The United Arab Emirates (UAE) has proposed implementing a corporate tax regime with a standard rate of 9% beginning in June 2023. The UAE Minister of Finance made the proposal during the country’s annual budget announcement. The implementation of a corporate tax regime is consistent with the UAE’s commitment to increase competitiveness and attract more foreign investment. It is also expected to bring in more revenue for the government.
The new corporate tax regime will apply to all businesses in the UAE, including those that are currently tax-exempt.
The proposed corporate tax rate of 9% is significantly lower than rates in neighboring countries like Saudi Arabia (20%), Qatar (10%), and Kuwait (15%).
The Federal Tax Authority (FTA) of the United Arab Emirates (UAE) has issued a guidance document on corporate taxation in the UAE. With a few exceptions and adjustments, the guidance applies to all taxable corporations in the UAE.
Corporate taxable income will be calculated using accounting net profit from financial statements, with certain adjustments. The FTA has provided a list of items that will be tax-free as well as a list of allowable deductions.
The guidance also clarifies how other jurisdictions’ taxes on income earned by UAE-based corporations are treated. The guidance’s overall goal is to create a more consistent and transparent taxation system for corporate entities in the UAE.
Tax potential losses after the new regime went into effect can be carried forward to subsequent fiscal periods, up to a maximum of 75% of the taxable income in the subsequent period.
Impact Study of Corporate Tax in UAE
The corporate tax debate in the UAE has been ongoing for some time. Some experts believe it will benefit the economy, while others believe it will harm it. Here is an examination of both sides of the debate.
Proponents of the corporate tax argue that it will increase government revenue. This can then be used to fund infrastructure and social services. It can also hold businesses accountable and help to level the playing field.
Opponents of the corporate tax, on the other hand, argue that it will make doing business in the UAE less appealing and may lead to companies leaving the country. They also believe it will place an additional burden on small businesses and stifle entrepreneurship.
The effects of CT in the UAE have become the talk of the town, and we will go over this topic in depth.
Cross-Functional Impact on a Business
The initial implementation of the new tax system would undoubtedly necessitate a shift in any business’s tax and finance mentality. From now on, it will be critical to examine every transaction and book-entry through the lens of CT.
The new CT regime would have a significant impact on how businesses operate, not only in terms of tax implications, but also on the overall finance supply chain, IT functions, and legal functions.
The CT regime’s main goal is to level the playing field for businesses by ensuring that all businesses are taxed fairly and equally. This would imply that businesses would need to rethink their overall strategy to ensure compliance with the new rules.
Furthermore, the CT regime would have an impact on how businesses manage their finances and supply chains. Businesses, for example, would need to ensure that their financial systems are up to date and capable of meeting the new requirements, as well as that their supply chains are capable of meeting the demands of the new regime.
It is likely that the UAE government will ensure that some of the best tax technology-related practices from other countries, such as e-audits, e-compliance, e-assessments, and e-invoicing, are implemented from the start of the tax regime.
The Impact on the Cost of Doing Business in the UAE
With the exception of companies based in free zones that do not do business with the Mainland, the new headline CT rate in the UAE is 9% for companies earning more than 375,000 UAE dirham ($102,000) in taxable income. A different rate will be made public separately for businesses subject to the OECD’s Pillar Two reforms, namely multinational enterprises (MNEs) with global consolidated revenues exceeding 750 million euros ($795 million).
Doing business in the United Arab Emirates (UAE) has long been a source of contention. According to a recent World Bank study, the UAE is the second most expensive country in which to do business, trailing only Switzerland.
According to the study, the cost of establishing a new business in the UAE is nearly twice as high as it is in developed countries such as the United States and Canada. In addition, the cost of doing business in the UAE is significantly higher than in developed countries.
Although the corporate tax rate is low in comparison to other countries in the region, it still represents a cost increase for businesses operating in the UAE. These taxes have a disproportionate impact on small and medium-sized enterprises (SMEs), which account for a sizable portion of the country’s businesses.
The introduction of corporate taxes has increased the cost of doing business in the UAE.
Impact on Individual Entity
How can you tell if someone has a “business” that is subject to UAE CT?
In most cases, this would be accomplished by mentioning whether the individual in question possesses (or is required to obtain) a business license or permit in the UAE to engage in the relevant commercial, industrial, and/or professional activity.
If a person has or is required to have a business license or permit, they are treated the same as legal entities engaged in the same activities. Furthermore, it appears that an activity is not considered a business if no business license or permit is required or held.
This sentence clearly states that dividends, capital gains, and other types of income are not subject to CT. However, Corporate Tax in the UAE can have an indirect impact on individuals.
The UAE is set to implement a corporate tax on profits beginning next year, and while businesses will bear the brunt of the burden, it will have an indirect impact on individuals as well. Here’s how it’s done:
- The cost of doing business in the UAE is expected to rise as companies pass on the cost of corporate tax to customers through higher prices. This will exacerbate inflation, which is already on the rise.
- The imposition of a corporate tax may also make the UAE less appealing to foreign investors, resulting in slower economic growth and fewer job opportunities. This would affect both Emiratis and ex-pats.
So, while you may not be directly affected by the corporate tax, it will have an impact on your wallet and lifestyle.
Note From Reyson Badger
The impact of this new regime has been hotly debated. Some argue that it will benefit the economy as a whole, while others argue that it will harm businesses.
The impact of the UAE Corporate Tax regime, on the other hand, will be positive for everyone because it levels the playing field between businesses, and the new changes in the tax system will bring more jobs and investment to the country. The corporate tax rate will be reduced to 9%, attracting more businesses to establish operations in the UAE. The government also intends to exempt foreign investors from paying profits taxes. This will entice more companies to invest in the UAE. The new tax regime will also encourage businesses to expand and create more jobs.