We know that the UAE will impose a Corporate Tax (CT) on June 1, 2023, at the start of the fiscal year. Everyone is debating and attempting to figure out the effects of CT on businesses, individuals, the government, and the overall economy. This article discusses how CT affects key stakeholders.
Companies Covered Under Corporate Tax in UAE:
- UAE native companies or domestic companies.
- Foreign companies that have a permanent establishment (PE) in the UAE.
- Non-resident companies that carry out business activities or profit from a source in the UAE.
Residential Status of the Companies
Resident companies are classified as having a residential status.
- Domestic companies.
- Foreign companies successfully managed and controlled in the UAE shall be subject to Corporate Tax in UAE on their global income, with certain exemptions.
An entity that is not a Resident shall be regarded as a Non-Resident. Therefore, only UAE-sourced income, subject to certain exemptions, and revenue related to a permanent establishment will be taxable in the UAE.
A progressive UAE Corporate Tax rate
|Particulars||Rate of Tax|
|AED 375,000/- is the maximum annual taxable income.||0%|
|The amount of taxable income exceeds AED 375,000/- per year||9%|
Multinational corporations with consolidated global revenues exceeding EUR 750 million (approximately AED 1.25 billion) will be subject to a different UAE Corporate Tax rate.
How to Determine Which Expenses Are Allowable and Which Aren't
In general, all revenue expenditures paid for business purposes should be permitted as a deduction when calculating taxable income.
However, the corporate tax regime in the UAE, as outlined in the public consultation paper, includes a list of items that will not be recognized as deductions for calculating taxable income:
- 50% of the cost of entertaining customers, shareholders, suppliers, and other business partners.
- Administrative penalties.
- VAT recovery.
- Donations made to an unapproved organization.
- Profits and losses that have yet to be realized.
- Interest exceeding 30% of EBITDA.
- Payments given to Free Zone residents are taxed at 0% when the income is received.
The final corporate tax legislation in the United Arab Emirates may also disallow some expenditures for computing taxable profits.
The Impact of Corporate Tax in UAE
- The introduction of Corporate Tax would include implementation, training, and bureaucratic compliance costs, which would be fair considering the UAE's simple tax system. Businesses will undoubtedly focus on tax planning to reduce the impact of CT on their profitability, increasing the demand for tax specialists.
- The shareholders will strive to maintain their share of profits by passing on the impact of CT to end users through higher sales prices, making things a little more expensive for end users, which will adversely impact their purchasing power.
- Reduced purchasing power would impact demand for products and services, and the trickle-down effect would be on business production and sales, affecting economic growth in the near run.
- The introduction of Corporate Tax in the UAE would greatly impact Foreign Direct Investment ('FDI') decisions. I create a gap between the pretax and post-tax returns on FDI. Investors are always interested in learning about direct taxes in the country where they wish to invest and taxes on profit repatriation.
- As explained above, enterprises will likely pass on the impacts of Corporate tax to individuals by raising their prices and reducing consumers' purchasing power. Employees would ask for a raise in wages to maintain their purchasing power. Overall, goods and services become marginally more expensive for end users.
Due to its competitiveness, UAE Corporate Tax would have a nominal impact on corporate savings and FDI, harming the country's economy in the short run. Still, it would build investor confidence in the long run, contributing to growth.
Considering all of the preceding, CT has been designed to promote investment and maintain openness to match global standards, hence providing a stable society in which enterprises may contribute and add value to the economy's growth.
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