FTA
The Federal Tax Authority (FTA) of the United Arab Emirates (UAE) has recently published a comprehensive guide called the Corporate Tax Guide on Taxation of Natural Persons, based on the UAE Corporate Tax Law. This guide aims to provide valuable insights into several crucial aspects regarding the application of Corporate Tax to natural persons operating within the UAE.
Corporate Tax to natural persons
One of the key areas covered FTA in the guide is determining the applicability of Corporate Tax to natural persons. It outlines important factors to consider, such as whether the individual conducts a business or engages in business activities within the UAE. Additionally, it emphasizes that the total turnover derived from these activities must exceed AED 1 million within a Gregorian calendar year for Corporate Tax to be applicable.
Furthermore, the guide delves into the calculation of Corporate Tax specifically for natural persons. It provides clarity on how to compute the tax obligations for individuals falling under this category. Moreover, it sheds light on the interactions that occur between natural persons and other businesses, highlighting any relevant considerations in such scenarios.
The guide of FTA is also emphasizes the significance of Corporate Tax compliance for natural persons. It outlines the necessary steps and requirements that individuals must adhere to in order to fulfill their Corporate Tax obligations. It serves as a useful resource for better understanding the main instances where Corporate Tax applies to natural persons and provides guidance on how to meet their respective tax responsibilities.
While it’s important to note that the Corporate Tax Guide on Taxation of Natural Persons (FTA) is not legally binding, it serves as a valuable source of information to enhance comprehension of the circumstances in which Corporate Tax is applicable to natural persons and the corresponding obligations they must fulfill.
The Federal Tax Authority (FTA) of the United Arab Emirates (UAE) has recently clarified the criteria for determining Non-Residents who are subject to Corporate Tax in the country. This clarification covers various aspects, including the registration requirements, taxable income calculation, and compliance obligations for Non-Residents under the Corporate Tax Law, which came into effect on June 1, 2023.
public and private corporations
The FTA has provided a comprehensive and simplified explanation in its guide for both natural persons (individuals) and juridical persons (public and private corporations) who generate income in the UAE. The guide aims to assist Non-Residents in determining whether they fall under the scope of Corporate Tax and offers general guidance on the matter.
According to the guide of FTA, a juridical person incorporated or formed outside the UAE, and not effectively managed and controlled within the country, is subject to Corporate Tax in three specific cases. Firstly, if the juridical person has a Permanent Establishment in the UAE, which refers to any fixed place of business or any other form of presence within the country. Secondly, if the juridical person derives State-Sourced Income, meaning income accruing in or derived from the UAE as per the provisions of the Corporate Tax Law. Lastly, if the juridical person has a nexus in the UAE, which implies earning income from Immovable Property within the country, such as land, buildings, fixtures, or permanently attached equipment.
The guide highlights that Non-Resident juridical persons falling under any of these cases must register for Corporate Tax purposes and obtain a Tax Registration Number (TRN) to ensure compliance and avoid administrative penalties. This registration is required when they have a Permanent Establishment or nexus in the UAE, specifically if they derive income from Immovable Property within the country.
The Corporate Tax Law
The Corporate Tax Law is a federal law in the UAE that imposes taxes on corporations and businesses. It was introduced through the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses, issued by the UAE on December 9, 2022. The law is applicable for financial years starting on or after June 1, 2023. It provides the legislative framework for the implementation of Federal Corporate Tax in the UAE. The tax rate is set at 9% of the taxable income of the entity, which is determined through various tax adjustments applied to the net income or profit of corporations and businesses. The law also outlines the criteria for determining the taxpayers subject to Corporate Tax, exemptions, deductibility rules, and rates and conditions applicable to different types of taxpayers and activities.
Corporate Tax, as defined by the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses, was introduced by the UAE on December 9, 2022. This law serves as the foundation for implementing a Federal Corporate Tax (Corporate Tax) in the UAE, effective for financial years beginning on or after June 1, 2023.
The introduction of Corporate Tax by FTA: aligns with the UAE’s strategic objectives and aims to expedite its development and transformation. By establishing a competitive Corporate Tax regime that adheres to international standards and leveraging its extensive double tax treaty network, the UAE solidifies its position as a prominent jurisdiction for business and investment.
Considering the UAE’s status as a global financial center and international business hub, the Corporate Tax regime incorporates globally recognized and accepted principles, drawing from best practices worldwide. This ensures that the implications of the UAE Corporate Tax regime are clear and easily understood.
In general, Corporate Tax applies to various categories of “Taxable Persons,” including UAE companies and other juridical persons incorporated or effectively managed and controlled within the UAE, natural persons conducting a Business or Business Activity in the UAE as specified in a forthcoming Cabinet Decision, and non-resident juridical persons with a Permanent Establishment in the UAE
UAE Free Zone
Juridical persons established in UAE Free Zones by FTA is also fall within the scope of Corporate Tax as “Taxable Persons” and must comply with the requirements outlined in the Corporate Tax Law. However, a Free Zone Person meeting the conditions to be considered a Qualifying Free Zone Person can benefit from a 0% Corporate Tax rate on their Qualifying Income
Non-resident persons without a Permanent Establishment in the UAE or earning UAE-sourced income unrelated to their Permanent Establishment may be subject to Withholding Tax at a rate of 0%. Withholding Tax functions as a form of Corporate Tax collected at the source by the payer on behalf of the income recipient, commonly applied to cross-border payments of dividends, interest, royalties, and other types of income according to FTA.
To prevent harmful tax practices and align with international tax transparency standards, the UAE Ministry of Finance (MoF) has introduced Federal Corporate Tax in the UAE. The UAE Corporate Tax (CT) law, with a headline rate of 9%, will be effective for financial years beginning on or after June 1, 2023, establishing one of the world’s most competitive tax rates. While some clarifications are still pending, the MoF has released 158 Frequently Asked Questions to supplement the law and provide further insights into its scope, applicability, and various issues.
For business owners
For business owners: FTA operating in the UAE, understanding the tax laws and regulations is crucial, and Corporate Tax is an essential aspect to consider. This document highlights key features of the UAE Corporate Tax law.
In cases where a Double Taxation Agreement exists between the UAE and another jurisdiction, the provisions within that agreement generally determine the person’s residency. These provisions take precedence over the treatment outlined in the Corporate Tax Law and its implementing decisions. Double Taxation Agreements typically address dual residency situations for juridical persons based on either the place of effective management criterion or through a mutual agreement procedure.
Differentiating Corporate Tax from Value Added Tax (VAT)
Differentiating Corporate Tax from Value Added Tax (VAT), it should be noted that they are distinct types of taxes levied on businesses. Corporate Tax & FTA pertain to the profits of corporations or businesses, whereas VAT is a tax on the value added to goods and services at each stage of production and distribution. Corporate Tax is calculated based on taxable income, adjusted through various tax considerations, while the tax rate for Corporate Tax in the UAE stands at 9%. On the other hand, VAT is a consumption-based tax borne by consumers, levied on the value added to goods and services at each stage of production and distribution. It is not imposed on corporate profits but rather on the value added along the supply chain.
In summary, Corporate Tax and VAT differ in terms of calculation, incidence, and the basis on which they are levied. Corporate Tax focuses on corporate profits, while VAT centers on the value added to goods and services throughout the production and distribution process. Policymakers have proposed reducing the corporate income tax rate, such as the suggestion made by Republican presumptive presidential nominee Donald Trump to lower it from 35% to 15%. However, such tax cuts have faced criticism due to potential revenue loss. Policymakers interested in reducing the corporate income tax while addressing concerns about the federal deficit may explore alternative revenue sources to compensate for the lower corporate rate.
How Is Corporate Tax Different From Value Added Tax in the UAE?
The UAE, being a prominent business hub, has its own set of regulations, including taxes that businesses need to be aware of. Corporate tax and Value Added Tax (VAT) are two important taxes in the UAE. This article aims to explain the meaning and distinction between these taxes.
Corporate tax is a tax on the profits earned by corporations and businesses operating in the UAE. It is calculated based on the taxable income of the business and has a fixed rate of 9%. Corporate tax applies to various entities, including UAE companies, non-resident entities with a permanent establishment in the UAE, and certain natural persons conducting business activities.
On the other hand, VAT is a consumption-based tax imposed on the value added to goods and services at each stage of production and distribution. Unlike corporate tax, which is based on profits, VAT is levied on the value added along the supply chain. It is ultimately borne by the end consumer. The current VAT rate in the UAE is 5%.
While corporate tax focuses on the income generated by businesses, VAT is a tax on the consumption of goods and services. Corporate tax is applicable to profits, whereas VAT is applicable to the value added during the production and distribution process.
To comply with these taxes, businesses may seek assistance from professional service providers like CDA. CDA offers tax advice, accounting, and auditing services, helping businesses understand and fulfill their tax obligations. They provide consultation on tax benefits, assist with filing VAT returns on time, and ensure compliance to avoid penalties.
In the UAE, a natural person refers to a living human being, whether residing in the UAE or elsewhere. The Corporate Tax Law also applies to natural persons to a certain extent. If a natural person conducts a business or business activity in the UAE, has a permanent establishment in the UAE, or earns state-sourced income, they may be subject to corporate tax. However, certain types of income, such as employment income, personal investment income, and real estate investment income, are exempt from corporate tax for natural persons. The provisions of applicable double taxation agreements between the UAE and other jurisdictions take precedence over the Corporate Tax Law in determining the residence and extent of corporate tax for natural persons.
The tax period for natural persons subject to corporate tax is the Gregorian calendar year, which runs from January 1 to December 31. They need to assess whether they exceed the AED 1 million threshold on December 31 to determine if they should register for corporate tax. The first tax period for a natural person starting their business or business activity on October 1, 2024, would be the Gregorian calendar year from January 1, 2024, to December 31, 2024. The corporate tax return should be filed before the end of September 2025.
To register for corporate tax or VAT in the UAE, you can visit the Federal Tax Authority’s website or use the EmaraTax portal. The registration process requires completing the necessary forms and providing the required documentation. Upon approval, a Tax Registration Number (TRN) for corporate income tax will be issued.
In summary, corporate tax and VAT in the UAE are distinct taxes with different focuses. Corporate tax is levied on the profits of businesses, while VAT is a consumption-based tax imposed on the value added to goods and services. Understanding these taxes and complying with the related regulations is essential for businesses operating in the UAE.
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