Effect of UAE Corporate Tax Law on International Businesses
The United Arab Emirates (UAE) has become one of the most attractive destinations for international businesses due to the government’s efforts to create a business-friendly environment. However, one of the recent changes that might concern such businesses is the introduction of corporate tax law. This blog post will analyze the potential impact of corporate tax in UAE and its law on international businesses, explaining its key aspects and possible implications.
What is UAE’s Corporate Tax Law?
The Federal Law No. 7 of 2017 introduced the corporate tax law in the UAE on January 1, 2018. This law establishes a 5% flat rate tax on all profits made by companies operating in the UAE unless there is a double taxation treaty in place with their home country.
The tax applies to all companies – foreign and domestic, but only on profits generated within the UAE. In addition, the law exempts several types of companies, such as those operating in oil and gas sectors, and it also does not apply to individuals (including sole proprietors).
The UAE corporate tax law aims to diversify the government’s revenue sources, as the country has been largely dependent on oil revenues. Furthermore, it supports the country’s commitment to the global transparency standards, as part of the OECD’s Base Erosion and Profit Shifting (BEPS) project.
Impact on International Businesses
Tax Compliance
International businesses that operate in the UAE need to comply with the new tax law and file their tax returns accordingly. The UAE’s Federal Tax Authority (FTA) is responsible for enforcing the law, and companies are required to maintain proper accounting records and submit their tax returns on time, or else face penalties.
While the 5% flat tax rate may appear to be low, companies need to consider the potential administrative costs associated with complying with tax regulations. Additionally, companies that have already been paying taxes with the guidance of Corporate tax services in UAE in other countries might now face double taxation, since the UAE’s tax law does not include provisions for foreign tax credits.
Attractiveness of the UAE as a Destination
There are concerns that the introduction of the corporate tax law might reduce the attractiveness of the UAE as a business destination. However, as mentioned earlier, the law exempts many sectors, which means that a considerable number of businesses might still consider UAE as a suitable location. Moreover, the country still does not have a personal income tax, which is a major appeal to both businesses and professionals.
Impact on the Economy
The corporate tax law has the potential to positively impact the UAE economy in several ways. It will enable the government to diversify its revenue streams beyond oil, which has become increasingly important given the instability of oil prices in recent years.
Furthermore, the tax law promotes transparency and helps the country to comply with international standards, which can boost investor confidence and attract more foreign direct investments. Moreover, the law may also provide an impetus for local businesses to incorporate Economic substances in the country.
Double Taxation Avoidance Agreements
One way for businesses to avoid double taxation is via Double Taxation Avoidance Agreements (DTAAs) between the UAE and other countries. The UAE has entered into DTAAs with over 115 jurisdictions, and this number is expected to increase in the future. These agreements typically provide for tax exemption or a credit in the home country for taxes paid in the UAE.
However, the actual operation of a tax treaty may be more complex, as each treaty has its unique provisions relating to, among other things, the scope of application, exemptions, and credit mechanisms. Therefore, international businesses should work closely with their tax advisors from audit Firms in Dubai when taking advantage of DTAA benefits.
Conclusion
The UAE’s new corporate tax law is a significant development for the country in its strive for diversification and transparency. While complying with the tax regulations might result in administrative costs for international businesses, the potential benefits in terms of diversifying government revenue streams, enhancing transparency and investment attractiveness of the country make the effort worth the while.
Furthermore, consultation with top Accounting Firms in Dubai like A&A Associate LLC, use of DTAA benefits can help businesses plan and manage their tax liabilities. Therefore, international businesses should keep a close eye on the UAE’s tax law developments, as well as regularly review their tax planning strategies to ensure compliance and mitigate risks.
