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Tax implementation in UAE

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VAT in UAE 

On January 1st, 2018, the United Arab Emirates (UAE) imposed a value-added tax (VAT). The standard rate of the VAT, which is a tax on the consumption of goods and services, is 5%.

The government of the UAE is attempting to diversify the economy and lessen reliance on oil revenues by implementing VAT. The implementation of VAT is also intended to give the government access to a new source of funding for infrastructure and public services.

Businesses that meet the requirements of the UAE VAT system must register for VAT and charge VAT on their taxable supplies. Companies that are VAT-registered may also recover any VAT paid on purchases and expenses.

For specific industries and types of transactions, the UAE VAT system offers a number of exclusions and unique rules. For instance, certain financial services and the sale of residential properties are subject to particular regulations whereas healthcare and educational services are excluded from VAT.

A business must register for VAT if its taxable supplies and imports exceed AED 375,000 per year. This is mandatory registration. However, it is optional for businesses to register with VAT if their imports exceed AED 187,500 per year. It is also called Voluntary registration.

In the UAE, the introduction of VAT has been mainly effective, and both businesses and consumers have had little trouble adjusting to the new tax structure. Due to the implementation of the VAT, the government has also recorded large increases in revenue.
 

Corporate Tax In UAE

The Ministry of Finance has introduced the federal corporate tax @ 9% on business profits exceeding AED 375,000 for the financial years beginning on or after 1 June 2023.

Who is subject to Corporate Tax?

Broadly, Corporate Tax applies to the following “Taxable Persons”:

  • UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE;
  • Natural persons (individuals) who conduct a Business or Business Activity in the UAE as specified in a Cabinet Decision to be issued in due course; and
  • Non-resident juridical persons (foreign legal entities) that have a Permanent Establishment in the UAE (which is explained under Section 8).
  • Natural persons who conduct Business or Business Activities in the UAE and have a Turnover of over AED 1,000,000 per Gregorian calendar year from

such Business or Business Activities.

Juridical persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons” and will need to comply with the requirements set out in the Corporate Tax Law. However, a Free Zone Person that meets the conditions to be considered a Qualifying Free Zone Person can benefit from a Corporate Tax rate of 0% on their Qualifying Income (the conditions are included in Section 14).

Non-resident persons that do not have a Permanent Establishment in the UAE or that earn UAE sourced income that is not related to their Permanent Establishment may be subject to Withholding Tax (at the rate of 0%). Withholding tax is a form of Corporate Tax collected at source by the payer on behalf of the recipient of the income. Withholding taxes exist in many tax systems and typically apply to the cross-border payment of dividends, interest, royalties and other types of income.

Companies in the UAE may be subject to additional taxes and levies in addition to corporation taxes, such as:

  1. Customs fees: Depending on the product, import fees can range from 0% to 5% on some items carried into the United Arab Emirates.
  2. Except for some payments made to non-resident corporations, there is currently no withholding tax in the UAE.
  3. Employer contributions to social security programs are compulsory. One such program is the end-of-service gratuity (ESG) fund, which offers lump-sum payments to workers who reach a particular level of service.

Businesses operating in the UAE should be aware that tax laws and regulations are subject to change, and they should keep up with any new changes. To ensure compliance with all tax duties, it is advised to seek professional guidance from tax specialists and accounting firms.

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