UAE Corporate Tax Law on International Businesses

UAE, as a global hub, has often attracted big-time opportunities for both local and well as foreign investors. The introduction of the latest UAE corporate tax law has brought about a noticeable impact on international businesses. The recently introduced corporate tax law, also known as federal corporate tax, applies to individuals as well as mid-scale or large businesses owning commercial licenses in the country. Other than the mainland, the free zones are also within the purview of the federal tax law.

What is the New UAE Corporate Tax Law?

From June 1, 2023, onwards, the UAE government has imposed a standard taxation rate of 9% on taxable income over AED 375,000/-. That is, those who have opened startup businesses or have an income of up to AED 375,000/-, including the threshold, will be taxed at a 0% rate. Such CT initiatives from the authorities are seen as a beneficiary step for small and startup companies. They can expand the scale of their business without the threat of heavy taxation.

How to Calculate the Taxable Income?

Calculating the taxable profit is simple and based on your gross income. When your taxable profit exceeds the said amount then you are subject to 9% of the tax rate. The taxable income is derived when the allowable expenses are deducted from the gross income. However, certain expenses, including penalties, five, bribery, or personal expenditures, are not deductible and with limitations according to UAE tax regulations. 

Where Corporate Tax Laws Apply?

The UAE tax regulations apply to all businesses and individuals or groups conducting commercial activities. The standard tax norm is not exemption even in the case of:

• Free zone businesses
• Unincorporated partnerships
• Legal firms
• Organizational structures
• Liable public benefit entities
• Individuals or foreign entities conducting business activity across the UAE through representative officers, branches, or agents.

However, the Corporate  Tax law is only exempted from capital gains or dividends from qualified intra-group transactions. Such exemptions are applicable for business restructuring, government or government-controlled entities, extractive or non-extractive natural resources businesses, and other wholly-owned UAE subsidiaries.

Some Effects of UAE Corporate Taxation Law on International Business

With the emergence of the new standard taxation law, international businesses had to review their previously planned company structures and operations to ensure compliance with UAE tax laws. That is, these foreign businesses had to reconsider significant steps to suit their needs. This included rethinking the ownership structure, changing dynamics with the legal form, applying for a commercial license, etc.

1. CT Law on Mainland and Free Zones 

When the new standard taxation law was imposed, the recipients of the UAE free zone tax benefits may also be influenced. Small businesses and firms get a boost in operating freely, while large international businesses are subjected to CT on their derived income. Those foreign businesses operating outside the free zones in the UAE are likely subjected to fees and taxes imposed by emirates authorities.

2. Businesses will Review the Accounting Standards

International businesses also have to review their accounting systems to stay assured of any penalties. In addition, they have to account for financial statements, transactions, transfer pricing policies, etc. The Flyingcolour tax consultant can assist you in accurately calculating the taxable profits, considering the allowable expenses as per the CT laws.

3. Reviewing the Existing Tax Planning and Structure 

Further, the CT laws have also influenced the transfer pricing regulations in the UAE. Foreign businesses will have to review the existing tax planning and structure to minimize tax risks. From now on, international firms began to reconsider intra-group transactions, dividend policies, capital gain strategies, and overall financial management.

4. Influencing Investments by International Businesses

As per the CT legislation, those international businesses that receive capital gain from operating in the UAE can be exempted from the tax purview. But they have to fulfill certain conditions. So, international businesses will think about their holding period as well as exit strategies for operating or investing in the UAE.

5. Relieving the Small Businesses 

The ministerial decision will benefit small businesses. The new law of tax relief for small businesses whose tax income is up to a specific amount threshold can be seen as an attempt to diversify the market. Such initiatives will boost the spirit of startups and mid-scale businesses likewise.

6. Relaxation from Double Taxations 

The CT law will also relieve the chances of double taxation. Taking into account the UAE’s extensive double tax treaty networks, the legislation also withholds tax rates on selective income streams. The impact of UAE tax law on double taxation practices is also optimistic and relieving.

7. Shift in Investment Patterns 

It also affects the earlier conceived image of the UAE as an attractive and competitive destination for foreign direct investment. In one way, the tax law can reduce the net returns from some investors with the fear of added expenses in doing business in Dubai. However, in the other way, financial analysts perceive the CT law positively. The newly introduced tax law will enhance market credibility and stability. Internationally, the UAE will be seen as a business-friendly destination, complying with best standard practices.

These are some of the notable effects of UAE corporate tax law. However, CT won’t significantly impact investors who are already subjected to corporate tax in their home countries or are the beneficiaries of double tax treaties.

Who Collects the Corporate Taxes from Businesses?

The corporate taxes are collected by the Federal Tax Authority (FTA) in UAE. The FTA has legitimized power to assess, audit, and collect taxes from individuals and businesses. If necessary, FTAs can also exchange information about the taxable person with the authorities at the federal and local levels. Further, FTA instructs all taxable persons to obtain a tax registration number before commencing a business and file their returns annually.

How can Flyingcolour Tax and Consultant help you?

The latest UAE corporate tax law has international implications. The Flyingcolour tax consultant team will help you understand your financial aspects and guide you in comparing the mainland and UAE free zone tax benefits. For years, FlyingColour has been offering auditing, consultancy, and accounting services to various clients all across the UAE. The company will help you sort out the complexities of corporate tax so you can concentrate on more pressing business matters.

To learn more about Effect of UAE Corporate Tax Law on International Businesses, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.