IMPOSITION OF CORPORATE TAX & APPLICABLE RATES

 

When will Corporate Tax come into effect?

IMPOSITION OF CORPORATE TAX & APPLICABLE RATES

Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Other Businesses reaffirms the Corporate Tax shall be applicable for the financial years beginning on or after June 1, 2023. It is important to know when the law will be applicable to your organization. Following are the scenarios based on different financial years: | IMPOSITION OF CORPORATE TAX & APPLICABLE RATES

· A business that has a financial year starting on 1st July 2023 and ending on 30th June 2024 will become subject to Corporate Tax from 1st July 2023 (which is the beginning of the first financial year that starts on or after 1st June 2023)

· A business that has a financial year starting on 1st October 2023 and ending on 30th September 2024 will become subject to Corporate Tax from 1st October 2023 (which is the beginning of the first financial year that starts on or after 1st June 2023)

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· A business that has a financial year starting on 1st January 2023 and ending on 31st December 2023 will become subject to Corporate Tax from 1st January 2024 (which is the beginning of the first financial year that starts on or after 1st June 2023)

· A business that has a financial year starting on 1st April 2024 and ending on 31st March 2025 will become subject to Corporate Tax from 1st April 2024 (which is the beginning of the first financial year that starts on or after 1st June 2023)

What are the applicable tax rates

Corporate Tax will be charged on the annual taxable income of a business as follows:

· 0%, for taxable income not exceeding AED 375,000; and

· 9%, for taxable income exceeding AED 375,000;

· A different tax rate for large multinationals that meet specific criteria set with reference to 'Pillar Two' of the OECD Base Erosion and Profit Shifting project.

UAE has confirmed the Corporate Tax threshold through its Cabinet Resolution No. 116 of 2022 determining the amount of annual income subject to corporate tax, followed after the Decree Law. In order to support small businesses and start-ups, UAE has set the zero-percent (0%) tax rate for annual taxable income up to AED 375,000. Any income exceeding the threshold of AED 375,000 will be subject to standard rated tax at the rate of 9%. The tax rates will apply to all categories of profits and other net income reported in the financial statements, prepared in accordance with internationally acceptable accounting standards. There will be a different tax rate specially for large multinationals other than zero rate and standard rate which is yet to be decided and clarified by the Tax Authority.

Apart from the small business relief, UAE government has also given tax benefits to certain Free Zone companies (Qualifying Free Zone Persons) on their Qualifying income, which is yet to be defined by the Tax Authority. All Qualifying Free zones will enjoy a tax rate of 0% provided that they meet various conditions including maintaining adequate substance, and not electing to be subject to Corporate Tax. It also requires a qualifying free zone person to apply the arm’s length basis to related party transactions and comply with Transfer Pricing documentation requirements.

Further, all mainland sourced income of free zone persons will be subject to the standard rated tax at 9%. It is important to note that in case of failure to meet any of the conditions required to be treated as a Qualifying Free Zone Person, standard rated tax of 9% shall be applicable on their collective taxable income.

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