As a freelancer, understanding the new corporate tax regulations in the UAE is essential to help your business remain tax compliant and successful. With the recent corporate tax law changes issued by the Ministry of Finance, it’s worth knowing about corporate tax for freelancers and whether this impacts you directly. Knowing what your tax obligations are will help your business in the long run.
In this article, we will explore some important aspects of corporate tax in Dubai and the United Arab Emirates. We’ll cover what UAE corporate tax is, discuss the income types affected and mention what tax exemptions apply to both individuals and businesses. With careful planning, research and preparation, you should be able to navigate the changes smoothly. Let’s get started!
What Is Corporate Tax?
When running a business in the UAE, or any other country for that matter, it’s important to understand the concept of taxable income. This is the amount of money earned by your business through sales and services, minus any expenses related to running your business.
Corporate Tax refers to a direct tax that is imposed on the overall net income or profit of a business entity or corporation. This type of tax may also be called ‘business profit tax’ or ‘corporate income tax’.
The Ministry of Finance (MOF) has released a set of guidelines for the implementation of federal corporate tax in the United Arab Emirates. The tax will be introduced for the first time and will be enforced starting from June 1, 2023, under the amended UAE Corporate Tax system. While the official law for corporate tax is yet to be issued, corporate taxes will be applied to all Emirates under the jurisdiction and management of the UAE Federal Tax Authority (FTA). This government entity is in charge of managing, collecting, and enforcing the corporate tax system.
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Changes To UAE Corporate Tax Rules: Impact On Freelancers
If you’re a freelancer, you may be wondering how these new tax changes will affect you as an individual with a business licence operating in commercial, industrial or professional activities in the UAE.
The new tax will be mandatory for all businesses and commercial activities in the UAE, however, the Ministry of Finance has clarified that individuals will not be taxed on their income earned from employment, real estate, equity investments or any other personal income that is not related to a trade or business in the UAE.
Implementing this new regime has many predicted benefits for the UAE’s economy and global position in the business world. Pioneering this regime, the UAE has its sights on becoming a global investment and business hub by employing international best practices with corporate tax rules. The country’s strategic objectives for progress will also be accelerated.
These changes confirm the UAE’s commitment to meeting global tax transparency standards and reducing negative tax behaviours. The new corporate tax laws may have a significant impact on the foreign direct investment flowing into the UAE. Investors prioritise profits, so they may have concerns about the application of pre-tax and post-tax returns, as well as double tax treaties, for existing entities.
Business Activities That Attract Corporate Tax
All activities performed by a company will be classified as “business activities” and, therefore, fall under the jurisdiction of corporate tax. If you have a business licence or permit to operate commercially, industrially or professionally in the UAE, you will have to pay corporate tax. This also applies to freelancers who have obtained a business licence or permit upon the request of the company they work for.
Foreign individuals and entities who conduct consistent and regular business activities in the UAE will be required to pay corporate tax. All companies and individuals who fall under the corporate tax regime will also need to register and submit an annual tax return.
Company Structures Subject To UAE Corporate Tax
If your business is structured like any of the examples mentioned below, you must comply with corporate taxation regulations. This includes registering for corporate tax, calculating your taxable income, filing an annual tax return and paying taxes accordingly. You must also comply with any other established regulations specific to the corporate tax law regime.
Business structures that are subject to corporate tax include:
- Limited liability companies (LLCs)
- Limited liability partnerships (with non-unlimited partner liability)
- Funds structured as a legal entity
- Public shareholding companies
- Public joint stock companies
- Branches of non-resident juridical persons incorporated within a free zone
Corporate Tax Threshold for UAE Businesses
Simply put, any business activity carried out in the UAE under a trade licence or permit, including income earned from freelance work (if the taxable income is over AED 375,000), comes under the UAE corporate tax laws. Therefore, if you’re a licensed freelancer earning taxable income over AED 375,000, you must pay the applicable corporate tax in line with UAE laws.
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UAE Corporate Tax Exemptions
There are a range of corporate tax exemptions that apply to both businesses and individuals or freelancers. Let’s take a look at these below.
Tax Exemptions for Businesses
Certain business activities are exempt from corporate tax under the new regulations, including:
- Extraction of natural resources, which will continue to be taxed based on the taxation rules of the specific Emirate.
- Foreign investment earnings from dividends, capital gains, interest, royalties, and other types of investment returns.
- Companies operating in free zones, designated as qualifying free zone persons (QFZP) with qualifying income.
Tax Exemptions for Individuals
There are additional exemptions that apply to individuals under the UAE Corporate Law. These include:
- Both public and private sector employees are not required to pay taxes on their individual salaries and employment income.
- Individuals who invest in real estate or receive capital gains from personal investments in shares or debentures, such as dividends or investment returns, will not be taxed as long as they are investing on a personal level.
- Under the UAE corporate tax regime, businesses registered in free zones will be taxed only for the business they carry out within the UAE. They will still be exempted from corporate tax for any business activity conducted outside the UAE, which is in line with the previous corporate tax exemption rule.
Qualifying Income & Qualifying Free Zone Persons
“Qualifying income” is income earned by individuals who are eligible for free zone status. This income must come from deals made with businesses located outside of the UAE, within the same free zone, or in any other free zone in the UAE. The term “qualifying free zone person” pertains to a legal or business entity like a partnership or limited liability company, which is established or registered within a free zone.
To be a qualifying free zone person, a business in the UAE must meet specific requirements. These include having adequate substance as outlined in the Economic Substance Regulations law, having physical assets, operating expenses, enough staff and resources, and the ability to generate profit. The business must also earn qualifying income, be controlled within the UAE, must not opt out of the free zone tax system, and must comply with transfer pricing regulations while maintaining accurate documentation.
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Corporate Tax For Freelancers in the UAE – Frequently Asked Questions
How do I know if I’m required to pay corporate tax on my freelance income?
Any business activity conducted in the UAE under a trade licence or permit comes under the UAE Corporate Tax. If you’re a licensed freelancer earning taxable income over AED 375,000, you must pay the applicable corporate tax in line with UAE laws.
When do the UAE corporate tax changes take effect?
Starting from 1 June 2023, companies will need to follow new tax rules for their financial years. For example, if a company’s financial year runs from 1 January to 31 December, the new rules will apply to them for the financial year beginning on 1 January 2024.
Are there any exemptions from corporate taxes for businesses or individuals?
Yes. Certain business activities are exempt from corporate tax under the new regulations. Additionally, both public and private sector employees are not required to pay taxes on their individual salaries and employment income.
What are the current corporate tax rates in the UAE?
The tax rates are as follows:
– 0% for taxable income up to AED 375 000 (approximately USD 102,000)
– 9% for taxable income above AED 375 000
– Large multinationals meeting specific criteria based on Pillar Two of the OECD BEPS rules have a different tax rate.
Which types of income are not subject to corporate tax in the UAE free zones?
Passive income like royalties and interest earned from mainland companies, or income earned from sources outside the UAE or other Free Zones. If a company earns income from group companies located on the mainland, those mainland companies will not be able to deduct certain expenses. As a result, the affected companies may decide to opt out of the 0% corporate tax rate and instead pay taxes at the standard 9% rate.
Am I required to register for corporate tax even if I have no income?
It is important to register for corporate tax even if you don’t anticipate earning any income in the coming year. Filing a tax return is required to apply the 0% corporate tax rate, even if no income is generated. Therefore, it is crucial to follow registration and filing procedures accurately to avoid penalties in the future.
What is taxable income?
The taxable income for a business will be its accounting net profit, which is the amount reported in the financial statements following international accounting standards. If the business incurs losses after the corporate tax effective date, it can apply these losses to reduce taxable income in future financial periods. A “tax loss” occurs when the business’s total deductions exceed its income for a particular financial period.
What is the difference between corporate tax and withholding tax in the UAE?
Corporate tax is a tax imposed on the income and profits earned by a company, whereas withholding tax is a tax that applies to individuals for specific activities such as employment or dividends. Corporate taxes in the UAE and Dubai are usually set at 0% qualifying free zone companies, but other businesses must pay a standard rate of 9%.
Withholding tax is an amount of money that an employer or business entity pays on behalf of its employees as income taxes. It is a tax liability for the recipient of the payment or the income rather than the payer. Rates for withholding tax can range between different countries and may vary depending on the business activity involved. Globally, withholding tax rates are between 15% and 25%.
All businesses must keep records of their withholdings and submit them when they file taxes each year to remain compliant with government regulations.
Under the new corporate tax system in the UAE, there will be no withholding tax applied to any type of domestic or cross-border payments.
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Final Thoughts On Corporate Tax For Freelancers in the UAE
The UAE is an attractive investment destination for entrepreneurs and freelancers due to its advantageous location, stable economic and political conditions, progressive business regulations, and varied range of skilled workers. The new UAE corporate tax system introduces clarity and transparency in the country’s business environment. In the future, it will encourage foreign direct investments and create a more competitive business landscape.So what does corporate tax for freelancers pose in 2023?
Navigating corporate taxation regulations can be a challenge, but by understanding your corporate tax obligations, you can maintain compliance with the UAE government’s taxation laws. As a freelancer in the UAE, this is essential if you want to create a financially stable and secure future for your business and take advantage of all the opportunities that this vibrant country has to offer.
If you’re struggling to understand the details about corporate tax for freelancers and how these changes may apply to you and your business, know that you’re not alone.
As a business owner or entrepreneur, engaging the help of a business setup consultant can help make your business journey easeful and stress-free. Our consultants have decades of experience as industry experts in company formation. We are available to provide customised advice on any aspect of setting up a business in Dubai and the UAE.
Contact us today to establish your business in a way that sets you up for success, right from the beginning!
