The federal government and the Ministry of Finance in the United Arab Emirates have announced the implementation of Federal Corporate Tax in the region. This is effective for financial years commencing on or after 1 June 2023. Over the years, the UAE has seen some significant shifts in the taxation and business environment. The region has always been the promoter of growth and business-friendly laws. Some significant initiatives we have seen over the years include Federal Decree Law No. 8 of 2017 on Value Added Tax, Cabinet of Ministers Resolution No. 31 of 2019 Concerning Economic Substance Regulations, Federal Decree Law No. 32 of 2021 on Commercial Companies, Federal Decree Law No. 33 of 2021 Regarding the Regulation of Employment Relationship and its amendments, and Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
On 3rd October 2022, his highness Sheikh Mohamed bin Zayed Al Nahyan, President of the United Arab Emirates, issued the Corporate tax law. According to Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Corporate Tax Law), the businesses in the region have to pay a corporate income tax at a standard rate of 9%.
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This initiative aims to enhance the UAE's appeal as a prime destination for businesses and investments. With the introduction of Corporate Tax, the UAE aims to bring about certainty and competitiveness, aligning its tax system with global standards. Additionally, the country boasts an extensive network of double tax treaties, further bolstering its attractiveness to international businesses.
As a key player in the international business hub and global financial center scene, the UAE is adopting best practices from around the world. The Corporate Tax regime is built on principles that are well-known and accepted globally. This approach ensures that businesses operating in the UAE can easily understand the rules and implications. Consequently, with this new tax system, the UAE is positioning itself as a transparent and business-friendly jurisdiction on the global stage.
Juridical persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons” and will need to comply with the requirements set out in the Corporate Tax Law. However, a Free Zone Person that meets the conditions to be considered a Qualifying Free Zone Person can benefit from a Corporate Tax rate of 0% on their Qualifying Income (the conditions are included in Section 14).
Non-resident persons who do not have a Permanent Establishment in the UAE or who earn UAE sourced income that is not related to their Permanent Establishment may be subject to Withholding Tax (at the rate of 0%). Withholding tax, a form of Corporate Tax collected at source by the payer on behalf of the recipient of the income, exists in many tax systems and typically applies to the cross-border payment of dividends, interest, royalties, and other types of income
However, the UAE Corporate Tax regime has been designed to incorporate best practices globally and minimize the compliance burden on businesses. But since the implementation, the financial markets, businesses, and organizations have a lot to scrutinize. They are still figuring out its impact and influence on the financial dynamics, operational efficiency, and overall competitiveness in the market. Moreover, the impact assessment looks at how UAE’s organizational structure might change, including any legal adjustments needed to make taxes work better. It digs into details like transfer pricing, grouping taxes, and how different parts of the company interact. It understands the importance of coming up with plans ahead of time to adjust, be creative, and stay in sync with the changing tax rules.
Delving into the impact of corporate tax in the UAE, let's break down the key aspects that require our attention and strategic focus. We'll look into legal considerations, compliance intricacies, and broader implications on business contracts, stakeholder communications, and resource planning. As pioneer financial consultancy firms in the UAE, our aim is to navigate the evolving corporate tax ecosystem in the UAE with precision.
It's crucial to thoroughly assess how the new corporate tax regulation in the UAE might affect your company. This checklist serves as a practical guide to help you evaluate financial impacts and risks, empowering you to make informed decisions and adapt proactively. For a comprehensive understanding, consider consulting tax professionals or seeking expert advice to ensure compliance and minimize any adverse effects on your company’s financial stability and growth.
Keep in mind the importance of regularly reviewing and updating this checklist as the tax landscape in the UAE evolves. This proactive approach will keep you ahead of any potential changes, ensuring that your company remains well-prepared and resilient in the face of shifting tax dynamics.
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