The UAE has become a leading business hub over the past couple of decades. These days, it’s one of the strongest financial centers in the world. Pretty much every advantage offered had the main purpose of drawing foreign investment.
The end of 2022 came with a slight change. The UAE brought in a federal law change to implement a corporate tax. It happened in December, 2022. Prior to this update, the UAE has been seen as a tax haven.
After all, there was a 0% tax on all profits made in the UAE. The tax haven didn’t apply to oil exploration businesses though.
Now, this new tax became effective on June, 1st, of this year. It was described as a goal for the UAE government to accelerate its development even more, but also to add to its strategy in terms of business opportunities.
As described, the law doesn’t seem to incorporate any unusual or hard to understand principles. They’re common in other countries as well, so taxpayers can predict what they may have to pay.
Apart from UAE’s strategic operation, the law aims to push UAE among the countries accepting international standards, especially around the G20 group.
Is UAE corporate tax free?
While established as a tax haven and a tax-free environment for any legal business apart from those involved with oil, the UAE has decided to change this aspect. The announcement has been made at the end of 2022, but the new law has come into effect at the beginning of summer.What is the corporate tax in UAE?
Just like in other countries, the corporate tax in UAE will depend on profits.A business will pay 9% in tax if it makes more than AED 375,000 a year. Obviously, the rate changes and fluctuates, but to help you get an idea, AED 375,000 is just over $100,000. Small and middle businesses won’t necessarily be affected at this stage.
The tax for profits up to AED 375,000 will still be 0%.
At the same time, the UAE government has also established some exemptions and this is where it gets interesting. If over the past fiscal year and the current one, your small business has made less than AED 3 million, you’re exempt from tax.
Further exemptions
Nonresidents without a permanent establishment will not be subject to this tax if their income is sourced outside of the UAE and that’s a very important consideration for the further analysis of this case. This means only those with a permanent establishment will pay tax.At the same time, nonresidents who get state sourced income won’t be taxed, yet these rates are expected to go up in a series of upcoming changes.
The new corporate tax law has more exemptions, including:
- Government entities
- Entities controlled by the government
- Extractive businesses
- Non-extractive natural resource businesses
The revenue threshold in the UAE
Generally speaking, small businesses can find relief from this tax due to the revenue threshold of AED 3 million.The threshold has a limited lifetime, from the 1st of June to the last day of 2026. It should be checked for the applicable tax years, but it’s also worth noting that free zone persons and MNE entities (revenue higher than AED 3.15 billion) are not eligible.
Taxpayers can opt in or out of the relief, it’s a personal (or better said, business) choice. The general idea is to encourage small business owners to start in the UAE, but also to stimulate startups. Small businesses can also stay away from transfer pricing documents, which cost quite a lot in the UAE.
Understanding micro, small, and middle businesses – What is the corporate tax in Dubai 2023?
While there are light changes from one area to another, Dubai is the primary business center in the UAE.
In Dubai, a micro business has up to 9 employees and a turnover of up to AED 9 million, in the trading industry. Services and manufacturing businesses have up to 20 employees and a turnover of up to AED 10 million.
A small business in trading has up to 35 employees and up to AED 50 million in turnover. Services and manufacturing small businesses have a double turnover and up to 100 employees.
Finally, a middle business in trading has a turnover of up to AED 250 million and up to 75 employees, while services and manufacturing middle businesses have up to 250 employees and the same turnover.
The threshold is pretty high if you look at it. The idea is to prevent micro and small businesses from being affected. A free zone businessperson who wants to benefit from the 0% corporate tax should have audited financial statements.
Reputable and popular free zones already have entities to deal with these documents, but this new decision makes it a general rule throughout the country.
How much tax do businesses pay in Dubai?
Based on the profits of the business, it could be nothing or 9%. Compared to other countries or even previously-known tax havens, it’s still a relatively low tax. However, it cancels the concept of a tax-free corporation zone for larger businesses.What the corporate tax in the UAE means for businesses
The new corporate tax in the UAE is too new for some. It’s believed there will be more to unfold. After all, it has only been implemented a few months ago. A proper analysis could be made in a year or two. It was announced half a year before the implementation, only to give businesses time to prepare.
One thing is certain though. Financial statements weren't given that much importance in the past. These days, they can make a difference. After all, the profit on such statements is the base of what a business will pay in corporate tax.
Business data must be extremely accurate. Indeed, given the no tax system back in the day, no one was too bothered about business data accuracy. Now, these statements must be perfectly calculated to ensure the right tax is calculated.
At this level, business management software could be a real thing. If you’ve never used such software before, this is the perfect time to decide on something.
Possible workaround scenarios – Tax per profit, not revenue
Before panicking about taxes and dismissing Dubai from your current or future plans, it’s worth noting that tax is being paid for profit and not for revenue.What does that mean? The tax for profit is basically the tax targeting what’s left after you’ve handled all the expenses of the company. You can give yourself a big bonus, award your employees, maybe invest in a few things for your business.
It's important to know that personal income is taxed now unless it doesn't have a business profile. For instance, capital gains, inheritances, dividends, or gifts (among others) are not taxed.
That’s where you can find room to mess about with the money. If you can find expenses that suit your business and lifestyle, you’ll be able to reduce your income. No one’s going to check how you use the respective funds.
However, it would be dodgy to buy new cars every month or other suspicious activities.
The tax per revenue covers more than that and implies paying tax for all the money you get in, regardless of your expenses. Therefore, the UAE may have brought in a tax, but it’s up to you to use your money responsibly to keep it to the possible lowest limit.
At the same time, it doesn’t mean you’ll have to spend all your profits in order to keep the tax to a minimum. As long as your profits are under the threshold, you’ll be alright and won’t be taxed.
This is most likely the most common scenario we will see from businesses in Dubai.
Possible workaround scenarios – Multiple businesses?
Assuming your business gets close to the threshold or you expect it to overcome it and get taxed, there’s also the possibility to run multiple businesses. However, that’s a completely different scenario.You’ll need a whole new setup, even if there’s another business with a similar profile. The activity is obviously very important and can affect the tax status, income requirements, or number of employees.
You would have to pay a new fee for incorporation and go through all that hassle again. However, if you’re about to pay tax, it’s totally worth it. Since you already run a business in the UAE, you probably know where to go, who to ask for help, or what service to hire for the job.
Taking advantage of exemptions
Exemptions are there for more reasons. And one of them could actually work in your favor. If your income is sourced outside of the UAE, you won’t have to worry about tax.If you make millions out of an online store, but you ban the UAE from using it, you’re basically getting all your money from outside the emirates.
If you’re an online influencer making money out of marketing posts and none of your customers is from the UAE, you’re sourcing your income outside of the UAE. You get the point. Again, the industry you activate in is just as important in the process.
In these two examples, you can see that one runs as a business and the other may run as a self-employed professional. Personal income with business sources will follow the same taxing rules.
What to do?
Just months after being implemented, the new corporate tax in the UAE is still uncharted territory. While everything is clear so far, there are more ideas out there, and figuring out what it will truly cost may take a fiscal year or two.If no one bothered about tax services when the tax was set at 0%, things would have changed now. One of the best things you could do is get in touch with a tax expert in the area and make sure it’s someone with a good reputation, rather than some cheap service.
You may also get some suggestions regarding the best business software to use. To some, it’s an extra expense, indeed, but it could help save much more in the long run.
Of course, small businesses with low revenue won't be affected here.
What not to do
Going blindly in is a no-no. Also, there’s no need to panic. The UAE government has made a calculated move and the law is clearly described.Avoid trying to dodge the system, getting money on your personal bank account rather than on your business bank account, and other shady activities. Keep in mind that it isn't necessarily about the money, but about who releases the invoice.
Personal income outsourced with business purposes is also taxed, so that won’t help. Besides, as you may already know, the banking system is quite strict in the UAE.
At this point, the best thing you can do is avoid abrupt changes in your business operations. Take your time to develop a new strategy to keep your profit under the threshold, whether with your business operations or expenses before the tax kicks in.
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