As we all are familiar with corporate tax. UAE is considered a flexible country regarding taxes. However, the UAE government has introduced a new tax regime, which is corporate tax. All the businesses used to pay Value Added Tax, but now they must comply with the UAE corporate tax law.
It is crucial for businesses to know the corporate tax. Every business is different in nature, and it is important to know their eligibility. Businesses in the UAE find it very difficult to understand the new corporate tax law and updates. Here are some of the challenges businesses face in the UAE.
- Understanding the complex tax rules and regulations
- Proper resources to comply with the regime
- Uncertainty about the interpretation of the tax rules
- Administrative burden
- Cost of compliance
Federal tax authorities make it easier for all the corporations and businesses in the UAE. They publish all the updates and guides for the businesses. Businesses can get the guidelines for the corporate tax now.
In this blog, we will discuss some new updates about exempt income. As FTA has updated a new corporate tax guide about exempt income. Businesses must have knowledge about dividends and participation exemptions.
Also, we will guide you on how dividends and other profit distributions are defined. Which income is exempt from participation? And who is eligible for the exemption? So, let’s dive into it.
Corporate tax (CT)
In January 2022, the Ministry of Finance announced the new Federal Corporate tax on the net profits of businesses. The tax is applicable from the 1st of June 2023 in UAE. According to UAE Federal Decree-Law No. 47 of 2022 on the taxation of UAE corporate tax.
Corporate tax is a form of direct tax levied on the net income or profit of corporations and other business entities. According to the Ministry of Finance, Corporate tax rates are:
- 0% for taxable income up to AED 375,000.
- 9% for taxable income above AED 375,000
The Federal Tax Authority is responsible for the administration and enforcement of corporate tax. However, corporate tax law is more complex than it looks. Also, you can calculate the corporate tax levied with the help of online calculators. You can always consult the best corporate tax consultants to learn more about it. Let’s look into the dividends and participation exemptions to understand the new guide.
What is Dividend?
Dividends are defined as any distribution of profits or assets made by a company to its shareholders out of its accumulated profits. Also the dividends can be paid in cash, securities, or any other assets or property.
Dividends received from a resident person are exempt from corporate tax. Also, these are generally subject to corporate tax in the UAE. However, there are still some exceptions.
These received from a resident person are exempt from corporate tax.
Dividends received from a foreign juridical person are exempt from corporate tax.
Participation Exemption
The participation exemption is a rule that exempts certain dividends from the corporate tax. The exemption is intended to prevent double taxation of dividends. The shareholder must hold at least 5% of the capital of the investee company for at least 12 months to qualify for it. The investee company must be a resident person or a foreign juridical person. Also, these are subject to a comprehensive income tax system.
These types of distributions are also exempt from corporate tax:
- Distribution of capital assets to shareholders in the course of winding up a company.
- These distributions are given to shareholders in exchange for their shares in the course of an acquisition or merger.
- Distributions made to shareholders as part of a tax-free reorganization.
Examples of dividends
Here are some examples of dividends that are subject to corporate tax in UAE:
- Cash dividends are paid by a UAE company to its shareholders.
- Stock dividends paid by a UAE company to its shareholders.
- Property dividends paid by a UAE company to its shareholders.
Under UAE corporate tax law, dividends are defined as any distribution of profits or assets made by a company to its shareholders. Dividends can be paid in cash, securities, or other property or assets.
Dividends are generally subject to corporate tax in the UAE. However, there are a number of exceptions.
Also, dividends received from a resident person are exempt from corporate tax.
These received from a foreign juridical person are exempt from corporate tax under the participation exemption.
The participation exemption is a rule that exempts certain dividends from corporate tax. The exemption is intended to prevent double taxation of dividends. The shareholder must hold at least 5% of the capital of the investee company for at least 12 months. Also, the investee company must be a resident person or a foreign juridical person who is subject to a comprehensive income tax system.
These are the types of distributions that are exempt from corporate tax:
- Distribution of capital assets to shareholders in the course of winding up a company.
- Also, the distributions made to shareholders in exchange for their shares in the course of a merger or acquisition.
- Distributions made to shareholders as part of a tax-free reorganization.
Conclusion
The definition of dividends under UAE corporate tax law is broad. Also, the encompasses a wide range of company distributions to their shareholders. In this blog, we explored the new updates about the dividends and the participation dividends. We also discussed that there are a number of exceptions to the general rule. These exceptions include dividends received from a resident person. Also, the dividends received from a foreign juridical person under the participation exemption.
ebs can help you with your corporate tax compliance in UAE. Our team of professionals will provide you with the right guidance about the new corporate tax updates by FTA. We will help you to register your corporate tax in time. Moreover, our corporate tax services will help you to stay compliant with the corporate tax law.
Our corporate tax services include:
- Corporate Tax Planning
- Corporate tax registration
- Tax Preparation
- Tax Compliance
- International Tax
- Tax Audits
Our services include accounting and bookkeeping services, Auditing, Due Diligence audit services, and many more. You can get in touch with our experts and contact us today.
FAQs
What is corporate tax in the UAE?
The Ministry of Finance introduced an additional tax for corporations in 2022, which is corporate tax. Moreover, it is a direct tax levied on the net profit or income of corporations and other businesses established in the UAE. Moreover, the UAE corporate tax regime applies to all businesses with a taxable income exceeding AED 375,000.
What is the corporate tax rate in the UAE?
The corporate tax rate is 9%. However, there are some exceptions to this rate. For example, qualifying free zone persons are not subject to corporate tax on their income within the free zone.
Who is subject to UAE corporate tax?
All businesses with a taxable income exceeding AED 375,000 are subject to UAE corporate tax. This includes resident and non-resident businesses, as well as businesses that are incorporated in the UAE.
How do I register for UAE corporate tax?
Businesses that are subject to UAE corporate tax must register with the Federal Tax Authority (FTA) within 30 days of exceeding the taxable income threshold. Also, the registration process can be completed online through the FTA’s website.
How do I file my UAE corporate tax return?
Businesses that are subject to UAE corporate tax must file an annual corporate tax return with the FTA. The tax return must be filed by the deadline, which is typically 30 days after the end of the tax year.