Introduction To UAE Corporate Tax 2023 part 1 – that will be the topic of today’s article.
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Since its inception, the United Arab Emirates has been without a tax burden. With this development, people were able to do business without third-party involvement. Even though there’s an extra fee to pay for international transactions, it’s quite low compared to other countries in the world.
But recently, the country is said to introduce its first-ever corporate taxes, set to start in 2023. Since change is constant, this news represents a significant shift for a country that’s long attracted businesses worldwide. Thanks to its status as a tax-free commerce hub! Meanwhile, businesses will be subject to the tax from June 1, 2023.
However, the country’s statutory tax rate will be 9% for taxable income exceeding 375,000 UAE dirhams ($102,000) and zero taxable income. In the long run, this will boost small businesses and startups, according to the ministry. In fact, the reports made it known that this UAE corporate tax system will be among the most competitive in the world.
Would you love to know more about the new corporate tax system in the United Arab Emirates? Do you want to travel to this country anytime soon? Are you scared of being taxed? If you answered yes to these questions, worry less! This is the right platform that keeps you up-to-date with the latest travel tips and guides.
Today, our focus will be on introducing the corporate tax, set to start in 2023. Not only is that, but we have compiled this article to walk you through the benefits of this corporate tax, why you need to abide by its rules and regulations, and many other things, to mention a few. Does that sound interesting? Well, read further to have a glimpse of what we’re saying.
Overview of the New UAE Corporate Tax 2023
According to the Ministry of Finance, United Arab Emirates, the corporate tax regime was designed to incorporate best practices globally. That being said, the program will minimize the compliance burden on businesses.
In addition, the corporate tax will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with internationally accepted accounting standards, with minimal exceptions and adjustments. Also, the corporate tax will apply to all businesses and commercial activities alike. But it excludes the extraction of natural resources that remain subject to Emirate tax.
Furthermore, free zone businesses in the country can therefore continue to benefit from these tax incentives as long as they meet the requirements. In contrast, other companies within the UAE’s many free zones have long enjoyed zero taxes and full foreign ownership, among other benefits.
According to the reports, the new corporate tax announcement gives companies in the UAE roughly a year and a half to prepare for taxes. Still, reactions are mixed on whether the move will allow the Gulf sheikhdom to retain its attractiveness to businesses. This is why Mark Hemmings, vice president of tax and treasury at Dubai-based specialty services firm Kent, views the decision as “practical and sensible.”
He also disclosed that “It will be very interesting to see the detail, but at first glance, this looks like a practical and sensible approach to ensure companies in the UAE can comply with the anticipated new international tax rules, whilst ensuring the UAE remains an attractive location for businesses to operate,”
Benefits of Corporate Tax in Today’s World
Corporate income tax (CIT) is a tax on a company’s net profits, and almost all countries levy it. Just like any other taxation system, corporate taxation means more than just generating revenue for the government; CIT also has some social benefits along with its economic advantages. To get to know them better, see the ten benefits of corporate tax in today’s world presented below.
In a bid to discourage tax avoidance, total transparency is required from companies so that they don’t take undue advantage of the system and pick only the most beneficial income tax structure for themselves. If a company has to show its total earnings, profits, and losses to the government, there is little chance it will hide anything.
Removes Doubts about Income
When companies are taxed on their net income only, they have no motive to overcomplicate or disguise their earnings. They can report any value as sales revenue because it will always lead to taxation, and they will never need to question the authenticity of their earnings in doing so.
Creates a Competitive Environment
When both large and small companies compete in a market and pay taxes on their respective earnings, it creates an equal environment for all businesses — no matter how large or small — to work and grow within. Moreover, if a company is taxed at lower rates than its competitors, it will suffer. It will find it challenging to keep up with other companies indefinitely.
Reduces Bias against Corporations
Unlike personal income tax systems where wealthy individuals are usually given tax breaks and targeted benefits, corporate taxation treats every company the same way regardless of its size, popularity, success, and earnings. This reduces the bias against corporate entities that is usually common among people owing to envy or ignorance.
If a business has to pay taxes for any price under a certain threshold or offset one tax with another by spending — as is the case with many countries — then it is incentivized to grow in size and provides the government with more revenue. This is beneficial for both parties because businesses can generate more income while collecting more taxes.
Penalizes Misuse of Resources
Countries that impose corporate taxation on companies are always at an advantage compared to other countries where businesses do not pay taxes. This is because the former takes away resources from their citizens which they would otherwise use in an unproductive manner or misused for negative purposes.
Reduces the Burden of Personal Income Tax
When a corporation is taxed on its net income, it reduces the tax burden of personal income taxpayers. This is because companies usually do not pay taxes on salaries to their workers or profit-sharing bonus that they distribute among key employees.
Encourages Development and Innovation
If a business pays any corporate tax, then it will always be at an advantage as compared to those companies that don’t. This is because those businesses which do not pay corporate taxes survive on the revenue generated by the other group and thus do not have sufficient funds for development or innovation.
Gives a Stronger Economy
The constant growth of a country’s GDP can only come from a strong economy that collects taxes from both its citizens and businesses. This strengthens the country’s economy because it can spend tax money on local development, foreign aid, environmental protection programs, etc.
Provides Better Opportunities for Investment
The more profitable a business is, the greater the amount of investment it attracts to itself. With increased investment opportunities come higher chances of success for a company, making the business environment more attractive to new businesses.
Tax Systems in the United Arab Emirates
Many countries in the world have a tax system, and what it means to be taxed varies between each. In UAE, there is no federal income tax as this will not fit into the current UAE tax system, which is based on charging companies for their activities within the country.
The United Arab Emirates’ economy has grown significantly since its formation in 1971, and its oil exports keep the economy running, but that’s not enough to support growth. While taxes are not used within UAE for citizens or companies, there is a system of fees known as Zakat, which all Muslims pay each year during Ramadan.
A tax system based on charging companies for their activities was implemented in 1998 after the formation of the UAE government. The Impost, or general tax system, led to more foreign businesses being attracted to the region, which helped build its local economy.
Impost charges are levied on companies that import goods into UAE using an Invoice-Import Method. They also include charges for all goods and services inside UAE, including shipping, insurance, and brokerage. Companies who provide services in UAE but do not import goods are charged based on their number of employees (Empowerment Tax).
Companies that operate outside the UAE which offer services to people within UAE are forced to pay taxes for this work through an External Commercial Presence (ECP) Method. Companies operating within UAE who import goods and provide services are charged taxes every year.