Corporate Tax in the UAE Part 1: Basics and the impact on individuals

Corporate Tax will not apply on an individual’s salary and other employment income for both the public and private sector; interest and other income earned from bank deposits or saving schemes will also not be subject to it

“Explain corporate tax to me in simple words, what all will change?” my wife asked me.

“A whole lot! Let’s start with the basics,” I said.

Corporate Tax, a direct tax

Corporate Tax (CT) is a form of direct tax as compared to Value Added Tax (VAT) which is considered as an indirect tax.

Direct Taxes like CT are levied and recovered directly from the businesses on which it is imposed. Indirect taxes like VAT are also levied on businesses. However, the businesses can recover it from their customers. Accordingly, it is the customers who incur the burden of indirect taxes.

Businesses cannot pass on the burden of direct taxes to their customers.

Business Activities – Legal entities vs Individuals

CT will apply to all UAE businesses and commercial activities. One exception from CT will be the extraction of natural resources.

It appears that all activities undertaken by a legal entity (such as companies) will be deemed as “business activities” and hence covered under CT. However, dividends and capital gains earned by a UAE business from its specified ‘qualifying shareholdings’ will be exempt from CT.

On the other hand, foreign entities and individuals will be subject to CT only if they conduct a trade/business in the UAE in an ongoing or regular manner.

Impact on Individuals

First things first, CT will not apply on an individual’s salary and other employment income (both public and private sector). Further, interest and other income earned from bank deposits or saving schemes will also not be subject to CT.

Dividends, capital gains and other income earned from owning shares or other securities in personal capacity will also be outside CT regime.

However, if an individual has (or required to have) a business licence/permit including a freelance license/permit, the individual’s activities could be treated as ‘business’ and subject to CT.

It has also been clarified that individual’s investment in real estate in their personal capacity should not be subject to CT if a commercial license/permit is not required.

One of the interesting issues would be to see if an individual who owns and rents out houses/apartments on a regular basis would be covered by CT for the rental income.

Effective Date of CT

The CT regime will become effective for financial years (FY) starting on or after June 1, 2023.

A FY is generally a period covering 12 months. As per the accounting norms, companies could have different FYs such as Jan to Dec, April to March, or July to June.

If a company has a FY of Jan to Dec, CT will be applicable for FY starting Jan. 1, 2024. Similarly, if a company has a FY of April to March, CT will be applicable for FY starting April 1, 2024.

It is a pragmatic approach to align CT with companies’ accounting year. In many other countries, the financial year for corporate tax is predefined which is independent of the accounting financial year. Companies are then required to prepare two sets of books of accounts, one for accounting and one for taxation.

Rates and taxation slabs

CT will be applied on the basis of increasing slabs, another pragmatic step. The slab system will support small and medium-sized enterprises (SMEs) and provide a standard relief to large businesses.

CT will be applied as follows – (a) zero per cent for taxable income up to Dh375,000 and (b) nine per cent for taxable income above Dh375,000. Taxable income will be calculated after making certain prescribed adjustments to the accounting net profit/income of a business.

“A different tax rate for large multinationals (meeting specific criteria of 'Pillar Two' of the OECD BEPS),” I tried to wrap up using some tax jargons.

“Sounds intriguing! You promise to be ready for it?” she asked.

“Absolutely,” I smiled as we reached back home from dinner at a friend’s place.

The writer is the managing director of AskPankaj Tax Consultants. For feedback and queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.