The Ministry of Finance has announced that a federal corporate tax of 9% will be applicable on all business profits above AED 375,000 with effect from 1st June 2023.
The new corporate tax will be applicable for the every financial year starting from the date announced by the Ministry of Finance. To make it easy for onshore businesses, only one corporate tax return is required to be filed at the end of every financial year. They will not be required to make any advance tax payments or file any provisional corporate tax returns.
For companies that are part of a Group of Companies, the law allows the Group to be taxed as a single taxable entity, after calculation of all losses across Group companies. This is expected to lessen the tax burden on profit-making entities that are part of the Group, as well as make corporate tax calculations easier in light of transactions within the same Group.
The corporate tax applies to all business activities, except the extraction of natural resources, which is subject to Emirate-level taxation.
Companies in free zones have been exempt from the corporate tax requirement, but this does not extend to business done with entities on the mainland. In other words, the profits on business done with companies in the same free zone or other free zones as well as international business will not be subject to corporate tax. This means that free zone companies will have to record their profits separately in accordance with international financial reporting standards.
The new corporate tax regime exempts profits of up to AED 375,000 in a bid to support startups and small businesses. It has been clarified that the corporate tax does not apply to personal income from investments and real estate, as well the income earned from employment. No corporate tax is payable on dividends received from shares in companies, whether located in the United Arab Emirates or overseas.
His Excellency Younis Haji Al Khoori, the UnderSecretary of the Ministry of Finance, believes that the introduction of the corporate tax regime will further strengthen the United Arab Emirates as a preferred destination for trade and investment.
The United Arab Emirates currently has Double Taxation Avoidance Agreements with 137 countries around the world. Taxes paid by multinational companies will be allowed to be credited against corporate tax payable in the United Arab Emirates. This move provides an incentive to foreign companies looking to expand to the Middle East to set up their base in the United Arab Emirates.
Even after the introduction of corporate tax, the tax rate in the United Arab Emirates remains one of the lowest in the world. The average corporate tax rate across 180 jurisdictions worldwide has been determined to be 25.34% with Comoros levying the highest corporate tax rate of 50%. The second and third highest corporate tax rates in the world are Puerto Rico and Suriname, with 37.5% and 36% respectively.
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