Explained: Does corporation tax apply to the self-employed?

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“Corporation tax” can best be understood as a form of direct tax levied on the net income or profit of a company or business entity. It is also commonly referred to as “corporate profit tax” or “corporate income tax”. The UAE has now introduced, for the first time, a federal corporate tax in the country. Announcing the new tax regime, the Ministry of Finance (MOF) issued a set of key indications which serve as guidelines for the applicability of corporation tax, which would be applied from 1 June 2023 (“tax on UAE Companies”). The corporate tax law itself is awaited.

UAE corporate income tax will apply to all business and commercial activities in the UAE, except for natural resource extraction business activity, which would still be taxed according to emirate-specific taxation. The Federal Revenue Authority (FTA), established in 2016, is the government entity responsible for the administration, collection and enforcement of the corporate tax system in the UAE. In addition, the Ministry of Finance will remain the competent authority for the purposes of international tax agreements, treaties, etc., including the exchange of information for tax purposes.

Taxable threshold:

UAE corporate tax will apply to a certain portion of the total income generated, referred to as “taxable income”. Taxable income could be determined by considering the net profit of a given business entity after adjusting certain deductibles. Further information is awaited on the exact applicable criteria.

Corporation tax will be applicable on taxable income above Aed 375,000.

Thus, for taxable income up to Aed 375,000, the applicable corporation tax will be 0%.

Corporate tax rates applicable to income above AED 375,000 include:

  • 9% for taxable income above Aed 375,000; and

  • a different tax rate for large multinational companies that meet certain specific criteria.

As stated above, UAE corporate tax will apply to all business and commercial activities conducted in the UAE. The only exemptions that have been clarified at present by the MOF relate to the business activity of extracting natural resources as there is a separate taxation at the emirate level applicable to such activity. In short, all business activities conducted in the UAE, under a business license or permit, including income generated from freelancer permits (provided the taxable income exceeds Aed 375,000), should be included. within the scope of the UAE corporate tax regime. . So, if you are self-employed, licensed in the UAE and earning taxable income above Aed 375,000, you are subject to UAE company law and liable to pay applicable corporate tax.

Other exemptions from UAE company law:

  • Individual wages and employment income are tax exempt for public and private sector employees.

  • Investments made by individuals in real estate or capital gains received from personal investment made through stocks or debentures, in the form of dividends, investment returns will not be taxed as long as they are taxed. will be personal.

  • Companies registered in the UAE Free Zones will be included in the UAE corporate tax regime, however, only to the extent that they conduct business in the UAE. For business activities outside the UAE, the corporate tax exemption granted to these business entities will also continue to be honored under the new corporate tax regime.

UAE corporate tax will apply from the accounting year beginning on July 1, 2023 and ending on June 30, 2024. However, for a company whose accounting year begins on January 1, 2023 and ends on December 31, 2023, will become subject to UAE corporate income tax as of January 1, 2024. the training of their staff or the implementation of a compliance policy. Of course, the UAE Company Law has yet to be published, and a thorough review of it to understand the threshold parameters and applicable tax rate is a mandatory step.

The introduction of the new Company Law may have a multiple effect on foreign direct investment in the UAE, where investors are particularly profit conscious, for existing entities concerns could relate to the applicability of pre and after tax and double taxation. treated among others. After introducing the new corporate tax regime for the first time in the country, the UAE now aims to implement international best practices by creating a leading global hub for investment and business while accelerating the country’s strategic goals for further progress. The new changes also reaffirm the country’s commitment to upholding international tax transparency standards and tackling negative tax practices.

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