Less than two weeks before the corporate tax goes into effect on June 1, the UAE Ministry of Finance announced that business owners in the country would only be subject to corporate tax if their sales in the calendar year exceeded one million dirhams ($272,294).
The ministry said on Wednesday that Cabinet Resolution No. (49) of 2023 aims to clarify the application of the corporate tax system for residents and non-residents and “ensure that only business income is taxable.”
The decision aims to clarify the details of the application of the corporate tax system in the UAE to natural persons (individuals in this context), and to ensure that the tax is imposed on the income of their businesses or business activities only.
The decision also clarifies that personal income, particularly from employment, investments and real estate (which do not require a license to practice), is not subject to corporate tax. Individuals doing business will be subject to corporate tax and registration requirements only if their combined turnover exceeds AED 1 million during the year.
Undersecretary of the Ministry of Finance Younis Haji Al Khouri said that the new decision “confirms the UAE’s commitment to implementing a competitive tax system for both local and foreign investors and individuals, by simplifying the corporate tax system, which contributes to enhancing the attractive business environment that supports the growth of small enterprises, startups and the economy in general.”
For example, if an individual residing in the UAE conducts an online business and their combined annual turnover exceeds one million dirhams, under the new resolution, the business income of an individual residing in the UAE and collected from their online work will be subject to corporate tax. However, if an individual resident in the country also earns income from renting property and personal investments, these sources of income will not be subject to corporate tax as they fall under the categories outside the scope of tax, according to the decision issued.
On the ninth of December 2022 last year, the UAE issued Federal Decree-Law No. (47) of 2022 on corporate and business tax, known as the “Corporate Tax Law”.
The Corporate Tax Act lays down the legislative basis for the introduction and application of a federal corporate tax in the State and applies to fiscal years commencing on or after June 1, 2023.
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Corporate tax rates are set as follows: 0 percent for taxable income up to AED 375,000, and 9 percent for taxable income above AED 375,000.
A few days ago, the Ministry of Finance issued an explanatory guide for the purposes of the Corporate Tax Law that includes clarifications on the various advantages of the corporate tax system in the country.
In April, the Ministry of Finance also clarified that small businesses in the UAE with revenues of 3 million dirhams or less could benefit from the new corporate tax exemption program.
The ministry said the ministerial decision on the exemption of small businesses “treats a taxable person as having not received any taxable income in a certain tax period where the revenues did not exceed a certain limit.”
Corporate tax is a form of direct tax levied on net income or profit earned by corporations and other businesses. In some other countries, corporate tax is referred to as “corporate income tax” or “business profit tax”.
Most countries in the world have a comprehensive corporate tax system including most of the GCC countries.
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