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Corporate tax & Its Guidelines In UAE - Federal Corporate Tax

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As per the Ministry of Finance, corporate tax is a type of direct tax that is charged on the net income or profit of an organization or business. It is also known as corporate income tax or business profit tax in other countries.

The Ministry of Finance announced on January 31st that the federal corporate tax will be implemented from June 1st 2023. In the UAE, corporate tax is as follows:

Zero rates on net profit up to AED 3,75,000
9% rate on net profit above AED 3,75,000
Different types of tax slabs for international companies following Pillar two of OECD base erosion and profit shifting.

The amount recorded in financial accounts prepared according to internationally accepted accounting standards is referred to as a company's net profit (The taxable income is the net profit of the company after making certain adjustments to be specified under UAE CT Law).

In the financial statement, the Corporate Income Tax is calculated at 9% of the net income. We can learn how Corporate Income Tax is calculated by using an example.

The net profit = AED 4,00,000, Corporate tax will be AED 2,250

Net profit up to AED 375,000 – Zero

Net profit AED 375,000 – AED 400,000 – 2,250 (25000 x 9%)

Corporate tax is AED 0 + AED 2,250 = AED 2,250

Impacts of corporate taxation on businesses in UAE

Here are some of the impacts of corporate taxation on the business entity are as follows:

a.Business operation

Businesses are liable for Corporate income tax where their operations lie on the mainland of the UAE, as mentioned above. Individuals' profits in their capacity are not taxable as long as their generating activity does not necessitate a business license. Businesses that have been registered in free zone areas must adhere to all of the regulations set forth by each free zone area. A company based in a Free zone must register and file a Corporate Tax return, but they will be eligible for a Corporate Tax benefit.

Some of the impacts of corporate taxation on businesses are as follows.

a. Business operation

Because corporate tax is charged on the profit earned by a business entity, shareholders are disproportionately impacted because the profit after tax is lowered. This can have an impact on business operations since corporate taxes make it very hard for stakeholders to consider large or expensive investments where a large profit can be made if a great breakthrough occurs. The corporate tax also forces management to choose whether to expand or maintain the same amount of business, as well as whether or not to open a workstation for cost savings.

With the Corporate Income Tax introduced, businesses will expect to sell less to reduce the investment level. The tax would adversely affect the working capital of the business as it is a short-term burden from the business’s point of view. As a result, the business must examine and bridge the gap.

Companies must file for corporate income tax and pay 9% of their taxable profit if their threshold exceeds AED 3,75,000. We can see that because corporate income tax is a short-term liability, it will hurt the company's working capital. As a result, when preparing the annual budget, the company should analyze and understand the effects of corporate income tax on the business entity's operations and plan accordingly.

b. Business structure

Each business structure draws different forms of tax liabilities. For instance, a sole proprietorship firm is solely responsible for any business losses and must pay out of pocket on all earnings, whereas a partnership firm's liability is shared among the partners based on the amount of capital they brought in.

Here are some of the tax-cutting strategies that have been implemented.

Choosing the tax-efficient assets
Investments in plant and machinery
Claiming all the expenses incurred by the business
Introducing various structures for the workforce in the firm as incentives
Stock option

How Corporate income tax will affect free zone area business

Corporate tax is a type of direct tax applied on a corporation's or other business's net revenue or profit. These economic zones are known as free zones. When a business activity has been granted an operating license, it is possible to take advantage of financial and tax benefits.

Free zone companies will be subject to the new tax imposed by the UAE Ministry of Finance, which levies a 9% tax if their operations are done on the mainland. As previously indicated, if their net profit exceeds AED 3,75,000, a 9% tax will be levied on the taxable profit.

An FZE or FZC is a limited-liability company that operates under the laws and regulations of the Free Zone in which it is located. The Commercial Companies Law (CCL) of the UAE does not apply. To initiate the process of forming a Free Zone Firm, all shareholders/directors of the newly proposed company must provide the necessary papers and conduct due diligence:

A Certified passport Copy and UAE visa/UAE entry stamp if you are a non-resident
2 proof of address (dated within 3 months)
Bank or professional reference letter
Curriculum vitae (professional history summary)
Company application form

The UAE has more than 40 specialized free zones where expatriates and foreign investors can own 100% of their businesses. These zones are distinguished by their highly efficient infrastructure and specific services that help businesses streamline operations and save time and effort.

Many free zones in the United Arab Emirates have received various perks, such as the ability to opt-out of paying taxes for a term of 50 years. For the treatment of VAT and numerous other payments and procedures, the free zone areas are treated differently depending on the designated free zones. Free zone companies that fall under the multinational group are liable to the global minimum taxation under the Pillar two of OECD base erosion and profit shifting.

Due to double taxation agreements negotiated by the United Arab Emirates to boost international trade, free zone enterprises also benefited from import and export duty exemptions.

If a free zone company has a company's operations on the mainland, it must follow the norms and restrictions set forth by the UAE Ministry of Finance, which will result in cooperation tax being applied to those enterprises with mainland operations. Corporate income tax carries the taxes that are incurred indirectly by business activities, such as capital gains and business-related interests, as well as taxes on dividends paid to shareholders.

As a result, we may conclude that corporate income tax has little impact on free zone commercial entities because they are subject to unique regimes established under the legal framework of effective free zone authorities. However, multinational business entities operating in free zone areas, as well as company entities with operations beyond the free zone area, will be subject to a 9% taxable profit if their net profit exceeds AED 3,750,000.