About Corporate tax in the UAE

Corporate tax is the most important element of a nation’s economic structure. It will help the government to obtain revenue that can be further utilised to fund different public services including healthcare, education, infrastructure development, and more. The United Arab Emirates (UAE) is considered to be a thriving business hub for many entrepreneurs and investors across the world. This article will discuss the different aspects of corporate tax in the UAE including various laws and regulations.

Understanding Corporate Tax in the UAE

The UAE possesses a short history of corporate taxation where the first corporate tax in the UAE was established in 1965 two years later the UAE gained independence. However, this was limited to foreign oil companies operating in the UAE till the law was revised in 1974. Later the tax rate was increased up to 55% and in 1980, followed by the cancellation of other corporate tax on all business in the nation, the UAE government terminated the corporate tax on all oil companies as well.

Later on, the nation was popular for its tax-friendly policies which acted as the core element for attracting foreign investors and entrepreneurs. According to the World Economic Forum, the UAE has been ranked as the 11th most favourable country globally for conducting business.

Types of Corporate Tax in the UAE

There are mainly two types of corporate tax law in UAE including corporate income tax and value-added tax.

Corporate Income Tax

Even though the nation does not facilitate any federal corporate income tax, most businesses operating in the UAE are subject to corporate income tax in the form of “branch taxes”. Branch taxes are limited to representative offices of foreign companies that operate within the country. Hence, the tax rate for branch taxes is 20% of the firm’s taxable income.

Value-Added Tax (VAT)

The UAE government introduced the VAT system in 2018 which is a form of consumption tax subject to goods and services at different levels of the supply chain. The government facilitated a standard VAT rate of 5%, which is relatively a lower rate compared to many other foreign countries. Hence, VAT can be referred to as the fundamental revenue stream for the UAE government and it accrued an estimated amount of AED 27 billion in 2019.

Exemptions and Deductions

The government initiated certain exemptions and deductions in corporate tax in the UAE to promote business development and alluring foreign investments. However, these exemptions apply to businesses that meet specific criteria such as:

Free Zone Enterprises

Foreign businesses situated in designated free zone areas are excluded from paying corporate tax for up to 50 years.

Small Businesses

Firms with annual revenue lower than AED 187,500 are exempted from registering for VAT.

Tax Losses

Companies experiencing losses can carry them forward for a period of up to five years to offset potential taxable profits in the future.

Investment in Infrastructure

Businesses investing in specified infrastructure projects may qualify for a tax exemption extending up to 50 years.

Penalties for Non-Compliance

The UAE government facilitates strict regulations regarding tax compliance. Businesses that fail to comply with these laws may be subjected to heavy penalties such as monetary fines, imprisonment, and even business shutdown. Hence, companies operating in any Emirates in the UAE must maintain proper accounting and bookkeeping records from FTA-approved auditors in the UAE to comply with VAT regulations. Companies that fail to register for VAT on time or in case of submitting incorrect reports or late tax returns may penalise heavy amounts ranging from AED 500 to AED 50,000.  

Conclusion

The UAE facilitates a tax-friendly environment for businesses that plays a crucial role in enhancing the nation’s economic growth and alluring foreign investors. Moreover, the introduction of VAT in 2018 further improved the revenue streams of the nation, which is critical for funding public services. However, foreign businesses must comply with corporate tax in the UAE to prevent heavy fines.

For any queries on corporate tax in the UAE, contact Alchemy Search, our experienced professionals offer expert assistance in corporate tax matters in the UAE. Partner with us to receive excellent assistance and guidance for effective corporate tax management in the UAE.