The UAE is currently navigating a period of change in economic law. In January 2022, the UAE government’s Ministry of Finance announced that it would introduce a federal corporate tax on net profits in 2023.
Now that this law has been introduced, it’s important to know its impact on potential investors in the UAE and get some reassurance that Dubai (and the wider UAE) remains an excellent investment destination.
What is the new law and when does it come into effect?
The UAE’s new corporate tax law is called Federal Decree-Law No. 47 of 2022 and it applies to all corporations and businesses operating in the UAE outside of free zones.
After June 1, 2023, all businesses that fall within the scope of the law are subject to the new tax rule from the beginning of their next financial reporting year. In reality, this affects most businesses in the UAE, especially those owned by overseas investors.
In summary, the law requires payment of 9% of taxable income over AED 375 000 and 0% below this threshold. Read more below to learn about this law, including its reliefs and exemptions.
What are the details of Federal Decree-Law No. 47?
The new corporate tax law applies to profits; that is, income minus various deductions. Deductible expenses may include administrative expenses, cost of goods, depreciation, and other expenditures. For a full understanding of what deductions your business may be able to deduct while complying with Federal Decree-Law No. 47 of 2022, you would need to contact a tax agent in the UAE.
Entities currently exempt from this new UAE corporate tax include government and government-controlled entities, qualifying investment funds, extractive and non-extractive natural resource businesses, qualifying public benefit entities, and qualifying private pension or social security funds.
Remember that this is a corporate tax only so there is still no tax on private incomes from employment, property and other investments. Small and medium enterprises may benefit from the tax relief program for revenues less than AED 3 million.
How has this law changed the investment landscape?
For a long time now, the UAE has been a very attractive destination for investors. It has consistently offered good returns because of its strong economy, stable politics and social structure, favorable location and excellent infrastructure.
The UAE has long-established itself as a global business and financial hub. It has welcomed international investors with open arms and there are more than 30 free zones in the nation that welcome 100% foreign ownership of businesses.
The UAE’s tax-free incentive has also been a big draw. Until recently, there was no tax on profits on almost all business types, so Dubai and the other emirates were considered tax havens.
So, what has changed? Is the UAE still a good option for international investors?
Let’s find out.
1. Streamlined taxation practices
For some time now, the UAE has sought to put itself in line with best international practices in terms of taxation while also diversifying its state income.
This began with the introduction of 5% value added tax (VAT) in early 2018 and was followed by Country-by-Country Reporting (CbCR) regulations in 2019. This new corporate tax law aligns the UAE with international markets.
The law is designed to minimize the compliance burden on businesses. Less burdensome reporting standards are applicable to businesses with an income of less than AED 50 million. In addition, cash basis accounting may be used by businesses with an income of less than AED 3 million.
These requirements are likely to be a consideration for investors when comparing corporate tax rates in other potential markets. Paying corporate tax in the UAE rather than individual income tax may be applicable and preferable to many investors.
2. Financial efficiency
The change in UAE tax law has wide-reaching implications for businesses. It may be that operational and financial changes need to be made to existing UAE businesses to ensure that there is a minimal tax burden placed on them while ensuring compliance with all laws and regulations.
3. Low rates of corporate tax
While moving from 0% to 9% is a big jump, the UAE still offers one the lowest rates of corporate tax in the GCC region, amongst developed nations and other key financial hubs. For example, the average rate of corporate tax amongst EU countries is 21%. Also, UAE free zones are still subject to 0% corporate tax.
These are all factors that potential investors may wish to consider in light of the UAE corporate tax reform.
For more information on the tax and reporting burdens your investment may be subject to, it’s vital that you talk to tax consulting services in the UAE.
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