The term corporate tax is new in the UAE region. This is because the UAE implemented this new taxation for businesses on June 1, 2023. The primary idea behind this is to diversify the sources of income for the region. Thus, there will be more room for public expenditure. The standard rate of corporate tax is 9%; however, there are generally two slabs. For taxable income up to AED 375,000, the rate is 0%, while a 9% rate applies to income over AED 375,000. The lower taxation in the UAE is still very attractive for businesses from around the world. This is because of its global geographical position and attractive business policies. In this blog, we understand corporate tax for various entities in the UAE.
The Basics: Taxable Income
Some terms are specific to corporate tax. For instance, it applies to taxable income. So what is taxable income? Is it similar to the net income or profit before taxes of a business? Well, the answer is no. Taxable income, in simple words, is the business’s profit as per the tax laws. The businesses adjust accounting income for allowable deductions and exemptions per the tax laws.
Corporate Tax for Various Entities in the UAE
The general rules are the same for different entities; however, there are specific rules for certain businesses. Let’s now explain corporate tax for various entities in the UAE in light of corporate tax law.
Government Entity and Government-Controlled Entity
Generally, government and government-controlled entities are exempt from corporate tax. Therefore, the provisions of the tax law do not apply to these entities. However, these entities shall be subject to the provisions of the corporate tax if they conduct business or business activity under a license issued by the licensing authority. Furthermore, a business with a license from a licensing authority will be an independent dependent for corporate tax purposes. Therefore, the government entity or government-controlled entity shall keep separate financial statements for this independent business. There should be a separate calculation of taxable income for business or business activity for each tax period.
It is worth noting that transactions between the business and the other activities of government entities or mandated activities of government-controlled entities shall be treated as related party transactions. Therefore, related-party transactions are subject to the provisions of Article 34 of the tax law.
Extractive Business
A person is exempt from corporate tax for its extractive business if it satisfies the following conditions.
- The person holds, either directly or indirectly, an interest in a right, concession, or license granted by a local government for conducting an extractive business.
- The person is subject to taxation under the applicable laws of an Emirate, as stipulated in Clause 6 of Article 7.
- The person has notified the Ministry in the form and manner agreed upon with the local government.
If a person derives income from both an extractive business and any other business, the following shall apply.
a) The income resulting from the extractive business shall be subject to taxes per the applicable legislation of the Emirate.
b) The income resulting from the other business shall be subject to the provisions of the corporate tax law. Unless the other business meets the conditions to be exempt from corporate tax under Article 8 of the tax law.
Non-Extractive Natural Resource Business
A person is exempt from corporate tax for a non-extractive natural resource business if it satisfies the following conditions.
a) The person holds, either directly or indirectly, an interest in a right, concession, or license issued by a local government to conduct a non-extractive natural resource business in the state.
b) The person’s income from their non-extractive natural resource business is solely derived from individuals or entities engaged in a business or business activity.
c) The person is subject to taxation under the relevant legislation of an Emirate.
d) The person has submitted a notification to the Ministry in the agreed-upon form and manner with the local government.
If a person earns income from both a non-extractive natural resource business and any other business covered by the tax law, the following rules apply.
a) Income from the non-extractive natural resource business will be calculated and taxed according to the relevant Emirate legislation.
b) Income from the other business will be subject to this corporate tax unless the other business qualifies for an exemption from CT under Article 7 of the tax law.
Qualifying Public Benefit Entity
A qualifying public benefit entity shall be exempt from corporate tax if it satisfies all the following conditions.
a) It is established and operated for one or more of the following purposes:
- Exclusively for religious, charitable, scientific, artistic, cultural, athletic, educational, healthcare, environmental, humanitarian, animal protection, or other similar purposes.
- As a professional entity, chamber of commerce, or similar entity, it operated exclusively to promote social welfare or public benefit.
b) It does not engage in business activities, except those that directly relate to or aim to fulfill its established purpose.
c) Its income or assets are used exclusively to further the purpose for which it was established or to pay any necessary and reasonable expenses incurred.
d) None of its income or assets are payable to, or otherwise available for, the personal benefit of any shareholder, member, trustee, founder, or settlor who is not a qualifying public benefit entity, government entity, or government-controlled entity.
e) It meets any other conditions prescribed in a decision issued by the Cabinet at the suggestion of the Minister.
The exemption shall be effective from the beginning of the tax period in which the qualifying public benefit entity is listed in the Cabinet decision issued at the suggestion of the Minister or any other date determined by the Minister.
Qualifying Investment Fund
An investment fund can apply to the authority for exemption from corporate tax as a qualifying investment fund if it satisfies all the following conditions.
a) The investment fund or its manager is under the regulatory oversight of a competent authority in the state or a recognized foreign competent authority for this article.
b) Interests in the investment fund are traded on a recognized stock exchange or are marketed and made widely available to investors.
c) The primary purpose of the investment fund is not to avoid corporate tax.
d) It meets any other conditions specified in a decision issued by the Cabinet at the suggestion of the Minister.
To ensure ongoing compliance with the conditions, the Authority may request any relevant information or records within the prescribed timeline.
Conclusion:
The introduction of corporate tax in the UAE marks a significant shift in the region’s fiscal policy. The standard corporate tax rate is 9% while a 0% rate applies for taxable income up to AED 375,000. Thus UAE remains an attractive destination for businesses worldwide due to its strategic geographical location and favorable business policies. This blog outlines the basics of corporate tax and its application to various entities, including government entities, extractive and non-extractive natural resource businesses, qualifying public benefit entities, and qualifying investment funds. By understanding these rules and conditions, businesses and entities in the UAE can navigate the new tax landscape effectively.
Creative Zone Tax & Accounting (CZTA)
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