UAE Corporate Tax Liability, Tax Credit and Withholding Tax
UAE CORPORATE TAX LIABILITY, TAX CREDITS & WITHHOLDING TAX
Corporate tax (CT) is a type of direct tax assessed on a corporation's or another entity's net profit derived from its operations.
In certain other countries, the term "corporate tax" may also be used to refer to "corporate income tax (CIT)" or "business profits tax."
For financial years beginning on or after 1 June 2023, the United Arab Emirates (UAE) will implement a federal Corporate Tax (CT) on corporate earnings at a rate of 9%, as announced on January 31, 2022.
The establishment of a federal CT regime aims to support the UAE's strategic goals and encourage companies to establish and grow operations there.
WHAT ARE THE CORPORATE TAX RATES IN THE UAE?
The UAE Ministry of Finance announced in January 2022 that the normal corporate tax rate in the UAE will be 9%, with the following tax segmentations and rates:
- Taxable income up to AED 375,000 is taxed at 0%.
- 9% of taxable income in excess of AED 375,000
- For major multinationals that satisfy certain requirements, a separate tax rate (which has not yet been set)
ASSESSMENT OF CORPORATE TAX
The books of accounts should be prepared in conformity with the International Financial Reporting Standards or any other standards that the UAE tax authorities may authorize for the purposes of UAE corporation tax.
THE INCOME AND EXPENSES SHOULD BE ADJUSTED AS FOLLOWS
- Eliminate any possible capital gains or other capital receipts credits that may have been included in the profit and loss statement.
- Payments from related parties with 0% tax made to a Free Zone Person
- 50% of the expenditures associated with entertaining customers, shareholders, vendors, and other business partners are disallowed.
- Administrative penalties, recoverable VAT, and unauthorized charitable donations
- expenses related to exempt income
These are a few of the costs that are prohibited from being deducted. There may need to be additional adjustments made, depending on the type of business and the costs debited to the profit and loss account.
After these modifications, the applicable financial period's calculation of UAE corporation tax will be made.
| Determination of UAE Corporate Tax | |
| Final taxable income of the UAE Business | (A) |
| (i) Taxable income between AED 0 - AED 375,000 | (B) |
|
(ii) Remaining income (if any) = Final taxable income (A) - Taxable income between AED 0 - AED 375,000 (B) [(X) @ 9%] |
(C) |
| Corporate Tax Payable by business | (B + C) |
| Less Foreign Tax Credit if any (to be computed in a prescribed manner) | (D) |
| Final Corporate Tax Payable | (B+C-D) |
TAX CREDIT
The UAE corporate tax regime will enable credit for the tax paid in a foreign jurisdiction against the UAE corporate tax liability on the foreign-sourced income that has not otherwise been exempted in order to prevent double taxation. The term "Foreign Tax Credit" refers to this.
Companies that are residents will be liable to UAE CT on all of their revenue, including overseas income that would have been subject to another nation's tax that is comparable to corporate tax.
The lowest of the following will constitute the maximum Foreign Tax Credit:
- The total amount of taxes paid in the foreign country
- On income from a foreign source, the UAE corporate tax is due.
The FTA will not refund any unused foreign tax credits, nor will they be able to be carried forward or back to previous tax years.
WITHHOLDING TAX
Many nations throughout the world use the notion of withholding tax to ensure a steady flow of income tax revenue.
Under this system, whenever a payment is made that is subject to corporation tax legislation, the payer is obligated to deduct a portion of the payment as tax and deposit it with the government.
However, the UAE Corporate Tax Law does not have a withholding tax, so the rate of withholding is 0%.
All domestic and international payments that UAE enterprises may make are subject to a 0% withholding tax rate.
This would apply exclusively to payments of the Dividend, Interest on loans, Professional fees, and Business income.
Due to the planned 0% withholding tax rate, firms operating in the UAE would not be required to deduct any taxes from payments made to residents or non-residents.
Therefore, UAE enterprises would not be required to locate any withholding tax returns.
The following income will have no withholding tax applied to it:
- UAE income received by a foreign business that is not due to a PE in the UAE of the foreign firm
- revenue from the UAE's mainland obtained by a Free Zone Person who benefits from the 0% CT regime, unless the income can be linked to a branch of that Free Zone Person operating on the mainland.
- dividends and other profit distributions made to a mainland UAE shareholder in a free zone person who benefits from the 0% CT regime.
