Corporate tax in Dubai is a type of tax on profits of businesses operating in the emirate, with a rate of 9%. Certain businesses and types of income are exempt from the tax.It was introduced in 2023 and is designed to help the government diversify its revenue sources and reduce its reliance on oil and gas.
In this guide we will cover all aspects of corporate tax from :
- What is corporate tax and its tax rate in Uae ?
- Who should register for corporate tax?
- How to calculate corporate tax in uae?
- When should I register for corporate tax?
- Understanding Benefits of corporate tax?
- Who is exempt from uae corporate tax ?
- Difference between vat and corporate tax ?
- Tax rate of corporate tax and it’s penalty for not following it
Who Needs to Register for Corporate Tax?
Most businesses operating in the UAE mainland, including those in Dubai,Abu dhabi sharjah,Ajman or any other emirates in Uae are required to register for corporate tax. This includes a broad range of activities such as manufacturing, trading, consultancy, professional services, hospitality, and real estate.
However, there are some exceptions. Businesses involved in the extraction of natural resources like oil and gas may follow a different tax regime based on their concession agreements. Additionally, specific non-extractive activities subject to Emirate-level taxation (like local municipality fees) may have distinct requirements.
Consulting with qualified tax advisors like JP International Management Consultancy is crucial to determine your specific registration obligations based on your business activity and location within the UAE.
How to calculate corporate tax in uae?
Unlike a simple sales tax applied directly to the sales price, corporate tax involves a more complex calculation. To arrive at the taxable income, the base for corporate tax liability, we begin with the company’s accounting income and subtract eligible deductions and credits.
Corporate tax = Taxable income x Corporate tax rate ( 9%)
Accounting Income
This is your gross revenue minus your business expenses.
For example, Imagine you run a bakery with revenue of AED 100,000 and expenses of AED 95,000 (rent, salaries, utilities, marketing). Your accounting income is AED 5,000 (revenue – expenses).
Now, let’s say depreciation (equipment wear and tear) is AED 5,000. This is a deduction that lowers your taxable income to AED 0 (accounting income – depreciation).
Basically, deductions like depreciation help reduce your final tax bill!
Deductions
These are expenses incurred during your business operations that you can subtract from your accounting income to reduce your taxable income. Common deductions include rent, salaries, utilities, certain marketing costs, and depreciation.
Partially Deductable
- Entertainment : You can only deduct 50% of expenses for entertaining clients, suppliers, etc. This includes meals, travel, and event costs.
- Interest : You can deduct interest on loans used for business purposes, but only up to 30% of your Earnings Before Interest, Depreciation, and Amortization (EBITDA). Any excess interest expense can be carried forward and deducted against taxable income in future tax periods. However, you cannot deduct interest on loans from related parties used for things like share buybacks or capital contributions.
Not Deductible at All:
- Capital Expenses: This includes things like buying equipment or buildings. These are considered investments, not operating expenses.
- Fines and Penalties: These are seen as punishments and cannot be deducted.
- Dividends and Profits: Money paid out to shareholders is not deductible, as it represents a distribution of company profits.
- Bribes and Illegal Payments: These are obviously not allowed as deductions.
- Donations (except to Qualified Public Benefit Entities (QPBEs): Donations to most charities cannot be deducted from your taxes. However, donations made to QPBEs approved by the UAE Cabinet are deductible.
- Personal Expenses: These don’t count as business expenses and are not deductible.
- Foreign Taxes: Taxes you pay in other countries cannot be deducted from your UAE corporate tax base.
When to Register for Corporate Tax in Dubai?
Resident Businesses (including Free Zones):
- Established before March 1, 2024: Register based on your license issuance month by May 31, 2024 (latest).
- Established on or after March 1, 2024: Register within 3 months of incorporation.
Non-Resident Businesses:
- With a Permanent Establishment (PE) in the UAE:
- Established before March 1, 2024: Register within 9 months of your PE’s existence.
- Established on or after March 1, 2024: Register within 6 months of your PE’s existence.
- With a nexus in the UAE (establishes taxable presence):
- Established before March 1, 2024: Register by May 31, 2024.
- Established on or after March 1, 2024: Register within 3 months of establishing the nexus.
The UAE follows a new financial year system starting on June 1st. Businesses in Dubai typically register for corporate tax during the first year their taxable income exceeds the AED 375,000 (approximately USD 102,100) threshold.
Understanding the Benefits of Corporate Tax
While corporate tax may seem like an additional expense, it contributes significantly to the development of Dubai. Here’s how:
Increased government revenue : Corporate tax is a major source of income for governments. revenue can be used to fund essential public services like infrastructure, education, and healthcare.
Reduced Reliance on Oil : Corporate tax can lessen the UAE’s dependence on oil revenue, promoting economic diversification.
Improved Infrastructure : Corporate tax revenue allows the government to invest in better roads, public transportation systems, and utilities, ultimately benefiting businesses by creating a more efficient operating environment.
Accountability and Transparency : The corporate tax filing process can encourage businesses to maintain accurate financial records and operate more transparently.
Enhanced Public Services : Corporate tax contributes to improved healthcare facilities, education systems, and social security programs, fostering a healthier and more skilled workforce that benefits businesses in the long run.
Sustainable Growth : Corporate tax revenue enables the government to invest in long-term development projects, ensuring Dubai remains a competitive and attractive business hub for years to come.
By contributing to the overall well-being of Dubai, corporate tax indirectly benefits businesses by creating a more stable and prosperous environment for them to operate in.
Who is Exempt from UAE Corporate Tax?
There are specific exemptions for certain business activities, including:
- Natural Resource Extraction : Businesses engaged in extracting natural resources like oil and gas are subject to separate tax regimes defined by concession agreements or fiscal letters.
- Certain Emirate-Level Taxes : Specific non-extractive activities subject to Emirate-level taxation (conditions apply) like local municipality taxes. These businesses may have a different tax framework depending on the specific emirate, but the exemption typically applies only if they meet certain criteria set by the relevant Emirate.
- Public Charities : Public charitable organizations registered in the UAE are exempt from corporate tax.
What is the difference between VAT vs. Corporate Tax in uae?
It’s important to distinguish between corporate tax and Value Added Tax (VAT). VAT is a tax levied on the consumption of goods and services at each stage of the supply chain. Businesses act as collection agents for VAT, charging it to customers and then remitting it to the government.
In contrast, corporate tax is a levy on a company’s net profits after accounting for all expenses and deductions. While both are government-imposed levies, they target different aspects of a business’s financial activity.
what is Penalty for not paying Corporate Tax in uae?
Corporate tax is not an optional expense in Dubai. Failing to register or meet your tax obligations can result in hefty penalties.
Fines: The UAE tax authorities can impose significant fines for non-registration, late filing of tax returns, or non-payment of taxes. These fines can be a percentage of your outstanding tax liability or a fixed amount, depending on the severity of the offense.
Interest Charges: Late payments accrue interest, further increasing your tax burden.
Business License Suspension: In extreme cases, the authorities may suspend your business license until all outstanding taxes and penalties are settled. This can severely disrupt your operations and damage your reputation.
Reputational Damage: Non-compliance with tax laws can tarnish your company’s image and make it difficult to secure funding or attract new business partners.
Why corporate tax is important in Uae?
The introduction of corporate tax in the UAE marks a significant shift in the country’s economic landscape. While the full impact remains to be seen, the system offers potential advantages for both the government and businesses. The government ,gains a new revenue stream to fund public services and diversify its income sources. Businesses can benefit from tax-free zones, deductions, and a competitive tax rate. Ultimately, a well-designed corporate tax system can contribute to economic growth and solidify the UAE’s position as a global hub for trade and investment.
