Does the new UAE corporate tax apply to the self-employed? – News


Under the updated regulations, certain types of income will be exempt

Published: Thu 10 Feb 2022, 13:46

Last update: Fri 11 Feb 2022, 10:34

The UAE recently announced the introduction of a federal corporate income tax for the first time from 2023.

While the new tax will apply to all businesses and commercial activities in the UAE, the UAE Ministry of Finance has confirmed that individuals will not be subject to tax on their income from employment, real estate, equity investments, or other personal income unrelated to a UAE trade or business. .

However, with corporate tax applied to natural persons having – or needing to obtain – a business license or permit to engage in the relevant commercial, industrial and/or professional activity in the UAE, what impact will this have on the independents?

Mohammad Al Dahbashi, managing partner of ADG Legal, said holders of the new self-employed permit, issued under the new labor law for self-employed expatriates, should not be subject to corporation tax on their individual income.

If self-employed persons with a business license are sponsored in a free zone and carry out activities for other companies, the sponsor will be subject to corporate tax.

He added: “Those who work as freelancers and provide services through a business or license should not be taxed on the income they generate as wages, but the business or license hosting their visa will be taxed on its net profit”.

However, Al Dahbashi said further details were awaited from the government to confirm whether corporate tax would only apply to businesses, especially with the new independent permit which allows individuals to work without the need for a sponsor or a valid employment contract.

ADG’s Head of Tax Practice, Izzat-Begum B. Rajan, shares what we know so far about UAE corporate tax:

Where will the UAE corporate tax be applicable?

It will be applied in all emirates, as it is a federal tax. Accordingly, the Federal Tax Authority will be responsible for the administration, collection and enforcement of corporation tax. The UAE Ministry of Finance will remain the “competent authority” for the purposes of bilateral/multilateral agreements and international exchange of information for tax purposes.

Who will be subject to the tax?

Corporate tax will apply to all businesses and commercial activities in the UAE, with the exception of natural resource extraction, which will remain subject to corporate tax at the emirate level.

As a result:

1. All activities carried out by a legal person will be considered as “commercial activities” and will therefore fall within the scope of corporation tax.

2. Individuals holding (or required to obtain) a business license or permit to engage in the relevant commercial, industrial and/or professional activity in the UAE will also be subject to corporation tax. This includes self-employed individuals who operate under a business license or permit.

3. Foreign entities and individuals carrying on a trade or business in the UAE “on a continuous or regular basis” will be subject to corporation tax.

4. Companies established in free zones will be subject to corporation tax, but the new tax regime will continue to honor the incentives currently offered to companies that comply with all regulatory requirements and do not do business with Mainland United Arab Emirates.

The specific sectors subject to UAE corporate tax are: companies engaged in banking, property management, construction, development, agency and brokerage.

All legal and natural persons within the scope of corporation tax will be required to register for corporation tax and file an annual tax return.

Who is exempt from corporation tax?

For individuals, the following income should not be taxed:

1. Salary and other employment income (whether received from the public or private sector).

2. Investment in real estate on a personal basis provided that the individual is not required to obtain a business license or permit to engage in such activity in the UAE.

3. Dividends, capital gains and other income from owning stocks or other securities personally.

4. Interest and other income from bank deposits or savings plans.

For businesses, the following income should not fall within the scope of UAE corporation tax – the terms of these exemptions are yet to be clarified:

1. Dividends and capital gains from its “eligible holdings”,

2. Qualifying intra-group transactions and reorganizations. Potentially, this means companies will have to use specific reporting and presentation templates for their accounts, separating exempt income from tax.

Generally, foreign investors’ income from dividends, capital gains, interest, royalties and other investment income will not be subject to tax.

UAE withholding tax will not apply to domestic and cross-border payments of any kind under the new UAE corporate tax regime.

When is the UAE TRQ applicable?

For financial years beginning on or after June 1, 2023. For example, if for a given year, the financial year of a company begins on January 1 and ends on December 31, the new tax rules will apply to this company for the fiscal year opened on January 1, 2024.

What income will be taxed?

The taxable income will be the net accounting profit of a company, after regularization of certain elements (conditions to be specified).

A company’s accounting net profit is the amount reported in financial statements prepared in accordance with internationally accepted accounting standards.

Losses incurred (from the effective date of corporation tax) can be used to offset taxable income in later years. As a reminder, a loss for corporation tax purposes (known as a “tax loss”) would occur when the total of the deductions to which the companies are entitled is greater than the total of the income for the financial year concerned.

Tax credits

Foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against corporate tax payable by the UAE.

In addition, UAE companies will need to comply with transfer pricing rules and documentation requirements established with reference to the OECD Transfer Pricing Guidelines.

What are the tax rates?

0% for taxable income up to 375,000 Dh (about 102,000 USD);

9% for taxable income above MAD 375,000; and

A different tax rate for large multinationals that meet specific criteria set with reference to the second pillar of the OECD BEPS rules.

What is a large multinational?

A multinational corporation is a corporation that operates in its home country, as well as in other countries through a subsidiary, branch or other form of presence (or registration) in the country. ‘foreigner. Earning income outside of its home country without a foreign presence or registration would not make a company a multinational corporation for the purposes of UAE corporation tax application.

In the context of the Global Minimum Effective Tax Rate (GMETR) as proposed under the second pillar of the OECD BEPS rules, “large” refers to a multinational corporation with consolidated worldwide revenues of more than 750 million euros (about 3.15 billion dirhams).

Tax unit

A group of UAE companies could choose to form a tax group and be treated as a single taxable person (conditions to be specified). As a result, a UAE tax group would only be required to file one tax return for the entire group. The tax losses of a company in the group can be used to offset the taxable income of another company in the group (conditions to be specified).


What still needs to be clarified by the UAE government?

Many aspects remain unclear. Further guidelines are being prepared and will be issued in due course by the Government of the United Arab Emirates. Specifically, we look forward to receiving more details on:

  1. Corporate tax registration, compliance and filing rules (online) for companies and individuals (including those established in free zones),

  • Definition of “ongoing or regular” business activities for the application of UAE corporate income tax to foreign entities and individuals,

  • The notion of “qualifying holdings” of a UAE company,

  • Exemptions for foreign investors,

  • Rules and deadlines for carrying forward losses, and rules for carrying forward potential losses, both for companies and for tax groups,

  • Group tax consolidation rules,

  • The tax rate applicable to large multinationals,

  • And more generally, any other possible tax exemptions and exclusions.

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