United Arab Emirates has been, for a long time, an endearing country for corporations for it did not, except for certain handful industries, impose any taxes on revenues or profits of the corporations. However, as a result of recent modifications to UAE legislation, especially Federal-Decree Law No. 47 of 2022, which will be coming into existence from June the 1st 2023, there will be a ground-breaking shift in the UAE corporate world. This legal amendment will be making the corporations, including free zone organisations, liable to taxation in the UAE.
Why The Change?
Earlier the oil-rich gulf nation operated as a very low tax jurisdiction. The state’s revenues largely came from nationalised and private fossil fuel extraction industries that paid around a 50% tax on revenues and the foreign banks that paid a 20% corporate tax on the operating profits. As a historical necessity and thanks to technological advancements such as EV, the UAE finds itself in a position to diversity its economy centred around fossil-fuels. The state intends to invest the newly imposed taxes on the growth of infra, healthcare and education. The other reason to introduce the new tax regime is to tackle the tax avoidance and to bring UAE in line with the international tax norms where a tax of 20% or more is imposed on business profits. (The current proposal of UAE to tax corporations at 9% is still lower in comparison with the world standards.) The new law is supposed to disincentive the entities from using the middle-eastern economic giant as a tax base in order to avoid taxation in their home countries.
Corporate Tax Rates in UAE :
· A 0% tax rate applies to taxable income up to AED 375,000
· A 9% tax rate applies to taxable income over AED 375,000
· All multinational corporations subject to OECD Base Erosion and Profit-Sharing laws that belong within Pillar 2 of the BEPS 2.0 framework, i.e. combined worldwide revenues in excess of AED 3.15 billion (€750m) will be entitled to varying rates.
· Point to be noted is the corporations operating from the free zones will be maintaining the 0% tax positions even after the law coming into effect. (The UAE Ministry of Finance, on the other hand, has issued preliminary guidelines stating that this qualifying revenue must fulfil severe conditions and can originate from both offshore and onshore sources.) Our experts at BCL can shed a better light on this if you are not sure where you stand.
What Does It Mean to the Corporations Operating From the UAE?
The UAE’s 2023 corporation tax will be 9% on profits (revenue minus costs) of any enterprises earning more than 375,000 AED (about $100,000 USD). Companies who produce less than this amount will continue to pay no taxes. In addition to the corporate tax, the UAE has stated that major multinational corporations with income over EUR 750 million will be subject to a 15% tax, in accordance with the Global Minimum Corporate Tax Rate agreement. The new UAE corporation tax will take effect in the tax year beginning June 1st, 2023, and most businesses will need to start saving money to pay their taxes as of that day.
Who is Taxed And Who Is Not?
Tax will be charged on legal entities having noteworthy legal personalities such as LLCs, PSCs, PJSCs, LLPs, and others. Furthermore, any foreign legal entity that makes money and is a tax resident in the UAE would also be subjected to taxation. Although free zones pay no corporation taxes, they must adhere to all regulatory requirements; this is also true for free zone enterprises that conduct business with the mainland. It’s to be duly noted that corporate taxation regulations may also apply to non-residents and residents of the UAE.
Considering the important roles that some organisations play in the wholistic socio-economic development of the UAE, certain entities are exempted from being taxed (subjected to meeting certain prerequisites.) To name a few, government entities and some government controlled entities that are specified in the cabinet decisions are automatically exempted, while extractive businesses and non-extractive natural resource businesses are kept out of the ambit of taxation given they are notified to the ministry of finance and are adhering to certain conditions. Since the list is non-exhaustive and it demands a careful evaluation of the type of entities to understand the intricacies of taxation, you can always consult our experts at BCL to help you understand the regime better.
Why Structuring Is Important?
Be it an individual or an organisation, it is imperative to have a sound tax plan in order to stay financially healthy and profitable. It is also a right to save taxes within the purview of the laws laid down by the government sans violating the rules, which, in turn might amount to tax evasions. As the profitability of companies grow, so do their tax bills and liabilities. This demands the entities commit sufficient time and resources to tax preparation in order to lower their tax bills. A planned corporate tax payment can lower the cost of indirect tax during the times of inflation. Intricate detailing and efficient structuring are the keys to tax management. It is not just the application of the laws, but a meticulous understanding of their usages at various instances of taxation and documentation can save the losses as well as boost the entity’s goodwill.
Corporate Tax Planning: What is it?
Does everyone have an idea on how money works? No. There comes the need for businesses to recruit tax specialists who are well-versed in the rules and regulations governing tax legislation. Tax planning is absolutely essential for an entity to save itself from legal, financial, and fiscal risks and to ensure the smooth running of its activities. Simply put, business tax planning is to construct a strategy to maximise earnings while lowering the company’s tax burden. If you are one such Startup and looking for a know-how company, we are a click away.
What Do You Achieve by Tax Planning?
Apart from reducing a range of direct taxes you ought to pay, proper planning achieves multitudes of other benefits as well.
- Cutting down the tax liability: In other words, it simply increases the profitability by enabling the entity to avail tax benefits within the legal framework.
- Augment productivity: Structuring the entities in a legally sound manner allows the entity to channelise its taxable income to various investment plans, which, in turn, increase the wealth accumulation and fatten up the portfolio.
- Financial & Economic growth: A properly maintained ledger invariably creates a healthy financial system inside the company allowing it to concentrate on its expansions. The money that is injected, in the form of taxes, to the system of governance allows the state to reinvest it into the infrastructure of the country doubling down the benefits that the citizenry avails.
What Mistakes You Can Avoid?
Procrastination: This may be avoided with careful preparation. It lessens the burden of extra tax and saves money by investing within the benefits provided by the law. It helps you determine when to withdraw money from capital gains and other plans to obtain maximum tax advantage.
Avoid Illegitimacy: The fundamental objective for completing corporate tax preparation is to avoid illegitimacy. Planning allows organisations to react to changes in their external environment and results in more coordinated operations.
What You Earn?
A Benefitted Shareholder: Good corporate tax planning enables entities to reduce their tax liabilities, resulting in higher earnings for shareholders or more money to reinvest. Increased shareholder earnings and capital reinvestment are indicators of successful business operations, and they can attract new prospective investors, further enhancing the company’s financial position.
Better Strategic Decisions: Corporate/company tax planning is essential for a company’s value-added operations and strategic decisions. It assists businesses in lowering their tax burden and working more smoothly and effectively.
Reduced Deductions: Keeping track of deductions, exemptions, and refunds, as well as effective management and reporting of the organisation’s costs, may assist decrease due taxes.
To sum it all up, taxation has been in place since the advent of money and centralised authorities. While it may be overwhelming for the commoners, as well as corporations, to understand the numbers, we at BCL, have well-informed and highly-equipped minds that meticulously understand the newly formulated rules. Being an entity with multi-national presence, we better understand the laws and their applications across the borders. We also understand how valuable a well-maintained book is to the well-being of the company as well as the economic growth of the country as a whole. If you want to consult us for a much-detailed understanding and implications of the new law, we are a click away.