Top 7 Impacts of Corporate Tax in UAE
As of the fiscal year beginning 1st June 2023, businesses in the United Arab Emirates will be taxed. All stakeholders have a few months left to prepare for the change. However, this is a hot topic and everyone is talking about it and trying to figure out how corporate tax will affect them individually and collectively. In this post we will assess how CT could affect various groups of people and businesses in the UAE.
1) Companies would be required to pay 9% in the form of corporate tax on adjusted taxable profits over and above the exemption threshold of AED 375,000. They would be liable for this tax annually. The amount of corporate tax companies would pay would affect their working capital. Consequently, they would have to address the gap. When planning their budgets for future periods, businesses would take into account the effect that corporate taxes have on their finances and make adjustments accordingly when setting out how much money they will need in order to continue running their operations.
2) Entities doing business in the UAE will have a route and option to register for single-tier CT which will allow them to adjust losses between entities within the group and arrive at a consolidated taxable income. This will help companies to manage their tax liability at group level instead of calculating and paying at individual company level. Also, companies that are not making profits or in other words making losses will be able to carry forward these losses and offset them against taxable profits of the subsequent years. This means that corporate tax will not become a burden on businesses that are not profitable.
3) The new law exempts businesses from paying corporate taxes which have taxable income of up to AED 375,000. This will encourage new businesses and start-ups to launch new companies. Tax year alignment with the financial year will be announced in law and/or regulations and businesses will act accordingly.
4) The introduction of a corporate tax system in the UAE will require substantial implementation, training, and compliance costs. However, business owners will focus on minimizing their taxes through tax planning, which will increase demand for professional tax accountants.
5) Shareholders would most likely endeavor to maintain their profit margins by passing on the impact of corporate tax to customers/end users by increasing the prices of their products/services. This will affect the purchasing power of individuals and may also have a short term impact on the demand.
6) The introduction of Corporate Tax (CT) will not have a significant impact on Foreign Direct Investment (FDI), since the rate is highly competitive compared to other counties and the government of UAE has double tax treaties in place so that investors can repatriate profits without being taxed again. Moreover, dividends and capital gains are not subject to corporate tax so they will remain attractive to investors.
7) Taxation is the major source of revenue for governments around the world. The government uses tax money to provide services for its citizens and improve their lives. Just like VAT, the corporate tax would be another revenue source for UAE government and through this new stream of revenue the government can invest in things like world-class infrastructure, hospitals, roads and medical facilities. Additionally, it would reduce dependence on oil-generated income and lead to diversified sources of funding for the government, indicating a healthy and mature economy.
In summary, the corporate tax legislation has been created in a way that it incentivize investment and maintain transparency which will effectively create a stable society that will attract business and add value to the economy.