are not required to file separate corporate tax reports.
Regulated Investment Funds: Real estate and other regulated investment funds can apply for exemptions from corporate tax.
Social Funds: Public and regulated private entities that manage social benefit funds are also eligible for tax exemptions.
Entities with Special Permission: UAE companies wholly owned by the UAE government and listed with a ministry-level decision for tax exemption are also exempt from the new corporate tax regime.
The Concept of Mainland Companies
The UAE’s corporate tax, a mandatory charge on company profits, is crucial for businesses in the region. Yet, the absence of a federal corporate tax system in the UAE means corporations enjoy a tax-exempt status. This significantly shapes the business environment, creating a favorable climate for operations.
Staying Compliant with Corporate Tax for Mainland Companies
Mainland companies in the UAE must stay abreast of their tax obligations to ensure compliance and evade legal repercussions.Failure to pay taxes may lead to a six-month jail term and an AED 100,000 fine. Starting June 1, 2023, mainland businesses will face a 9% corporate tax on profits.
How Are Free Zone Businesses Affected?
The UAE government’s commitment to fostering a business-friendly climate with reduced taxation for free zones continues even with the introduction of the new corporate tax regime in 2023. Although technically subject to taxation due to the new rules, free zone businesses will be set at a 0% tax rate, thereby maintaining a tax-free environment.
Calculating Corporate Tax for Mainland Companies
The Ministry of Finance (MOF), the regulatory body for UAE corporate tax, has established a tiered taxation policy for mainland companies. This policy considers a company’s net yearly profit as taxable income to determine the appropriate tax rate.
Tax Calculation Tiers:
Businesses with Net Yearly Profits up to AED 375,000: These companies will be subject to a 0% tax rate.
Businesses with Yearly Net Profit Above AED 375,000: These companies will be subjected to a 9% tax rate on the amount over AED 375,000.
Large Multinational Companies: Companies with a total global revenue exceeding EUR 750 million will be subject to a separate taxation policy under ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting (BEPS) project.
Tax Deductible Expenses
When preparing their corporate tax returns, mainland companies in the UAE must be mindful of the expenses that can be deducted for tax purposes and those that cannot.
How to File Corporate Tax for Mainland Companies
The process of corporate tax filing for mainland companies in the UAE depends on how businesses report their financial year. Following the end of a financial year, companies have nine months to file their taxes and financial reports with the Federal Tax Authority (FTA).
Staying Competitive with Corporate Tax
Notably, the UAE’s 9% corporate tax rate is lower than many regional rivals, enhancing its appeal to businesses. With informed planning and early preparation, companies can flourish in this dynamic setting.
Final Thoughts on UAE Corporate Tax
The key to navigating the new landscape of UAE corporate tax for mainland companies lies in early preparation. Minimising liabilities and ensuring compliance are top priorities. As the UAE’s corporate tax landscape evolves, having a trusted partner to assist with tax consultation, registration, and filing, can prove essential.
Key takeaway: Early preparation is vital for compliance and competitiveness in the UAE’s new corporate tax landscape. While navigating this ever-changing terrain, minimising liabilities becomes a top priority.
As the UAE’s corporate tax landscape evolves, having a trusted partner is essential. It provides full professional support in tax consultation, registration, and filing, helping your business remain compliant and competitive. Additionally, It also offers expertise in UAE business setup, helping launch and grow your company.
Reach out to GloBridge’s expert team today for guidance through the UAE’s corporate tax regime, both confidently and efficiently.