For entrepreneurs and business owners in the UAE, grasping the intricacies of withholding tax within the broader spectrum of corporate taxation is indispensable for adhering to the nation’s evolving tax laws. In December 2022, the UAE Federal Tax Authority made substantial progress by releasing a decree that specified the obligations related to withholding tax within the corporate tax framework of the United Arab Emirates.
This exhaustive guide by Shuraa Tax aims to demystify corporate taxes, focusing on withholding tax. It delves into the latest legislation and its ramifications for business operations in the UAE. Whether navigating tax liabilities or aiming to optimise your tax strategy, this blog provides valuable insights and addresses any inquiries concerning the prevailing corporate tax landscape, particularly on withholding tax in UAE.
Understanding Withholding Tax in the UAE
Withholding tax in the UAE involves deducting a portion of an employee’s or contractor’s income at the source, typically by their employer or business entity. This deducted amount is an advance payment towards the individual’s annual income tax liability. If too much is withheld, the individual may be eligible for a tax refund, while insufficient withholding may lead to owing taxes when filing returns.
Tax regulations and rates vary between countries, affecting collection methods. Globally, withholding tax rates typically range from 15% to 25%, applying to various income sources such as dividends, interest payments, and royalties. This practice ensures timely revenue collection for governments worldwide.
Implications of Withholding Tax Regulations for UAE Businesses
On December 9, 2022, the Ministry of Finance (MoF), working in conjunction with the Federal Tax Authority (FTA), introduced Federal Decree-Law No. 47, which outlines the current guidelines governing corporate tax (CT) and withholding tax in UAE. According to the decree, withholding tax is now set at 0%. These changes came into effect on June 1, 2023, and apply to all subsequent financial years.
Income Sources Exempt from Withholding Tax
Presently, withholding tax exemptions in the UAE encompass the following income sources:
- Income generated by a foreign company within the UAE that is not attributed to its Permanent Establishment (PE) in the country.
- Mainland-sourced income benefits from the Free Zone’s 0% corporate tax regime, excluding transactions conducted through an onshore branch.
- Dividends or other profit distributions issued by a Free Zone Person are subject to zero taxation for mainland shareholders. For instance, if a DMCC company distributes dividends to a resident of the JAFZA free zone, withholding tax is waived at a rate of 0%.
Withholding Tax Versus Value-Added Tax (VAT)
Certainly, here’s a comparison table between Withholding Tax and Value-Added Tax (VAT) in the UAE:
| Aspect | Withholding Tax | Value-Added Tax (VAT) |
| Implementation | Introduced earlier than VAT | Implemented in 2018 |
| Taxation Scope | Levied on certain types of income payments | Charged on the sale of goods and services |
| Collection Method | Deducted at the source of income | Added to the price of goods and services |
| Taxpayer Responsibility | Businesses pay tax on behalf of employees | Companies collect tax from customers |
| Government Role | Ensures tax compliance and collection | Collects tax revenue from businesses |
| Tax Rate | Variable, depending on income type and rate | Fixed rate of 5% |
| Registration Requirement | Not applicable to most businesses | Mandatory for companies exceeding the threshold |
| Impact on Businesses | Directly affects income payments and cash flow | Affects pricing and profit margins |
This table outlines key differences between Withholding Tax and Value-Added Tax (VAT) in terms of implementation, scope, collection method, taxpayer responsibility, government role, tax rate, registration requirement, and business impact.
Understanding Corporate Tax in the UAE
Corporate Tax in the UAE has transformed its taxation landscape, positioning it as a leading jurisdiction with a progressive tax framework. This legislation profoundly influences business operations within the country. While all businesses and commercial activities in the United Arab Emirates are subject to corporate tax, various exceptions exist, notably for industries engaged in natural resource extraction, which remain subject to emirate-level taxation. Below, you’ll find detailed information on corporate tax regulations applicable to businesses and individuals.
Entities Subject to Corporate Tax in the UAE
Under UAE Tax Law, entities liable for corporate tax, referred to as “taxable persons,” encompass the following:
- UAE companies and other corporate entities established and operated within the UAE.
- Individuals conducting business or commercial activities within the UAE, subject to forthcoming Cabinet Decision regulations.
- Foreign legal entities with a Permanent Establishment in the UAE are known as non-resident juridical persons.
Entities Exempted from Corporate Tax in the UAE
Specific business sectors or organisations are exempt from corporate tax owing to their significant societal and economic contributions to the UAE. These entities, known as Exempt Persons, include:
- Government bodies.
- Extractive and non-extractive natural resource businesses, subject to specific regulations.
- Qualifying public benefit entities as defined in Article 9 of the CT Law.
- Public or private Pension and Social Security funds.
- Qualifying investment funds as specified in Article 10 of the CT Law.
- Wholly owned UAE subsidiaries of governing organisations, government entities, qualifying investment funds, or public/private pension/social security funds are eligible for zero income tax under Article 18 of the CT Law.
- Free zone persons meeting certain conditions outlined in Article 18.
Types of Exempt Income
When determining taxable income, the following expenses are exempt:
- Dividends and other distributions received from either resident individuals or foreign holdings.
- Participating interests, as Article 23 of the CT Law defines.
- Income obtained by non-resident individuals from operating aircraft or ships during international transport, provided it meets the conditions specified in Article 25 of the CT Law.
- Revenue generated from a permanent foreign establishment, following Article 24 of the CT Law.
Corporate Tax Structure in the UAE
The corporate tax regime in the UAE mandates that companies and commercial entities pay taxes on their net income. Here’s how the rates are structured:
- A 0% tax rate is implemented on business profits up to AED 375,000. This measure is designed to bolster support for small businesses and startups.
- For-profits exceeding AED 375,000 from their inaugural financial year onward, companies are subject to a 9% tax rate. This rate has been uniformly applied to all companies since June 1st, 2023.
Advantages of Withholding Tax Implementation
Tax regulations offer numerous advantages for governments and businesses, contributing to financial stability and regulatory compliance. Here’s a closer look at the key benefits:
Regulatory Compliance Assurance
Withholding tax ensures businesses adhere to local laws and regulations, shielding them from potential fines or penalties arising from non-compliance.
Enhanced Accountability
It holds foreign individuals accountable for income earned within the UAE’s borders, promoting transparency and tax adherence.
Prevention of Double Taxation
Withholding tax mechanisms efficiently monitor and collect taxes from non-residents, averting the risk of double taxation and related conflicts.
Combatting Tax Evasion
By deterring tax evasion, withholding tax contributes to additional government revenue and bolsters fiscal sustainability.
Flexible Tax Management
Withholding taxes often replaces income taxes, offering businesses greater flexibility in managing their tax obligations.
Employee Incentives
Withholding tax can serve as an employee incentive, allowing companies to deduct taxes from salaries and rewarding staff with bonuses or additional benefits.
Benefits of Business Operations in the UAE
Below are the benefits of Business Operations in the UAE:
Business-Friendly Environment
The UAE offers a conducive environment for business growth, characterised by pro-business policies and a vibrant economic culture, setting it apart globally.
Favorable Tax Regime
The introduction of a low corporate tax rate and exemptions for specific businesses and organisations demonstrates the UAE’s commitment to attracting entrepreneurs and companies worldwide.
Tax Incentives
These tax incentives reduce financial burdens on businesses, enhance profitability, and create opportunities for reinvestment, making the UAE an attractive destination for businesses.
Strategic Geographical Location
Situated as a gateway between Europe, Africa, and Asia, the UAE provides unparalleled access to international trade routes and global markets, bolstering opportunities for business expansion.
World-Class Infrastructure
The UAE boasts state-of-the-art infrastructure, including advanced transportation, logistics, and telecommunications facilities, facilitating seamless business operations and global connectivity.
Investor Protection
The UAE’s legal framework safeguards the interests of foreign investors, offering them security and confidence in their investments that contribute to a stable business environment.
Stable Political Environment
With a stable political environment and progressive regulatory policies, the UAE further enhances its attractiveness as a business hub, fostering growth and innovation.
Economic Reputation
These benefits collectively contribute to the UAE’s reputation as a leading global business destination, with low corporate tax rates and targeted exemptions playing a crucial role in its economic allure, driving growth and diversification.
Expert Guidance for Your Business with Shuraa Tax
The UAE government supports business growth through various initiatives, offering an ideal environment for expansion. To ensure compliance, stay informed on corporate tax law changes, including withholding tax rules in UAE. Reach out to our experienced accounting professionals for assistance.
Shuraa Tax consultants simplify Dubai business setup and tax compliance. We provide comprehensive support from registration to obtaining licenses and securing tax residency certificates. Contact us at +971508912062 or info@shuraatax.com for expert advice and peace of mind in tax matters.
FAQs
Q1. What is withholding tax?
Withholding tax is a form of income tax collected by the government from individuals receiving payments such as salaries, wages, commissions, dividends, interest, or royalties. It’s deducted at the source before payment to the recipient, depending on their earnings, tax requirements, and available exemptions.
Q2. Is there a withholding tax in the UAE?
Businesses in the UAE aren’t subject to withholding taxes, as their corporate income and profits are taxed at a 0% rate. For specific exemptions applicable to your business, seek advice from a corporate tax consultant or accountant.
Q3. What are the Compliance requirements for withholding tax?
Based on current guidance from the Federal Tax Authority, UAE-sourced income paid to non-residents may qualify for a 0% withholding tax rate, eliminating the need for tax withholding or related paperwork for UAE businesses or foreign recipients. For further compliance guidance, contact our team of specialist accountants.
Q4. How is withholding tax calculated?
Non-residents without a permanent UAE presence may be exempt from withholding tax if they receive no UAE-derived revenue related to their establishment. Withholding tax is standard for cross-border payments like dividends, royalties, and interests. UAE resident individuals are exempt from withholding tax for transactions among themselves.
