Corporation tax has landed, will you need to pay 0% or 9%?

It was perhaps inevitable that following the introduction of 100% foreign ownership, a move to a greater knowledge based economy and many other legislative changes making foreign investment favorable, that a business tax would follow.

Corporation tax is here and registration for all UAE based businesses is mandatory.

The big question is will your business be paying 0% or 9% corporation tax and what should you do now?

Corporation tax 101

Here are the basics that you need to know:

• Registration is now open and if you have a UAE entity, then you need to register to avoid penalties,
• This is a tax on the sale of goods and services and it is a tax on profits after deduction of allowable business expenses,
• Individuals do not need to register unless they are carrying out a business activity, such as freelancers operating with a business license,
• Business relief of the first AED 375,000 of profits will be at 0% and the excess at 9%
• Tax returns will be based on your accounting year end, and the first period that you will need to submit is for year ends ending on or after 1 June 2023.
• Filing of the tax return must be made within 9 months of the year end and is made on a self-assessment basis,
• Free zone companies must also comply with the new law.

The legislation is lengthy, complex and more detail will be coming out over the next weeks and months in the form of further Cabinet decisions.

0% or 9%?

Whilst all businesses need to register, the rate of tax to pay depends on whether you have a local or free zone business and a number of other important factors which will determine what types and sources of income will be charged at 0% or 9%.

Everything in legislation is connected and if you go back to the structure of the free zones, you will know that they are designed with some key conditions:

• Guaranteed 0% business taxes of licensed members starting from 50 years of constitution of the free zone, on a renewable basis,
• International trading, free zones exist to license businesses that trade within the same zone and outside of the UAE,

Now, for a free zone entity to maintain 0% corporation tax, it will need to comply with all of the following additional conditions:

• Maintains substance in the United Arab Emirates
• Conducts business on an arms-length basis,
• Complies with transfer pricing regulations,
• Other conditions in relation to qualifying income and as prescribed by the Minister.

As a general matter of planning your free zone business, you should avoid mixing local and international business within the same entity since if the 0% conditions are broken, potentially all of the business profits would be charged to tax at 9%.

Holding Companies

Dividend income and capital gains will be taxed at 0% subject to meeting certain conditions in relation to the level of participation of the holding.

Next Steps

Reach out to your OnPro representative for a discussion on how the new regulations impact your business.

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