One of the significant changes to the UAE’s financial landscape is the introduction of Corporate Tax (CT) with effect from the year 2023. This critical shift has implications for both mainland and free zone companies. In this blog, we’ll explore corporate tax, its rate, and its impact on different types of companies in the UAE.
Corporate tax is a levy placed on a firm’s profit to raise government revenue. The tax rate is applied to companies’ net profits within a financial year. It’s a significant part of most countries tax systems and is now becoming a reality for businesses in the UAE.
The new corporate tax applies to all companies operating in the UAE, both onshore (mainland) and offshore (free zones). However, it does not apply to companies engaged in oil and gas exploration and production or to branches of foreign banks. Further, it applies to companies and not to individuals.
As of the time of writing, the UAE has announced the introduction of corporate tax, effective from June 2023. The UAE has set the corporate tax rate at 9%, which is very competitive compared to global tax rates.
Mainland companies operate under the jurisdiction of the UAE government. Each of the UAE’s seven emirates(states) has its mainland licensing authorities. Mainland licensors are responsible for issuing licenses to companies operating within their jurisdiction, which is within the emirate, excluding free zones in the emirate. Mainland companies have access to the local market and are open to any activity businesses need to license for.
Yes, under the new regulations, companies incorporated in UAE free zones are subject to corporate tax, the same as mainland companies. However, free zone companies that qualify for specific conditions have been incentivised with 0% tax rates.
With this, free zone companies doing business with other free zones and the rest of the world are at an advantage, as they can use the incentive and offer competitive pricing compared to mainland companies.
Companies subject to corporate tax must file an annual tax return with the Federal Tax Authority. They must also keep accurate and up-to-date financial records, which must be available for review by the tax authorities.
For entrepreneurs planning to start a business in the UAE, it’s crucial to factor in corporate tax in financial planning and decision-making.
As a first step, look at your business and the target market. Considering operational convenience, it is better to opt for a mainland license if you primarily target customers on the mainland. This can be different if you are providing services through the internet, and your presence does not mean any difference.
Instead, if your target is companies in free zones or customers outside UAE, you should base your company in a free zone and meet conditions that qualify you for a 0% tax incentive.
Even though this is a comprehensive definition, many other factors can influence this decision. One should be careful about shareholding, tax implications from a group company point of view, and many others. It is advisable to consult a tax consultant before you decide on this. You can also schedule a discussion with our consulting team, who will guide you through the tax implications of your business in the UAE.
The introduction of the corporate tax in the UAE marks a significant milestone in the country’s fiscal landscape. While it adds a new layer of financial responsibility for businesses, the competitive rate of 9% is still attractive compared to global standards. Whether you’re operating a mainland company or a free zone company, understanding these changes and preparing for them is critical to maintaining compliance and ensuring the sustainability of your business in the UAE.