In January 2022, the UAE announced a significant overhaul of its corporate tax system, which took effect on June 1, 2023. This change marks a pivotal shift in the UAE’s fiscal landscape, traditionally known for its low-tax environment. The new corporate tax, set at a rate of 9%, applies to corporations with revenues exceeding AED 375,000 (approximately USD 100,000). This initiative aims to diversify tax sources and align with international tax norms to prevent corporate tax avoidance.
Business leaders in Dubai must understand the implications of this revised tax system on their financial planning, business operations, and management strategies. Staying informed about these changes is crucial for adapting to the new fiscal environment and ensuring compliance with the updated regulations.
Dubai VAT
Dubai has historically been recognized for its low-tax environment, attracting global businesses and investors with its favorable tax policies. Traditionally, the UAE imposed no corporate taxes, except in specific sectors like resource extraction and foreign banking. However, the introduction of a 5% value-added tax (VAT) in 2018 marked a significant shift, impacting both companies and consumers for the first time.
Dubai Corporate Tax in 2023
The UAE has introduced a corporate tax system, effective from June 1, 2023, with a 9% tax rate on corporate earnings exceeding AED 375,000 (approximately USD 100,000). Companies earning below this threshold are subject to a 0% tax rate, reflecting the UAE’s support for small and medium-sized enterprises. This tiered approach ensures that only businesses with substantial earnings contribute to corporate tax, supporting growth in the SME sector.
For large multinational corporations with annual revenues above EUR 750 million, an additional 15% tax rate applies, in alignment with the Global Minimum Corporate Tax Rate Convention. This ensures compliance with international standards to reduce tax avoidance by global conglomerates. While the corporate tax framework took effect on June 1, 2023, companies operating on a January-December fiscal year will begin applying the tax from January 1, 2024, allowing time for fiscal adjustments to meet the new requirements.
Key Highlights of the Updated Corporate Tax System
Corporate Tax Obligations in Dubai
Corporate tax in Dubai applies to entities with legal structures such as Limited Liability Companies (LLCs), Public Corporations (PSCs), Public Joint Stock Companies (PJSCs), and Limited Liability Partnerships (LLPs). Foreign corporations generating income in the UAE or paying UAE taxes are also subject to corporate tax. Additionally, some free zone corporations engaged in trading activities with mainland UAE corporations may need to pay corporate tax.
Corporate Tax Rates
Dubai’s corporate tax rate is structured as follows: corporate income up to AED 375,000 is subject to a 0% tax rate, while income exceeding this threshold incurs a 9% tax. Rates may differ for large multinational corporations depending on their specific business environments.
Corporate Tax Exemptions
Certain entities, such as charities, public interest groups, investment funds, businesses involved in oil and natural resource extraction, and government-owned companies, are exempt from corporate tax. Additionally, holding companies receiving dividends or selling shares of subsidiaries are also exempt under corporate tax law.
Calculating Taxable Income
Corporate tax is calculated based on net income and losses as reported in financial statements. If a corporation experiences losses, it may offset up to 75% of future taxable income against these losses, helping to manage tax obligations in subsequent fiscal years.
Taxable Groups
Corporations in Dubai can form tax groups, allowing multiple companies to be treated as a single taxable entity. However, subsidiaries eligible for tax exemptions or registered as free zone residents cannot participate in a tax group.
Foreign Tax Deduction
To prevent double taxation, Dubai’s tax system allows deductions for taxes paid to foreign jurisdictions that are not exempt. This credit helps corporations operate efficiently across multiple regions while minimizing tax liabilities.
Free Zone Corporation Tax Compliance
All free zone corporations are required to register and file corporate tax returns, even if they do not owe tax. Given the dynamic nature of Dubai’s tax environment, free zone corporations should seek professional tax advice to ensure compliance with evolving regulations.
Personal Income and Capital Gains Tax in Dubai
Dubai is renowned for not imposing personal income or capital gains tax. Individuals pay only a 5% VAT on consumer goods and services. These policies foster a favorable tax environment for corporations and individuals, enhancing Dubai’s attractiveness to foreign investors.
Understanding Corporate Tax and VAT Differences in Dubai
Corporate tax and value-added tax (VAT) are distinct tax items with unique characteristics and calculation methods. Corporate tax is levied on a corporation’s net profit and is paid directly by the corporation, not by the consumer. The calculation method for corporate tax is based on the income generated by the corporation, with Dubai’s corporate tax system using a tax base to determine the amount owed.
On the other hand, VAT is a consumption tax borne by the end consumer. It applies to the purchase price of a product or service at each stage of the supply chain, from production to the point of sale. The ‘value added’ at each stage of production or distribution is taxable, and the tax is passed on to the consumer as a percentage of the final selling price. Essentially, corporate tax is a direct tax on corporate profits, while VAT is an indirect tax on the added value of goods or services consumed by consumers.
Category | Details |
Corporate Tax | Applicable to all corporations and individuals engaged in business under a commercial license in the UAE, including Free Zone entities, foreign entities, and certain activities. |
Tax Rate | – 0% for taxable income below AED 375,000 |
Value-Added | Standard rate of 5%, applicable to most goods and services, with some exemptions. |
VAT Exemptions | Certain goods and services, including groceries, healthcare, and education, are exempt from VAT. |
Corporate | – Extraction of natural resources |
Registration Requirements | – Corporations and individuals with commercial licenses in the UAE |
Reporting Deadline | Within 9 months after the end of the fiscal year |
Payment Frequency | Quarterly payments are required |
Premia TNC’s Assistance
Premia TNC offers comprehensive corporate management services tailored for businesses in Dubai, encompassing corporate establishment, ongoing operational support, accounting and audit services, tax consultation, and visa assistance. Our team of experts is dedicated to ensuring smooth business operations and regulatory compliance, providing you with the support needed to navigate Dubai’s unique business landscape confidently. If you require assistance in any of these areas, from setting up your business to managing day-to-day operations, please reach out to us for professional guidance and reliable service.
