Tally Solutions | Updated on: April 20, 2023
The Ministry of Finance of UAE manages and develops the financial resources of the UAE’s federal government. They accomplish this mission through fiscal policies and local and international relations so that the development, integrity, and sustainability of the fiscal system are in agreement with the best practices available. The ministry has introduced a new corporate tax so that the UAE will become a leading global hub in terms of business and investment. This will increase the UAE’s development and transformation and its strategic objectives will be accomplished.
What is federal corporate tax?
A corporate tax is a tax on the income or capital of a corporation and other entities. The taxes are levied on a business's taxable income. Just like a person pays income tax, a corporation pays corporate tax. Many countries have such taxes on a national level as well as a state level.
How is corporate tax calculated?
Corporate taxes are calculated based on the company's net income or taxable income. The net income is also called net profit or net earnings. You need to calculate all the income generated from all the revenue streams. The expenses, which include operating expenses, depreciation, amortization, interest on loans, and others, incurred by the company, also need to be calculated. Business management software such as TallyPrime makes it easy with ready availability of financial reports such as balance sheet, profit and loss account etc.
Is there a federal corporate tax in the United Arab Emirates?
Currently, there is no federal corporate tax in the United Arab Emirates (UAE). The corporate tax is calculated on a territorial basis. It is based on the tax decrees issued by each individual Emirate's government. There are seven Emirates in the UAE. The corporate tax rates range is wide. It is 10 percent in Qatar, 15 percent in Oman and Kuwait, and 20 percent in Saudi Arabia.
On 31 January 2022, the Ministry of Finance (MoF) made the announcement that a new federal corporate tax (CT) system will be implemented and it will be put into effect either on 1 July 2023 or 1 January 2024. It will depend on the financial year followed by the business. Businesses will be required to register once the registration process and ongoing business compliance obligations are announced by the Ministry of Finance.
How much is the new corporate tax in the UAE?
The corporate tax in UAE will be 9 percent with some exceptions. Businesses that have a net income or a taxable income of AED 375,000 or more will be affected by this new tax. Of course, this means that small businesses whose taxable income does not exceed AED 375,000 will have the tax rate remain at 0%.
What is needed for the new corporate tax?
The new corporate tax law suggests employing the accounting net profit position in the financial statements of businesses as the starting point for specifying the taxable income.
The business' financial reports, financial statements, and accounting books will be the most important for such assessment.
What are the exceptions to the new corporate tax?
The UAE introduced a federal tax that is applicable to all businesses and commercial activities operating in the seven emirates. However, there are some exceptions like:
- Businesses that operate in the natural resources extraction industry will still be subjected to the tax decrees issued by the respective Emirate
- Businesses registered in Free Trade Zones are exempted given that they comply with all the regulatory requirements, and they don't operate businesses with Mainland UAE
- Individuals’ income, unless the employment income comes from business/commercial/professional engagement, freelancing, or any other economic activities that must have a permit or must be licensed
- Individuals’ income from real estate investments, as long as these investments are done in a personal capacity and not as a business which requires a commercial license
- Individuals’ income, capital gains and dividends earned from personal investments in shares and securities
- Individuals’ income and interest gained from deposit and savings accounts
What are the objectives of the new corporate tax?
The objectives of the new corporate tax UAE are:
- To become a leading hub for business and investment in the world
- Drive development and transformation to attain its strategic objectives
- Reaffirm UAE's commitment to fulfilling international standards for tax transparency and controlling harmful tax practices
How many different levels are in the corporate tax?
According to the Ministry of Finance, the new corporate tax rates are:
- For taxable income up to AED 375,000, it is 0 percent
- For taxable income above AED 375,000, it is 9 percent
- There will be a different tax rate for large multinationals that meet specific criteria assigned under the Pillar Two of the OECD Base Erosion and Profit Shifting Project
Who will be in charge of the new corporate tax?
The Federal Tax Authority (FTA) will be in charge of the administration, collection, and enforcement of the new corporate tax.
Will foreign companies or individuals have to pay the new corporate tax?
Foreign companies and individuals will be subjected to the new corporate tax in UAE as long as they run a business or conduct trade in the UAE in an ongoing or regular manner.
Will the income gained by a foreign investor come under the new corporate tax?
A foreign investor’s income gained from dividends, interest, royalties, capital gains, and other investment returns will not come under the new corporate tax.
What is the corporate tax rate applicable for entities established in a free zone?
Entities established in a free zone that meet the conditions will be classified as 'Qualifying Free Zone Persons' and will be subject to corporate tax at the following rates:
- 0% on qualifying Income
- 9% on taxable income that does not meet the qualifying income definition
What is a Tax Period?
Given corporate tax is imposed on an annual basis, it is necessary to specify the 'Tax Period'. The Tax Period will normally be the Gregorian calendar year (i.e. from 1 January to 31 December) unless the business applies a different 12-month period for preparing its financial statements. For example, if your business follows a financial year starting from 1st April , then the tax period will be 1st April to 31st March.
Will I have to pay UAE CT alongside VAT in the UAE?
If you are a registered business for VAT, you will have to pay VAT and CT separately. If your business is not VAT registered, you may still have to pay federal corporate tax.
Will VAT paid be deductible for UAE Corporate tax?
Only irrecoverable input VAT may be deductible for CT purposes. Otherwise, VAT charged (sales) and incurred (purchases) would not impact the calculation of taxable income.
How to prepare for federal corporate tax in UAE?
Below are a few things to prepare your business for corporate tax:
- Understand the corporate tax using law and supporting information available on the Ministry of Finance and the Federal Tax Authority websites
- Assess the corporate obligation for your business, such as:
- Whether your business needs to register for UAE corporate tax
- What is the accounting / Tax Period for your business?
- By when your business needs to file a UAE corporate tax return
- What documents and applications should your business make for UAE corporate tax purposes
- How UAE CT may impact your business’ obligations and liabilities under contracts with customers and suppliers
- What financial information and records will your business need to keep for UAE corporate tax purposes?
- Keep yourself up to date by regularly checking the official website for latest information and guidelines
- Enable your team on corporate tax applicability and business implication
- Use Accounting software or Business software to manage your business requirements and corporate tax
What is TallyPrime, and can it help in calculating taxes?
TallyPrime allows your business to be corporate tax ready along with making sure the business transition goes smoothly.
The features of TallyPrime will make sure your business is corporate tax ready and VAT compliant. The many features of TallyPrime include:
- Generate business reports instantly related to accounting, inventory, and financial statements such as balance sheets, profit and loss accounts,, and many more to help you calculate corporate tax
- Finishing VAT returns with high accuracy and consistency, all easily
- Generate VAT-compliant invoices, and manage different types of VAT supplies such as imports, exports, and more
- Manage your account books with high accuracy and consistency with ease
- Suit different purchase and sales processes with complete flexibility
- Use multiple price levels for your products to make different price levels such as a wholesaler, customer, retailer, and more
For a smooth transition to the new corporate tax era in the UAE, using efficient integrated software should be the top priority for businesses. TallyPrime is extremely user-friendly and it has step-by-step instructions to help at every step Your business will have better control over the the cash flow and your business efficiency will increase. Following tax rules will become easier since your books are accurate and balanced. You will get your hands on all the business reports effortlessly.
At Tally Solutions, you will find the answers to your questions regarding the new corporate tax in the UAE. New rules can be confusing, especially tax ones, but you don’t have to worry when you have Tally Solutions.
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