The United Arab Emirates has decided to introduce a federal corporate tax on business profits for the first time from June 1, 2023. As with any new system, there may be teething problems in the initial stages, but given the announcement of the new federal corporate taxation by the UAE’s Ministry of Finance, every business owner must be prepared for compliance. To support small businesses and startups, the government has kept the statutory tax rate at 0% for taxable income up to AED375,000 (US$102,000). The law was duly passed and notified vide the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses issued by the UAE government on December 9, 2022.
To prepare for the new federal corporate tax in the UAE, you will first need to determine whether your organization comes under the purview of the law. Detailed information on the law, its application, and exemptions are available on the UAE Ministry of Finance website. The federal corporate tax, which will be imposed at 9% on profits above AED375,000, exempts individual income like salaries, earnings from real estate or shares, and other income that is not related to direct business activity in the UAE. Meanwhile, those conducting businesses in Free Zones are not automatically exempt from the corporate tax but will have to apply and qualify for an exemption.
However, all business owners will have to register for corporate tax if they have business units in the UAE, even though their income or business comes under the exempt category. They will have to file returns and claim exemptions. For every business entity in the UAE, preparing books of accounts becomes stringent because the profit on books will be the basis for corporate tax, and any errors or omissions can attract penalties. They have to get ready now, while taking into account the 5% UAE VAT, which was introduced in 2018, so that they can avoid issues once the federal corporate tax implementation date arrives this June.
As a business owner, you will need to train your staff and identify the areas of your business that can be impacted the most and the least because of the new tax regime. You’ll also need to maintain detailed data, books of accounts, financial statements, and documentation regarding costs, revenues, incomes, and expenses because you wouldn’t want to get into trouble with the tax authorities. As such, this may be the right time to hire an expert tax adviser if you don’t already have one.
