Corporate Tax is coming and coming very soon! As the UAE government has announced the Corporate Tax on business income from the financial year starting 01 June 2023. So, the first question is what is Corporate Tax?
What do we know about Corporate Tax?
The Corporate Tax, also generally called company tax, is a tax imposed on the net profit of the corporation and other similar organizations. It is a directly imposed tax on income generated excluding the cost of materials, administrative expenses, and all other kinds of expenditures on research, marketing, and sales.
Corporate Tax can be reduced from the set limit by the Government by finding the loopholes in the tax policy and by reducing the on-paper business income by increasing different expenditures. We will discuss in detail how to tackle the Corporate Tax situation through different strategies.
When is the UAE government implementing Corporate Tax?
UAE was considered a tax haven as there was zero income tax implied on the profits generated by the companies. Now, the situation is changing as more and more people are shifting to the business arena. The government has seen an opportunity to increase its revenue by implying taxes on the profits of different entities.
The Ministry of Finance (MOF) of the UAE government announced on 31st January 2022 that new taxes will be implemented in the UAE. They have announced the implementation of the federal corporate income tax (CIT). It is expected to be implemented from 1st June 2023 throughout the United Arab Emirates.
What are the main features of Corporate Tax implemented by the UAE?
The details of the upcoming Corporate Tax are explained below this will help the business holders to prepare for what is coming their way. It will help them to analyze the problem and prepare for the problem.
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Proposed rates of Corporate Tax
UAE which was previously known as tax heaven still isn’t applying high tax rates on their corporations. The rates proposed by the UAE government are quite reasonable as compared to the rates throughout the world. Different rates of Corporate Tax according to the business scale are as follows:
- 0% or no Corporate Tax on the small-scale business which is only earning taxable profits up to AED 375,000 approximately 102,000 US dollars
- 9% will be the rate of Corporate Tax for the businesses earning taxable profits above AED 375,000
- Multinational organizations generating huge revenues above 1.2 billion AED will get a different Corporate Tax treatment to be announced in due course.
Scope and subjected businesses
Corporate Tax (CIT) will apply to the following incomes:
- The implemented Corporate Tax will apply to the profit-generating commercial, industrial, and other kinds of professional business activities.
- It will also be implemented on the individual level. However, only on those individuals that are required to have a business license or permit to work and perform any kind of commercial or professional activities on the premises of the UAE.
- Freelancers also come under this category if they are working under some kind of freelancing license.
- This Corporate Tax will also be implemented on local banking services (foreign banks are already paying tax on their incomes)
Exemptions from Corporate Tax
The Ministry of Finance of UAE has announced that new taxes will not be applicable on the following types of incomes:
The Federal and Emirate Governments and their departments, authorities and other public institutions
- Wholly Government-owned UAE companies that carry out a sovereign or mandated activity, and that are listed in a Cabinet Decision
- Businesses engaged in the extraction and exploitation of UAE natural resources that are subject to Emirate-level taxation (T&Cs apply);
- Charities and other public benefit organizations that are listed in a Cabinet Decision (T&Cs apply);
- Public and regulated private social security and retirement pension funds;
- Investment funds (T&Cs apply)
What are the steps we can take to prepare our business for Corporate Tax in UAE?
When any problem arises, it is necessary to first recognize the problem, gather the information about that problem, and then look for the solution. So before solving this tax problem we need to gather useful data about Corporate Tax and then formulate a strategy to minimize the Corporate Tax as much as possible.
The following steps can be useful to prepare your business to fight the upcoming Corporate Tax reforms in UAE:
Accept and embrace the reforms
We should prepare our business for Corporate Tax and the first and foremost step is to have a basic understanding of the Corporate Tax implication. A lot of stuff is available on the website of the Federal Tax Authority or you can also check this link for Corporate Tax Training in UAE.
Communicate the issue among employees and board members
Once the problem is identified it is time to communicate all the issues and challenges you will face due to Corporate Tax. The financial, legal, and operational impacts of the new Corporate Tax should be communicated to all the stakeholders, owners, and board members so that a solution can be devised with the consultation of everyone involved. Also don’t forget to check on following items while preparing for Corporate Tax.
- Get your business Accounting Practices aligned as per IFRS
- Tax planning culture to be in place specially for large groups
- Staff Training for Corporate Tax awareness
- Review the pricing structure to be commercially viable
- Review the longterm suppliers’ contracts to have impact analysis on cost structure, as Corporate Tax will hit the bottom line of the business
- Cash Budgets to account for the adverse working capital effect
What is the importance of Corporate Tax consultants?
Professionals can help business owners to better understand the problems related to tax reforms and guide them about the ways through which this Corporate Tax can be minimized. Corporate Tax consultants can help the business owners in the following ways:
- They can guide you if the taxes are applicable to your business or not
- They can help you sort out your finances and guide you about what kind of operational and other expenditures should be added to your finance sheet
- They can help you file taxes and take care of all the legal matters which will not be easily understood by business owners
- They will help you with the proper documentation of your finances and look for any gaps left which can damage your financial growth
Whether you engage a Tax Consultant or prepare it on your own, now is the right time to start assessing the impact of Corporate Tax on your business.