The UAE is a tax-friendly destination, courtesy of its well-rounded corporate tax relief measures. Balancing international standards and local needs, these measures foster business interest and growth in the UAE.
However, reaping the benefits is not automatic. It depends on businesses’ ability to comply with procedures and to strategize effectively.
Hence, the UAE corporate tax relief system is not just about providing incentives. It is also about steering businesses towards responsible practices and sustainable growth.
What is the UAE corporate tax relief?
At its core, the UAE corporate tax relief is a boon for corporations looking to expand their financial horizons. In essence, it is a reduction in the tax liabilities owed by corporations to the government. This system operates in various ways depending on the business size, industry, and other specifications provided by UAE law.
Benefits of corporate tax relief
- Reduced financial burden: The UAE corporate tax relief majorly alleviates the financial burden on businesses. Lowering the tax liability allows corporations to retain more of their earned profit.
- Enhanced cash flow: Moreover, due to the reduced tax requirements, businesses experience improved cash flow. This improved liquidity provided by UAE corporate tax relief enables technology’s investment, workforce expansion, and other growth-oriented strategies.
- Promotion of entrepreneurship: Similarly, reduced tax rates encourage the launch of new enterprises. The UAE corporate tax relief may act as a catalyst for budding entrepreneurs to bring their business ideas to life.
- Economic stimulation: In addition, by distributing wealth back to businesses, the tax relief helps stimulate economic activity, leading to an overall increase in the country’s GDP.
Read: New UAE corporate tax exemptions, amendments and penalties
Tax relief policies in the UAE
The UAE Ministry of Finance launched Federal Decree-Law No. 47 in 2022. This regulation introduces an extensive corporate tax policy on business profits, including small business relief (SBF).
Under this decree, corporate tax relief is extended to individuals. Specifically, salary and investment income are exempt from corporate tax. Moreover, entities operating within the qualifying freezones receive attractive tax benefits. A zero percent corporate tax rate applies to them, imposing no additional tax obligations.
Additionally, various ministerial decisions have been implemented, primarily aimed at small businesses. From start-ups to micro-sized operations, these resolutions provide corporate tax relief, ease compliance costs, and encourage entrepreneurship.
Given the importance of global benchmarks, the decree integrates the element of foreign tax credit into the UAE corporate tax framework. This assures credit for any foreign tax paid by UAE taxable persons and brings the UAE corporate tax system in line with international standards.
Finally, except for Bahrain, the UAE has set the bar high in the GCC region by introducing one of the lowest corporate income tax rates globally, a standard rate of nine percent.
Compliance with tax relief policies
Small business relief
The SBR is a considerable component of the UAE corporate tax relief system. Catered to businesses garnering annual revenues not exceeding AED3 mn, it carries specific eligibility terms. For example, beneficiaries cannot be part of a Multinational Enterprise Group or a Qualifying Free Zone Person.
For SBR applications, business entities must furnish relevant records to the Federal Tax Authority (FTA) to verify compliance. They must maintain accurate records for seven years after the relevant tax period. These records, evidencing compliance, comprise bank statements, sales ledgers, invoices, and more.
However, tax losses or net interest expenditures from the relief period cannot be carried forward to future tax periods.
Intra-group transfer tax relief
Likewise, the UAE corporate tax relief system extends to intra-group transfers. Nonetheless, recipients must meet specific requirements, such as UAE residency, having the same financial year, and using consistent accounting standards. Meeting these prerequisites is vital to successfully securing tax relief.
Freezone entity tax relief
Freezone entities, too, can leverage UAE corporate tax relief, but strict compliance is essential. These entities must adhere to transfer pricing rules and fulfill documentation requirements. In addition, they must maintain a substantial presence in the UAE to benefit from the zero percent corporate tax rate.
Frequently Asked Questions
Q: Are VAT and UAE corporate tax interchangeable taxes in the UAE?
No, VAT and corporate tax in the UAE are distinct. Both types of taxes are applicable in the country, serving different purposes. VAT is a consumption tax on goods and services, while corporate tax pertains to the net income of a company.
Q: Is UAE Corporate Tax applied universally across the UAE?
Absolutely. Every business, regardless of its emirate, is subject to this tax, provided it meets the requirements set by the FTA.
Q: Does ownership, be it by UAE or GCC nationals, affect a UAE entity’s liability to corporate tax?
No, the imposition of UAE corporate tax is irrespective of the entity’s ownership. Legal entities based or incorporated in the UAE, including foreign bodies having a stable establishment or taxable linkage in the UAE, are all subject to UAE corporate tax. This stands regardless of the nationality or residence of the founding or owning members of the entity.
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