UAE’s single-digit corporate tax regime: Redefining global standards for fiscal efficiency

Move has set the stage for unprecedented growth and prosperity

By Sheetal Soni & Prateek Tosniwal

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Published: Mon 13 Nov 2023, 10:09 PM

Last updated: Mon 13 Nov 2023, 10:10 PM

In a transformative move that has reshaped the economic landscape, the UAE introduced its comprehensive Corporate Tax regime on June 1, 2023. This historic step has not merely redefined the nation’s fiscal policies but has also positioned the UAE as a beacon of innovation and efficiency in the global business arena, setting the stage for unprecedented growth and prosperity.

Navigating the corporate tax landscape

Embracing transparency and simplicity, the UAE’s corporate tax has to be meticulously calculated annually based on a business entity’s taxable income within a specific tax period. This approach aligns seamlessly with the financial year for which financial statements are prepared, emphasizing fiscal responsibility.

The regime introduces two pivotal tax brackets: businesses with taxable income below Dh375,000 enjoy a complete exemption, nurturing entrepreneurial ventures. For incomes exceeding this threshold, a flat nine per cent tax rate provides a fair and predictable framework, promoting economic growth. Furthermore, businesses within free zones, designated as qualifying free zone persons, enjoy a zero per cent corporate tax rate on qualifying income, enhancing the allure of these zones for investors seeking tax-efficient environments.

Inclusivity in taxation

The UAE’s corporate tax regime is remarkably inclusive, encompassing a diverse array of taxable entities. Incorporated Juridical Persons, whether local or foreign corporations effectively managed within the UAE, fall under its purview. Additionally, non-resident juridical persons, boasting a permanent establishment in the UAE and those earning state sourced income, are subject to this transformative tax framework. Natural persons, entrepreneurs earning business income without incorporating corporate entity with an annual turnover exceeding Dh1,000,000, are part of this progressive approach, aligning with the principle of progressive taxation.

Sheetal Soni, Partner - MI Capital Services
Sheetal Soni, Partner - MI Capital Services

Comparison with global taxation

The UAE’s taxation system stands out globally for its straightforward and streamlined approach. The lowest tax rate of nine per cent provides a clear and predictable framework, fostering an environment conducive to investment and economic growth. The tax rate is the lowest among various major countries like the USA (27 per cent), UK (25 per cent), Singapore (17.5 per cent), and other 140 taxpaying countries. Unlike the complexities often found in other nations’ taxation systems, the UAE’s approach simplifies the process for taxpayers, reducing administrative burdens for businesses and enhancing the country’s appeal as a business-friendly destination.

Breaking free: Series of irresistible benefits and exemptions unleashed for free zone businesses in UAE

Free Zones in the UAE offer a range of benefits, including tax exemptions on qualifying incomes for businesses registered within these zones. This strategic initiative has been a key driver in attracting both local and international entrepreneurs, fostering economic growth, and establishing the UAE as a global business hub. Companies operating within free zones enjoy tax privileges, making them an appealing choice for businesses aiming to thrive in a tax-efficient environment.

With the recent inclusion of trading of qualifying commodities in the qualifying list of activities which can claim zero per cent tax rate benefit, significant benefit if extended to commodity traders in various free zones in UAE including numerous global entities registered in DMCC.

Other various business with following activities registered in free zones can claim benefit of zero per cent corporate tax: Manufacturing and processing of goods, headquarter business, holding of shares and securities, distribution of goods and material in and from designated free zones, reinsurance services, logistic services, wealth management services, ownership and management of ships, and financing and leasing or aircraft.

No taxation on personal income

As the name of the law suggest, UAE corporate tax law aims to tax corporations and businesses. Personal income in the hands of Individuals are outside the preview of corporate tax. Natural persons not engaged in business activities or those with businesses generating revenue below Dh1,000,000 annually enjoy tax exemptions on all their incomes, including employment, personal investment (dividends, interest income, gain on sale of securities), and real estate earnings. This exemption ensures financial flexibility, allowing individuals to explore diverse income streams without additional taxation burdens.

Exemptions for funds, trusts, and foundation structures

The UAE is a leading asset and wealth management hub, offering a range of investment fund regimes and fund vehicles that cater to a wide variety of fund manager and investor requirements. While there are various structures that collective investment funds may take, the term ‘investment fund’ refers to a contractual arrangement or legal entity whose primary purpose is to pool investor funds and invest such funds in accordance with a defined investment policy.

Regardless of the type of investment fund, the corporate tax law seeks to ensure the tax neutrality of investment funds so that investors, whether domestic or foreign, are in the same or a similar tax position as if they had invested directly in the underlying assets of the fund.

In recognition of the neutrality principle, an investment fund that meets the relevant conditions can make an application to the FTA for exemption from corporate tax as a qualifying investment fund. To qualify for exemption, the investment fund must meet specific conditions, including regulatory oversight, trading on a recognized stock exchange, and a primary purpose not aimed at avoiding corporate tax.

In addition, exemptions are extended to trusts and foundation structures to qualify for exemption from corporate tax subject to satisfying certain conditions.

No taxability on investment incomes

Investment incomes like dividends and other profit distributions received from a resident person are exempt from corporate tax. This exemption also covers distributions made by a resident free zone juridical person (whether qualifying or not) to another resident person. Dividends and other profit distributions received from foreign juridical persons are exempt from corporate tax if the recipient has a participating interest in the foreign company.

Other income and gains may also be exempt if they are derived from a Participating Interest, applying to holdings in both resident and non-resident participations. The requirements for a participating interest in both a resident and non-resident are the same, with a participation in a qualifying free zone person or an exempt person considered to meet the subject-to-tax requirement.

Small business tax relief, paving the way for SMEs and micro SMEs to thrive

Special relief is extended to business with revenue of Dh3 million and below can elect for small business relief and will not be obliged to calculate its taxable income or complete a full tax return. This will mean that eligible entities will be benefiting from both “administrative relief” i.e. relief from administrative burden of filing the detailed tax return as well as “tax relief” i.e. they will not be required to pay any corporate tax on income earned in the tax period.

Enhanced business credibility

Certainly, the implementation of corporate tax in the UAE signifies a significant step toward fiscal responsibility and transparency. As businesses embrace this new tax regime, it is imperative to recognise that maintaining accurate accounts and records is not merely a requirement but a strategic imperative. Proper documentation serves as the bedrock of fiscal compliance and efficient financial management.

Prateek Tosniwal, Partner, MI Capital Services
Prateek Tosniwal, Partner, MI Capital Services

One of the notable outcomes of adhering to corporate tax regulations is the enhancement of business credibility. Enterprises that demonstrate compliance with these tax regulations showcase their credibility and trustworthiness. This credibility, in turn, has a positive impact on relationships with clients, partners, and investors.

Investment in future development

However, this nine per cent tax rate is more than just a financial transaction: it’s an investment in the future. The tax revenue collected from businesses contributes significantly to the UAE’s development projects and initiatives. These investments can lead to improved infrastructure, better public services, and enhanced business ecosystems, creating a favorable environment for businesses to thrive.

Conclusion: Every business counts: Tailored benefits extend a helping hand to all – ensuring special care for everyone

In conclusion, the UAE’s single-digit corporate tax regime marks a transformative phase in the nation’s economic strategy, positioning it as a global leader in business efficiency. The innovative and inclusive approach, coupled with tax exemptions for various categories, underscores the UAE’s commitment to fostering a conducive environment for businesses to thrive. Special care seems to have been taken to ensure there is something for almost everyone. As the global business landscape evolves, the UAE’s progressive tax policies set the benchmark for simplicity, transparency, and investor-friendly initiatives, catapulting the nation into a new era of economic prominence.

The writers are Partners, MI Capital Services


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