In the UAE, a federal corporate tax is being introduced for the first time starting in 2023.
Although the new tax will apply to all UAE businesses and commercial activities, the UAE’s Ministry of Finance has confirmed that individuals will not be taxed on their income from employment, real estate, equity investments, and other sources unrelated to a UAE trade or business.
With the corporate tax applied to individuals holding business licenses or permits in order to engage in commercial, industrial, and/or professional activity in the UAE, how will this affect freelancers?
Mohammed Al Dahbashi, the Managing Partner of ADG Legal, explained that holders of the new freelance permit, issued under the new labor law for self-sponsored ex-pats, should not be subject to corporate tax on their individual earnings.
Any freelancers with a business license who are sponsored in a free zone and perform services for other companies are subject to corporate tax.
He added, “Those freelancing and providing services through a company or a license should not be taxed on the income they generate as salaries, but the company or license hosting their visa will be taxed on its net profit.”
In the meantime, Al Dahbashi said more details are awaited from the government to clarify whether the corporate tax will apply only to businesses, particularly with the new freelance permit that allows individuals to work without the need for a sponsor or a valid employment contract.
Izzat-Begum B. Rajan, ADG’s Head of Tax Practice, shares what they know so far about the UAE Corporate Tax:
Where will the UAE’s Corporate Tax apply?
As a federal tax, it will be applied to all emirates. As a result, the Federal Tax Authority will be responsible for the administration, collection, and enforcement of corporate taxes. For purposes of bilateral/multilateral agreements and the international exchange of information for tax purposes, the UAE Ministry of Finance will remain the “Competent Authority” for the UAE.
Who will be subject to this tax?
The corporate tax will apply to all businesses and commercial activities in the UAE, except for the extraction of natural resources, which will remain subject to emirate-level corporate taxation.
As a result:
- All activities undertaken by a legal entity will be considered “business activities,” and thus subject to corporate tax.
- In addition, individuals who hold (or are required to hold) a business license or permit to carry out the relevant commercial, industrial, and/or professional activity in the UAE will also be subject to corporate tax. Freelancers with a business license or permit may carry out their activities under this category.
- Companies and individuals conducting business in the UAE on an ongoing or regular basis will be subject to corporate tax.
- Free zone businesses will be subject to corporate tax, but the new tax regime will retain the incentives that are currently available to businesses that comply with all regulatory requirements and do not conduct business on the mainland.
Businesses engaged in banking, real estate management, construction, development, agency, and brokerage activities are subject to UAE corporate tax.
For corporate tax purposes, all legal entities and individuals must register and file a yearly tax return.
Who is exempt from corporate tax?
Taxes should not be applied to the following incomes for individuals:
- Salary and other employment income (public or private).
- Individuals may invest in real estate in their personal capacity, provided they do not need a license or permit to do so in the UAE.
- Earnings from owning shares or other securities for personal purposes, such as dividends, capital gains, and interest.
- Interest and other income from bank deposits or savings schemes.
For businesses, the following income should not be subject to UAE corporate tax – the conditions for these exemptions are yet to be determined:
- Dividends and capital gains from its “qualifying shareholdings“,
- Evaluating intragroup transactions and reorganizations. This may require businesses to use specific reporting and presentation templates for their accounts, to separate the tax-exempt revenue.
Dividends, capital gains, interest, royalties and other investment returns of foreign investors are generally not subject to tax.
UAE withholding tax will not be levied on domestic or cross-border payments of any kind under the new corporate tax regime.
When is the UAE CT applicable?
For financial years beginning on or after 1 June 2023. When, for example, a company’s financial year begins on 1 January and ends on 31 December, the new tax rules will apply to the company for the financial year beginning on 1 January 2024.
Which income is taxed?
The taxable income is the accounting net profit of a business after making certain adjustments (conditions to be specified).
Accounting net profit refers to the net profit reported in financial statements prepared in accordance with internationally accepted accounting standards.
As of the corporate tax effective date, losses incurred can be used to offset taxable income in subsequent financial periods. A loss for corporate tax purposes (often called a “tax loss”) arises when the total deductions a business can claim exceed the total income for the relevant financial period.
Tax credits
UAE will allow corporate tax paid by foreign companies on UAE taxable income to be credited against its tax liability.
Additionally, UAE businesses will have to comply with transfer pricing rules and documentation requirements set by the OECD.
What are the tax rates?
0% for taxable income up to Dh375,000 (approx. USD 102,000);
9% for taxable income over Dh375,000; and
Large multinationals that meet specific criteria set out in Pillar Two of the BEPS rules are subject to a different tax rate.
What does a large multinational do?
Multinational corporations are corporations that operate both within their home country and in other countries through foreign subsidiaries, branches, or other types of presence (or registration). A business earning income from outside its home country without establishing a foreign presence or registration would not qualify as a multinational corporation for the purposes of the UAE’s corporate tax.
Global minimum effective tax rate (GMETR) refers to the global minimum tax rate as proposed under Pillar Two of the OECD BEPS rules for multinational corporations with consolidated global revenues higher than EUR750 million (approx. Dh3.15 billion).
Fiscal unity
UAE group of companies can elect to form a Tax Group and be treated as a single taxable person (conditions to be specified). So, a UAE tax group would only have to file one tax return for the entire group. Losses from one group company may be used to offset the taxable income of another group company (under certain conditions).
What needs to be clarified by the UAE government?
There are still many aspects that are unclear. The UAE government is preparing additional guidelines that will be released in due course. The following areas are the topics that are yet to be disclosed:
- The Corporate Tax (online) registration, compliance, and filing rules for businesses and individuals (including those operating in free zones),
- A definition of “ongoing or regular” business activities for the purpose of applying the UAE’s corporate tax to foreign entities and individuals,
- Shareholdings in a UAE business that qualify as qualifying
- Tax exemptions for foreign investors,
- Businesses and Tax Groups must adhere to losses carryforward rules and timelines, as well as potential losses carryback rules.
- The rules for consolidated tax groups,
- Tax rates applicable to large multinationals,
- In general, any other potential tax exemptions and exclusions.