From the fiscal year beginning 1 June 2023, companies in the United Arab Emirates will be taxed. There are still a few months left for all parties involved to prepare for the change. But it is a hot topic, and everyone is discussing it, trying to determine how corporate tax will affect them individually and collectively. In this article, we will have a look at the impact that CT could have on different groups of people and businesses in the UAE.
Businesses must pay a 9% corporate tax on their adjusted taxable profits, exceeding the exemption amount of three hundred and seventy-five thousand Emirati Dirhams (AED 375,000). This tax would be levied annually. The amount of corporate tax owed by each company would impact their working capital, necessitating adjustments to address the resulting gap. Businesses need to consider the impact of corporate taxes on their finances when planning future budgets and adjust their financial needs accordingly to ensure continued operations.
Businesses operating in the United Arab Emirates can register for a single-tier corporate tax (CT) system. This allows them to combine the losses of different entities within their group to arrive at a single, consolidated taxable income. This simplifies tax management by enabling companies to manage their tax liability at the group level rather than calculating and paying taxes for each company. Additionally, companies experiencing losses can carry them forward and use them to offset their taxable profits in future years. This ensures that the corporate tax system doesn’t unfairly burden businesses currently not profitable.
Under the new law, businesses with taxable income under AED 375,000 are exempt from corporate tax. This aims to encourage new companies and startups. The alignment of the tax year with the financial year will be officially announced, and businesses will be expected to comply.
Implementing the corporate tax system will incur significant implementation, training, and compliance costs. However, business owners will likely focus on minimizing taxes through strategic planning, leading to an increased demand for professional tax accountants.
Shareholders may attempt to maintain their profit margins by raising the prices of goods and services and passing the tax cost onto consumers. This could impact purchasing power and potentially have a short-term effect on demand.
The introduction of a Corporate Tax (CT) in the United Arab Emirates is not expected to significantly impact Foreign Direct Investment (FDI) due to several factors. Firstly, the CT rate is competitively low compared to other countries. Secondly, the UAE has double taxation treaties, allowing investors to repatriate profits without further taxation. Additionally, dividends and capital gains remain exempt from CT, making them attractive to investors.
Governments worldwide rely on taxes as a primary source of revenue to fund vital services and improve citizens’ lives. Like Value Added Tax (VAT), CT will create another revenue stream for the UAE government. This revenue can then be invested in infrastructure, healthcare, and other essential areas. Furthermore, CT reduces dependence on oil income, diversifying the government’s funding sources and demonstrating a robust and mature economy.
CT legislation fosters investment and transparency, creating a stable and business-friendly environment that contributes positively to the UAE’s economy.