For organizations that have a permanent establishment in UAE, the Government has introduced a Corporate Tax of 9% starting from 1 June 2023. Companies having a net profit of AED 375,000 and above are subject to Corporate Tax.
Corporate Tax is a type of direct tax levied on the net profits of companies by the Government of a Country. It is a source of income for the Government to carry out developmental activities.
The Gulf Region remains an attractive jurisdiction for foreign investment due to favorable tax regimes. Corporate Tax in UAE will pave the way for a new income stream and reduce the dependence on mainstream revenues.
What is the difference between Corporate Tax and Value Added Tax?
Taxes are the main source of revenue for most countries globally. It helps in earning additional revenue for the country. Corporate Tax is applicable on the net profits of a company operating in a country.
There is a significant difference between direct and indirect tax. Value-Added Tax (VAT) and Excise Taxes are indirect taxes the business collect on behalf of the government. The tax is borne by the end customer during the point of sale.
Corporate Tax in UAE – Updates from Federal Tax Authority
As per the Federal Tax Authority, there are certain exemptions and incentives for companies operating across various sectors. Using the incentives and deductions the companies will not be paying the statutory Corporate Tax rate of 9% and it could be a lesser percentage in actuality.
Also, the Corporate Tax updates indicate that the startups incurring costs and losses in the initial years can carry forward their losses indefinitely and set off their profits over the coming years.
Corporate Tax in UAE
Furthermore, companies with a threshold below the defined figure are exempt from corporate tax. AED 375,000 is the minimum threshold of net profit for a company to fall under the Corporate Tax regime.
Businesses operating in strategic sectors such as natural resources, electricity generation, investment funds, etc., have several exemptions. Also, Free Zone companies are exempt from the Corporate Tax upon meeting certain conditions.
Importance of Corporate Tax for GCC Economies
Corporate Tax is a source of a new income stream for countries. Four out of six GCC countries have corporate tax regimes ranging from 10% in Qatar, 15% in Kuwait & Oman, and 20% in Saudi Arabia.
Corporate Tax varies by country and UAE is a Tax Haven due to the low rates. The introduction of Corporate Tax is to fund the developmental activities of the country and provide better infrastructure for the residents.
Who Can be Categorized as Qualifying Group and Tax Group
Setting up a company in UAE is easy with the Free Zones offering low-cost packages and requiring minimum documentation. This makes UAE a hub for foreign investors.
However, with the Corporate Tax Laws, large companies must have clarity on their shareholding structure. Many large companies create holding companies and subsidiaries for tax saving and profit/loss distribution.
Until now the tax status of individual companies in the holding company did not matter. For VAT calculations, holding companies had VAT grouping options, and holding companies remained VAT neutral.
However, with corporate tax, the holding company must evaluate the grouping options. To reduce excessive tax outflow through group companies, the holding company must follow the corporate tax guidelines.
There are two groups in Corporate Tax – Qualifying Group and Tax Group
1. Qualifying Group
Two or more companies/individuals can form a Qualifying Group if the owner of the company has direct or indirect ownership of at least 75% of each of the companies. There is no formal approval required from FTA to create a Qualifying Group.
Transfer of assets and liabilities across Qualifying Groups will not result in any gain/loss for tax purposes. Each member of a Qualifying Group will calculate their profit or loss and must comply with tax regimes.
2. Tax Group
For organizations with a permanent establishment in UAE, the Government has introduced a Corporate Tax of 9% starting from 1 June 2023. Companies that generate a net profit of AED 375,000 and above are subject to Corporate Tax.
Corporate Tax, a form of direct tax imposed by the Government on a company's net profits, serves as a source of income for the Government to fund developmental activities. With favorable tax regimes, the Gulf Region remains an attractive destination for foreign investment, and the implementation of Corporate Tax in UAE will create a new income stream and reduce dependency on mainstream revenues.
Distinguishing Corporate Tax from Value Added Tax (VAT), it's important to note that while Corporate Tax is levied on a company's net profits, VAT and Excise Taxes are indirect taxes collected by businesses on behalf of the government, ultimately borne by the end customer during the point of sale.
Updates from the Federal Tax Authority shed light on exemptions and incentives available for companies across various sectors. By leveraging these incentives and deductions, companies may not be liable to pay the full 9% statutory Corporate Tax rate, potentially resulting in a lower percentage of tax paid.
Furthermore, the Corporate Tax updates highlight that startups incurring initial costs and losses can carry forward these losses indefinitely and offset them against future profits.
Certain companies below the defined net profit threshold of AED 375,000 are exempt from Corporate Tax. Strategic sectors such as natural resources, electricity generation, and investment funds may also benefit from specific exemptions. Additionally, Free Zone companies can be exempt from Corporate Tax if they fulfill certain conditions.
Corporate Tax plays a vital role in generating new income streams for GCC economies. Among the GCC countries, Qatar, Kuwait, Oman, and Saudi Arabia have corporate tax regimes with varying rates. With its low rates, UAE is considered a tax haven. The introduction of Corporate Tax aims to fund the country's developmental activities and enhance infrastructure for residents.
Understanding the categorization of companies into Qualifying Groups and Tax Groups is crucial, particularly for large companies utilizing holding companies and subsidiaries for tax planning and profit/loss distribution. While the tax status of individual companies in a holding company did not previously impact VAT calculations, the introduction of Corporate Tax necessitates evaluation of grouping options to minimize excessive tax outflow through group companies.
There are two groups under Corporate Tax - Qualifying Group and Tax Group. A Qualifying Group can be formed by two or more companies/individuals if the owner has direct or indirect ownership of at least 75% in each company, without requiring formal approval from the Federal Tax Authority. Transfer of assets and liabilities within a Qualifying Group does not result in tax gain/loss. Each member of a Qualifying Group calculates their own profit or loss and complies with the relevant tax regimes. On the other hand, a Tax Group requires prior approval from the Federal Tax Authority and consists of two or more groups of companies/individuals. Each shareholder must possess at least 95% of the voting rights in the company. The Tax Group is treated as a single taxable entity, with the taxable income derived from the aggregate net income or loss of all group members.
In conclusion, Corporate Tax in UAE introduces a new tax landscape for companies and serves as a significant factor for business planning and decision-making. With the assistance of experienced business consultants, companies can navigate the complexities of Corporate Tax and ensure compliance with relevant regulations.