In a bold move that marks a departure from its zero-tax legacy, Dubai has decided to introduce corporate tax, setting the stage for significant changes in its business ecosystem. Starting June 2023, businesses face a 9% tax on profits exceeding AED 375,000. This is a decision aimed at aligning the UAE with global tax standards and ensuring a sustainable economic future. This strategic shift is not just about revenue; it’s about Dubai reinforcing its position as a responsible and forward-thinking player on the international stage. For businesses, this means adapting to a new fiscal reality, one where strategic planning and compliance will be key to leveraging the advantages of the UAE’s dynamic economy.
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This article aims to empower you with the right knowledge to sail through the corporate tax tides.
The Scope of the New Law and Taxable Entities Under the Law – Dubai Corporate Tax Regime
Wondering whether your business will be subject to taxation under the new law? Here’s a comprehensive look at the scope and the taxable entities under the law:
Uniform Application: The law is consistently applied across all Emirates, including Dubai, ensuring a coherent tax framework nationwide.
Resident Entities: Companies established in Dubai and anywhere in the UAE are taxed on global income, with provisions for free zone companies subject to specific conditions.
Non-Resident Entities: Those with a permanent establishment in the UAE or earning income within the country are subject to corporate tax like in Dubai, based on the extent of their local activities.
Corporate Tax Rates in UAE
The new corporate tax regime in the UAE subjects businesses to a standard tax rate of 9% on taxable income that exceeds a specified threshold. This threshold has been set at AED 375,000 which means that taxable income up to this amount will not be subject to corporate tax. This effectively applies a 0% rate to small and medium-sized enterprises (SMEs) and startups that don’t meet the taxable income criteria.
For large multinational corporations, the UAE has indicated the potential for a different tax rate, which aligns with the OECD’s Base Erosion and Profit Shifting (BEPS) Project, specifically under Pillar Two rules. These rules aim to ensure that large multinational enterprises pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. The specific criteria and the rate for large multinationals under the UAE corporate tax regime have not been fully detailed yet, but are expected to comply with the global minimum tax rate proposed by the OECD. Just for information, this rate currently is 15%. For a deeper understanding of how Tax Rates can impact your business operations, check out our detailed guide.
Exemptions and Incentives under Corporate Taxation in Dubai
The new corporate tax regime in Dubai and the UAE introduces specific exemptions and incentives tailored to support particular sectors and facilitate certain crucial business activities.
These exemptions are conditional, typically revolving around the nature of the transactions, the relationship between the entities involved, and the business rationale behind reorganizations.
Key conditions for exemptions include:
- Government and Controlled Entities: Specified by Cabinet Decisions, these entities are automatically exempt from corporate tax.
- Businesses in Natural Resources: Both extractive and non-extractive natural resource businesses may be exempt if they notify the Ministry of Finance and meet certain conditions.
- Public Benefit Entities: Entities contributing to the public good may be exempt if listed in a Cabinet Decision.
- Investment Funds: Public or private pension and social security funds, and qualifying investment funds, can be exempt if approved by the Federal Tax Authority, subject to specific conditions.
- Subsidiaries of Exempt Entities: UAE subsidiaries wholly owned and controlled by a government entity, investment fund, pension, or social security fund may also be exempt.
- Support for Corporate Structuring: Qualifying intra-group transactions and reorganizations are exempt, aimed at encouraging efficiency and growth within corporate groups by facilitating restructuring without the imposition of additional tax burdens.
Entities looking to benefit from these exemptions should carefully assess the conditions to ensure they align with the regime’s requirements. It may also be a good idea to seek expert guidance to navigate the complexities of the new tax landscape that is also continuously evolving.
Compliance and Enforcement of Corporate Tax in Dubai
The Emirates enforces strict adherence to corporate tax rules in all of the UAE. Penalties are in place alongside other legal provisions to ensure businesses operate within the UAE’s regulatory framework.
The Federal Tax Authority (FTA) is tasked with managing the tax system through registration and tax filings, collecting taxes to support fiscal policies, and enforcing tax laws through audits and penalties for non-compliance. It also plays a crucial role in Dubai’s corporate tax framework by offering guidance, clarifying tax obligations, and conducting awareness sessions for businesses. If your business needs assistance in staying compliant, consider Outsource Accounting Services to ensure expert handling of your accounting needs.
Tax Accounting Considerations under UAE’s Corporate Tax Regime
Below are the critical aspects you need to be mindful of when addressing tax accounting under the new UAE corporate tax law:
- Deferred Tax Assets and Liabilities: The enactment of the UAE Federal Corporate Tax Law necessitates businesses to assess deferred tax implications for reporting periods ending on or after January 16, 2023.
- Transitional Rules: The transitional provisions of the law provide that a taxable person’s opening balance sheet for corporate income tax purposes will generally align with the prior period’s closing accounting balance sheet. This simplification aids in the initial calculation of deferred taxes but requires careful consideration of any specific conditions or adjustments mandated by future Cabinet Decisions
- Potential Exemptions: Businesses need to carefully assess their eligibility for exemptions under the law, which may significantly impact their tax profile and deferred tax calculations. This is particularly relevant for Free Zone Entities, which may be subject to specific conditions to maintain their tax-exempt status.
- Key Adjustments: Companies must also consider various potential adjustments impacting their corporate tax profile and deferred tax calculations. These adjustments could relate to provisions, impairments, unrealized gains or losses, interest deductions, carry-forward tax losses, and tax group consolidation adjustments. Utilizing Online Bookkeeping Services can help streamline these processes and ensure accurate financial records.
Regularly consulting resources provided by the Ministry of Finance and the Federal Tax Authority is essential in staying informed about the latest guidance and requirements under the UAE corporate tax regime. Another option is to engage with a reputed tax organization operational in Dubai.
Conclusion
As businesses gear up for Dubai’s new corporate tax regime, it’s crucial to thoroughly assess their tax profiles, understand the nuances of applicable exemptions, and ensure that accurate documentation and reporting systems are in place. Embee NextGen stands ready to guide companies through this complex process, offering specialized services to streamline compliance and optimize tax strategies. For a seamless transition and strategic tax planning, consider partnering with Embee NextGen. Moreover, exploring Digital Transformation can significantly enhance compliance efforts and operational efficiency in the new tax landscape.