Starting June 2023, a new corporate tax is making its way to the UAE, affecting both mainland and free zone businesses. But don’t fret, there’s good news too! Small businesses earning up to AED 375,000 won’t be taxed at all, while larger companies will face a 9% tax on income exceeding that threshold. Make a note of the registration deadlines (February 28, 2024, and September 30, 2025) to stay on top of your tax game. Government entities, oil and gas production companies, and more are exempt, but here’s the real bonus: free zone businesses meeting the Qualifying Free Zone Person criteria can enjoy a fabulous 0% tax rate on their “qualifying income”.
But there’s more! Just a week before the eagerly awaited launch of Corporate Tax in the United Arab Emirates (UAE), the Ministry of Finance released a series of ministerial decisions that shed light on exemptions, payment procedures, and other important aspects of the new tax system. These decisions aim to enhance the flexibility of the UAE’s Corporate Tax regime and create a supportive business environment for all sectors. Let’s delve into the details of these updates and understand how they will impact businesses in the UAE.
Ministerial Decision No.114 of 2023: Accounting Standards and Methods
To streamline the tax calculation process, this decision provides clear guidelines on accounting practices for businesses in the UAE. Larger companies with revenues exceeding AED 50 million must use International Financial Reporting Standards (IFRS) for their financial statements. Small and medium businesses, with revenues not exceeding AED 50 million, have the option to use IFRS for SMEs. Additionally, businesses with less than AED 3 million in revenue can use the cash basis accounting method, reducing their compliance burden.
Ministerial Decision No.115 of 2023: Pensions and Social Security Funds
This decision focuses on ensuring that privately regulated pension funds and social security funds in the UAE remain exempt from Corporate Tax. It aligns the UAE’s practices with international standards to maintain the funds’ exempt status when investing globally. The decision also outlines conditions, including maximum contributions per beneficiary and annual compliance confirmation by a statutory auditor, to ensure the integrity of the exemption.
Ministerial Decision No.116 of 2023: Participation Exemption
To prevent double taxation and encourage investment, this decision provides Corporate Tax exemptions on dividends, profit distributions, and capital gains from a Participating Interest. A Participating Interest refers to a 5% or greater ownership stake in another entity’s shares or capital, held for at least 12 months. The exemption applies if the subsidiary is in a jurisdiction with a Corporate Tax rate of at least 9% or can demonstrate an effective tax rate of at least 9% on profits, income, or equity.
Impact and Significance:
These ministerial decisions represent the UAE government’s commitment to a smooth transition into the era of Corporate Tax. By clarifying accounting standards, exemptions for pension and social security funds, and participation exemptions, the UAE aims to create a transparent and supportive tax environment for businesses. These updates not only reduce the compliance burden on businesses but also encourage investment by mitigating double taxation concerns.
As the UAE prepares to introduce Corporate Tax, these last-minute updates provide valuable insights into the exemptions, payment procedures, and accounting standards that businesses will need to navigate. The government’s proactive approach to addressing these crucial aspects demonstrates its commitment to maintaining a business-friendly environment while diversifying its revenue sources. Businesses in the UAE should familiarize themselves with these changes and ensure compliance to make a smooth transition into the new tax regime. By embracing these changes, the UAE continues to position itself as a progressive and attractive destination for businesses and investors alike.