Does the UAE’s new corporate tax applies to freelancers?

The UAE has recently announced establishing a federal corporate tax on business profits for the first time starting from 2023.

While the new corporate tax will apply to all United Arab Emirates's businesses and commercial activities, the UAE’s Ministry of Finance confirmed that individuals will not be subject to tax on their incomes from employment, equity investments, real estate or other personal income independent from a UAE business or trade.

However, the corporate tax applied to individuals having – or being required to obtain- a business license or permit to carry out the relevant commercial, industrial, and/or professional activity in the United Arab Emirates, how will this impact freelancers?

Mohammad Al Dahbashi, the Managing Partner of ADG Legal, said the new freelance permit holders, issued under the new labor law for self-sponsored ex-pats, should not be subject to corporate tax on their individual icome / earnings.

If freelancers with a business license are sponsored in a free zone and carrying out any activities to other companies, the sponsor will be subject to corporate tax.

He added, “Those freelancing and providing services through a company or a license should not be taxed on the income they generate as salaries, but the company or license hosting their visa will be taxed on its net profit.”

However, Al Dahbashi said additional details await from the government to confirm whether the corporate tax will be applicable only to businesses, mainly with the new freelance permit that allows individuals to work without the requirement for a sponsor nor a valid employment contract.

ADG’s Head of Tax Practice Izzat-Begum B. Rajan shares what we know about the United Arab Emirate Corporate Tax so far:

Where will be the UAE’s Corporate Tax applicable?

It will be applied over all the emirates, as it is a federal tax. As a result, the Federal Tax Authority (FTA) will be responsible for the administration, collection, and imposition of the corporate tax. The United Arab Emirate Ministry of Finance will remain the “Competent Authority” for purposes of bilateral/multilateral agreements and the international exchange of information for tax plans.

Who will be subject to the corporate tax?

The corporate tax will be apply to all United Arab Emirates businesses and commercial activities, except for the extraction of natural resources, which will remain subject to emirate-level corporate taxation.

With effect of that:

1. All activities undertaken by a legal entity will be consider as “business activities” and therefore be within the scope of the corporate tax.
2. Individuals having (or being required to obtain) a business license or permit to conduct the relevant commercial, industrial and professional activity in the United Arab Emirates will also be subject to the corporate tax. This count freelance workers who carry out their activities with a business license or a permit.
3. Foreign entities and individuals regulating a business or trade in the United Arab Emirates “in an ongoing or regular manner” will be subject to the corporate tax.
4. Businesses established in free zones will be subject to the corporate tax, but the new tax rule will continue to honor the motive currently being offered to those businesses that follow all regulatory requirements and that do not conduct business with mainland United Arab Emirates.

Specific sectors subject to theUnited Arab Emirates's corporate tax are businesses engaged in banking operations,construction, real estate management, and development, agency, and brokerage activities.

All legal entities and individuals in the scope of corporate tax will be required to register for Corporate Tax purposes and file a yearly tax return.

Who is exempted or free from the corporate tax?

For individuals, the following income will not be taxed:

1. Salary and employment income (whether received from the public or private sector).
2. The investment in real estate in a personal capacity provided the individual is not required to obtain a commercial license or permit to perform such activity in the UAE (United Arab Emirates).
3. Dividends, capital gains, and other income earned or attained from owning shares or other securities in a personal capacity.
4. Interest and other income earned from saving schemes or bank deposits.

For businesses, the following income must not fall under the scope of the UAE’s corporate tax – the conditions for these exemptions are yet to be defined:

1. Dividends and capital gains attained or earned from its “qualifying shareholdings”,
2. Qualifying intra-group transactions and reorganizations. Potentially, this means that businesses will need to use specific reporting and presentation templates for their accounts, segregating the revenue exempt from the tax.

Generally, foreign investors’ income from dividends, interest, capital gains, royalties, and other investment returns will not be subject to the tax.

UAE withholding tax will not be applicable on domestic and cross-border payments of any nature under the new UAE’s corporate tax rule.

When is the UAE CT (Corporate Tax) applicable?

For financial years starting on or after June 1st, 2023. For instance, if on any given year, a company’s financial year starts on January 1st and ends on December 31st, the new tax rules will be applicable to this company for the financial year starting on January 1st 2024.

Which kind of income will be taxed?

The taxable income will be the accounting net profit of a business, after making adjustments for specific items (conditions to be specified).

The accounting net profit of a business is the amount reported in the financial statements prepared in line with internationally-accepted accounting standards.

Losses caused (as from the corporate tax effective date) can be used to offset or balance taxable income in subsequent financial periods. For a reminder, a loss for corporate tax purposes (called as a “tax loss”) would arise when the total deductions the businesses can claim are above as compare to the total income for the relevant financial period.

Tax credits

Foreign corporate tax paid on United Arab Emirate taxable income will be allowed as a tax credit against the UAE’s corporate tax liability.

Additionally, UAE businesses will need to follow transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.

What are the tax rates?

• 0% for taxable income up to 375,000 AED (approximately USD 102,000);
• 9% for taxable income above thann 375,000 AED; and

A different tax rate for large multinationals that full certain criteria is set with reference to Pillar Two of the OECD BEPS rules.

What is a large multinational?

A multinational corporation is a corporation that works in its home country, as well as in other countries through a foreign subsidiary or branch, or any another form of presence (or registration). Earning income from outside its home country without a foreign presence or registration would not make a business a multinational corporation for the purpose of the application of the United Arab Emirates’s corporate tax.

In the context of the global minimum effective tax rate (GMETR) as proposed under Pillar Two of the OECD BEPS rules, “large” refers to a multinational corporation that has combined global revenues higher than 750 million EUR (approximately 3.15 billion AED).

Fiscal unity

A UAE group of companies could determine to form a Tax Group and be treated as a single taxable person (conditions to be defined). As a result, a UAE tax group would only be need to file a single tax return for the entire group. Tax losses from one group company may be used to balance or offset the taxable income of another group company (conditions to be defined/specified).

What still requires to be clarified by the UAE Government?

Many aspects remained ambiguous. Additional guidelines are under planning and will be issued in due course by the United Arab Emirate Government. Specifically, we await to being provided with more details on:

1. Corporate Tax (online) registration, compliance, and filing rules for both individuals and businesses (including those established in Free zones),
2. Definition of “ongoing or regular” business activities for the application of the United Arab Emirate’s corporate tax to Foreign entities and individuals,
3. The notion of “qualifying shareholdings” of aUnited Arab Emirate business,
4. Exemptions for foreign investors,
5. Losses carry forward rules and timelines, and potential losses carry back rules, both for businesses and Tax Groups,
6. Tax Group consolidation rules,
7. The tax rate applicable to large multinationals,
8. And more commonly, any other potential tax exemptions and exclusions.

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