Defined: Does Corporate Tax Apply To Freelancers? – Tax

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‘Corporate Tax’ can better be understood as a form

of direct tax levied on the net income or profit of a corporation

or business entity. It is also commonly referred to as

‘business profit tax’ or ‘corporate income

tax’. The United Arab Emirates has now introduced, for the

first time, federal corporate tax in the country. Announcing the

new tax regime, the ministry of finance (MOF) has released a set of

key pointers that serve as guidelines for the applicability of the

corporate tax, which would be enforced from 1 June 2023 onwards

(‘UAE Corporate Tax’). The corporate tax law in itself

is awaited to be issued.

The UAE corporate tax will apply to all business and commercial

activities in the UAE, except for the commercial activity of

extraction of natural resources, which would still be taxed as per

emirate specific taxation. The Federal Tax Authority (FTA)

established in 2016, shall be the government entity responsible for

the administration, collection and enforcement of the corporate tax

regime in the UAE. Further, the Ministry of Finance will remain the

competent authority for purposes of international tax agreements,

treaties etc., including the exchange of information for tax

purposes.

Taxable Threshold:

The UAE corporate tax will apply to a certain portion of the

total income generated, which is referred to as the ‘taxable

income’. The taxable income could be determined by taking

into account the net profit of a given business entity after having

adjusted certain deductibles. More information is awaited on the

exact criteria applicable. 

The corporate tax will be applicable on a taxable income above

Aed 375,000. 

Thus, for a taxable income up to Aed 375,000, applicable

corporate tax will be 0%.

The corporate tax rates applicable for income above AED 375,000

include:

  • 9% for taxable income above Aed 375,000; and
  • a different tax rate for large multinational companies that meet

    certain specific criteria.

As discussed above, the UAE corporate tax shall be made

applicable to all business and commercial activities conducted in

the UAE. The only exemptions that have been clarified at present by

the MOF concern the commercial activity of extraction of natural

resources as there is a separate emirate level taxation applicable

for the said activity. In short, all nature of business activities

carried out in the UAE, under a trade license or permit, including

income earned under freelancer permits (provided taxable income

exceeds Aed 375,000), shall be included within the scope of

applicability of the UAE corporate tax regime. Thus, if you are a

freelancer, who is licensed in the UAE and earning a taxable income

in excess of Aed 375,000, you are subject to the UAE corporate law

and required to pay the applicable corporate tax.

Other exemptions to the UAE Corporate Law:

  • Individual salaries and employment income are exempted from

    being taxed for both public and private sector employees.
  • Investments made by individuals in real estate or capital gains

    received from the personal investment made through shares or

    debentures, in the form of dividends, investment returns will not

    be taxed as long as it is in their personal capacity.
  • Businesses registered in the free zones in the UAE will be

    included under the UAE corporate tax regime, however, only to the

    extent that they conduct their business within the UAE. For

    business activities outside the UAE, the corporate tax exemption

    granted to such business entities will continue to be honored under

    the new corporate tax regime as well.

The UAE corporate tax will apply from the financial year

starting from 1 July 2023 and ending on 30 June 2024. However, for

a business that as its financial year starting from 1 January 2023

and ending on 31 December 2023, will become subject to the UAE

corporate tax starting from 1 January 2024. This requires

businesses and individuals to start planning ahead, whether it

concerns the implementation of the measures, imparting training for

their staff or ensuring a compliance policy. Of course, the UAE

corporate law is still awaited to be published, and a thorough

review of the same to understand the threshold parameters and the

applicable tax rate is a given mandatory step ahead. 

Introduction of the new corporate law can have a multifold

effect on foreign direct investment following into the UAE, wherein

the investors are particular about the profits, for existing

entities the concerns could be about the applicability of the

pretax and post-tax returns and double tax treaties amongst others.

Having introduced the new corporate tax regime for the first time

in the country, the UAE now aims to implement international best

practices in creating a leading global center for investment and

businesses while accelerating the country’s strategic

objectives for further advancement. The new changes also reaffirm

the country’s commitment to meeting international standards

for tax transparency and in curbing negative tax practices.

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.

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