New Corporate Tax Law in Abu Dhabi, UAE: Everything You Need to Know
Corporate Tax Law in Abu Dhabi, UAE : As businesses in Abu Dhabi and the United Arab Emirates (UAE) look towards another financial year in the summer of 2023, they will face a completely new taxation system – Corporate Tax. This new piece of legislation, known as the UAE Federal Decree-Law No. 47 of 2022 on taxation of corporations and businesses (the “Corporate Tax Law”), has been created to ensure that businesses become subject to UAE Corporate Tax from the beginning of their first financial year that starts on or after 1 June 2023. With the new Corporate Tax law, the amount of tax businesses will pay depends on their size and scope, as well as their industry. For those in Abu Dhabi, this could mean significantly different tax shares compared to other countries, and could affect the profitability of businesses in the region. For those unfamiliar with the ins-and-outs of the Corporate Tax Law in Abu Dhabi and the UAE, it can be difficult to get the facts straight and understand what’s at stake. In this blog post, we examine the implications of Corporate Tax in Abu Dhabi and the UAE, explaining what business owners need to know to prepare themselves for the coming financial year. From understanding the rules of corporate taxation to the provisions in the Corporate Tax Law itself, this blog post is designed to help businesses stay compliant with the new Corporate Tax Law and plan ahead to ensure a successful financial year.
The UAE last year announced that it would levy a nine per cent corporate tax on companies with a profit of Dh375,000 and above, hence, requiring them to enrol for tax registration. The UAE’s corporate tax will be one of the lowest in the world.
Overview of the New Corporate Tax Law in Abu Dhabi, UAE.
Abu Dhabi, the capital of the United Arab Emirates, recently enacted a new corporate tax law that affects companies both large and small doing business in the region. This new law applies to both local and foreign companies and requires them to pay certain taxes on their revenues and profits. The goal of this new law is to create a fair and equitable tax system that encourages economic growth and stability in Abu Dhabi.
The UAE last year announced that it would levy a nine per cent corporate tax on companies with a profit of Dh375,000 and above, hence, requiring them to enrol for tax registration. The UAE’s corporate tax will be one of the lowest in the world.
In order to comply with the new corporate tax law in Abu Dhabi, companies must register with the Federal Tax Authority and submit their financial records for auditing. If any discrepancies are found, the company will be subject to penalties and additional taxes. In addition, companies will need to file a corporate income tax return each year and pay any applicable taxes.
In addition to the corporate tax law, Abu Dhabi also has a Value Added Tax (VAT) system in which companies must pay 5% of their taxable revenues. This VAT is applicable to both local and foreign-owned companies and is not subject to a waiver.
For many companies, the new corporate tax law in Abu Dhabi can be a daunting task to navigate. Professional accounting firms can help companies understand their obligations and ensure they are compliant with the law. Understanding the ins and outs of the new corporate tax law in Abu Dhabi is essential for any company doing business in the region.
Advantages of the New Corporate Tax Law in Abu Dhabi, UAE
The new Corporate Tax Law in the UAE offers several advantages for businesses. It provides a clear framework for taxation, ensuring transparency and stability. Companies can benefit from lower tax rates, which can boost profitability and attract foreign investments. Additionally, the tax law promotes a level playing field, reduces tax evasion, and strengthens the country’s economy. It also encourages diversification and innovation, paving the way for sustainable growth and development.
Requirements and Penalties for Non-Compliance
Compliance with UAE Corporate Tax regulations is essential to avoid penalties and legal consequences. The requirements include timely filing of tax returns, maintaining accurate financial records, and disclosing all relevant information. Failure to comply can result in penalties such as fines, interest charges, and even legal action. Penalties may vary depending on the severity and frequency of non-compliance. It is crucial for businesses to stay updated with the tax laws, seek professional advice, and ensure strict adherence to all compliance obligations to avoid potential penalties and maintain a good standing with the tax authorities.
Taxable Entities: UAE Corporate Tax Law
The corporate tax law provides a participation exemption from corporate tax when receiving dividends or selling shares of a subsidiary company. Additionally, certain entities such as charities, public benefit organizations, investment funds, businesses involved in oil and resource extraction, and wholly government-owned companies are exempted from corporate taxes.
Calculating taxable income
Typically, the company’s financial statements’ net profit or loss will serve as the basis for determining the applicable tax rate and income. If the company experiences a loss, it has the opportunity to offset that value against taxable income in subsequent financial years, up to a maximum of 75%.
Taxable income
The taxable income for corporate tax purposes will be based on the accounting income reported in the standalone financial statements. However, certain adjustments will be made, which include:
1. Unrealized gains or losses related to capital items.
2. Income and expenses derived from exempt activities by exempt persons.
3. Dividend income and other profit distributions from resident persons.
4. Dividend income and capital gains under the participation exemption.
5. Income from a Permanent Establishment (PE) located outside the UAE subject to a minimum CT rate of 9%.
6. Income derived by non-residents from operating or leasing aircraft and ships in international transportation.
7. Gains or losses from reorganizations or intragroup asset and/or liability transfers subject to specific conditions.
8. Net interest expenditure limited to 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization).
9. Entertainment-related expenses deductible up to 50% of the incurred amount.
10. Disallowed interest expenses can be carried forward for 10 years, subject to interest deduction limitation rules. Further restrictions may apply to related-party debt.
11. The Corporate Tax Law also lists non-deductible expenses, including donations, administrative penalties, recoverable VAT, dividends, or similar benefits paid to a taxable person’s owner, among others.
UAE Corporate Tax Law : Groups
A group of companies has the option to establish a tax group, enabling them to be treated as a single taxable entity. However, for this arrangement to be possible, the company or subsidiary must not qualify as an exempted party or be registered in a free zone.
Implications
The implementation of the new Corporate Tax (CT) regime has wide-ranging implications for businesses and individuals engaged in business activities in the UAE. It is crucial for them to start evaluating the impact of the new rules, including assessing their applicability, analyzing cash flow implications, understanding exemption regimes, and establishing effective processes to ensure compliance. As more information becomes available through Ministerial Decisions in the following months, businesses should stay updated and proactively prepare for compliance well in advance of the effective date.
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