As an entrepreneur or business owner operating in the UAE, understanding what withholding tax is and what it implies for your business is essential to ensure you remain compliant with current tax laws. In December 2022, the UAE Federal Tax Authority issued a decree establishing the requirements of withholding tax under the United Arab Emirates corporate tax structure. This article is a guide to answer any questions on corporate taxes including withholding tax, the current legislation and how it applies to your business.
What Is Withholding Tax?
So what is withholding tax?
Withholding tax is an amount of money that an employer or business entity pays on behalf of its employees as income taxes. In most cases, this amount is deducted at the source (hence it is withheld). Tax regulations and rates differ from nation to nation, with collection methods also varying. Generally, taxes are withheld globally at a rate of between 15-25%.
Most tax systems levy a withholding tax on dividends, interest payments and royalties. This is a common practice worldwide as it ensures that the government in question receives their fair share of revenue on time.
Implications of Withholding Tax Rules To UAE Businesses
On the 9th of December, 2022, The Ministry of Finance (MoF) above the Federal Tax Authority (FTA) released an important update on Federal Decree-Law No. 47. This legislation details the current rules on corporate tax (CT) and withholding tax guidelines in the UAE. The legislation on withholding tax in the UAE is complex and covers just one aspect of the corporate tax landscape pertinent to the region.
The changes made to this federal decree are applicable from June 1, 2023, and relate to all financial years thereafter.
Income Sources Eligible For 0% Withholding Tax
Currently, 0% withholding tax in the UAE applies to these different income types:
- Income earned by a foreign company sourced in the UAE and not attributed to its Permanent Establishment (PE) based in the country;
- Mainland-sourced income benefitting from the Free Zone’s 0% corporate tax regime but not coming through an onshore branch; and
- Dividends or other profit distributions beneficially issued by a Free Zone Person, subject to zero taxation on mainland shareholders within it. For example, if a DMCC company distributes dividends to someone residing in the JAFZA free zone they will be eligible for zero per cent (0%) withholding tax.
Advantages of Withholding Tax
By implementing withholding tax rules, governments can collect taxes more accurately and quickly – an essential aspect of any nation’s financial stability. Here are some more advantages of withholding tax as it applies to almost all countries.
- Ensures compliance with local laws and regulations, thus protecting businesses from any costly fines or penalties.
- Ensures foreign individuals can operate within the UAE’s borders while still being held accountable for their income and associated taxes.
- Prevents the risk of double taxation and allows the government to efficiently monitor and collect taxes from non-resident individuals who may have difficulty paying what they owe.
- Combats tax evasion while generating additional government revenue.
- Withholding taxes are often used in place of income taxes, thus offering more flexibility for businesses in terms of tax payments.
- Can be used as an incentive for employees by allowing companies to deduct withholding taxes from employee salaries and reward them with additional benefits such as bonuses or additional vacation time.
Withholding Tax versus Value-Added Tax (VAT)
You might ask, does withholding tax include VAT?
Well, the answer here is no, withholding tax is separate from Value Added Tax (VAT). The UAE has implemented a 5% VAT rate in 2018 while withholding tax was introduced much earlier.
VAT is a tax that is charged on the sale of goods and services in the UAE. It’s paid by consumers when they purchase goods and services, but businesses also collect it from their customers. In this way, businesses act as agents for the government to collect taxes from buyers. All businesses registered for VAT must charge it on all applicable sales, and submit it to the government.
Therefore, although VAT and withholding tax are different types of taxes that serve separate functions, both are important for businesses and other non-residents operating within the UAE. They help the government to collect taxes more effectively, and can also provide peace of mind for business owners to stay compliant with all their tax obligations.
How Corporate Tax Relates to Your Industry
The Corporate Tax Law has revolutionised the taxation system of the UAE, making it one of the most progressive tax systems in the world. It also significantly impacts how companies do business here. All United Arab Emirates businesses and commercial activities will be subject to corporate tax. However many exceptions apply to this rule, including those industries involved in natural resource extraction which are still bound by emirate-level taxation. Further information on corporate tax for businesses and individuals is outlined below.
Corporate Tax For Businesses
Companies and other commercial entities must pay a corporate tax on their net income, with the amount determined as follows:
- To support small businesses and start-ups, the government has currently set a 0% tax rate on business profits up to AED 375,000.
- Companies are liable to a 9% tax on profits in excess of AED 375,000 starting from their first financial year. For existing companies, the implementation will take place beginning June 1st 2023.
Corporate Tax For Individuals
Under UAE Tax Law, ‘taxable persons’ as it applies to corporate tax can be defined as:
- UAE companies, as well as any other corporate entities that are established and managed within the UAE, can benefit from an effective approach to control.
- Individuals who do not meet the requirements for income eligibility are to be classified as a ‘Free Zone person’.
- Those who conduct business in the UAE, as identified by a Cabinet decision are natural persons.
- Non-resident corporate persons (i.e., foreign legal entities) that (i) enjoy a permanent establishment in the UAE (as stipulated in Article 14 of the CT Law), or (ii) earn UAE-sourced income.
Exempt Individual Entities & Income Types
Exempt Persons
- Government bodies
- Extractive businesses and non-extractive natural resource businesses are all subject to specific regulations.
- Qualifying public benefit entities, as outlined in Article 9 of the CT Law
- Pension and Social Security funds, whether public or private
- Qualifying investment funds, as stipulated in Article 10 of the CT Law
- A wholly-owned UAE subsidiary of a governing organisation, government entity, qualifying investment fund or public/private pension/social security funds can benefit from zero income tax – as per Article 18 of the CT Law
- Free zone persons on meeting certain conditions in Article 18.
Exempt Income Types
When calculating taxable income, the following expenses are exempt:
- Dividends and other distributions earned from a resident person or foreign holdings
- Participating interests as stated in Article 23 of the CT Law
- Income derived by non-resident persons for operating aircrafts or ships during international transport that meets conditions outlined in Article 25 of the CT Law
- Any revenue generated from a permanent foreign establishment according to Article 24 of CT law.
The Benefits of Operating a Business in the UAE
In contrast to numerous other nations, the United Arab Emirates is spearheading efforts to bolster economic and business development. This is well evidenced by a pro-business culture with a highly favourable tax environment here in Dubai and in other Emirates.
The UAE also has unparalleled access to diverse marketplaces and its strategic location between Europe, Africa and Asia are all further reasons why this is an attractive place to run a business. The UAE also boasts world-class infrastructure and transportation, and a legal system that protects foreign investors’ rights.
Withholding Tax: Frequently Asked Questions
What is withholding tax?
Withholding tax is a type of income tax that is collected by the government from employees and other individuals who receive payments such as salaries, wages, commissions, dividends, interest or royalties. It’s typically withheld from salaries at the source of payment before it has been paid to the recipient. The amount withheld depends on what the individual earns, how much tax is required and what exemptions are available.
Is there a withholding tax in the UAE?
Businesses in the UAE do not incur withholding taxes, since their corporate income and profits are subject to a 0% rate. However, it’s important to get clear advice from a corporate tax consultant or accountant for specific details on exemptions that apply to your business.
What are the compliance requirements for withholding tax?
As per current advice from the Federal Tax Authority, UAE-sourced income paid to non-residents may be eligible for a 0% withholding tax rate. As a result, no taxes would need to be withheld. Furthermore, UAE businesses or foreign recipients will not have any obligations associated with filing related paperwork or reports. To keep up with compliance regulations, contact our specialist team of accountants to provide further guidance for your business.
How is withholding tax calculated?
Non-residents without a permanent presence in the UAE that receive no UAE-derived revenue related to their establishment may be exempt from withholding tax. Tax withholding is often the standard for any cross-border payment, including those of dividends, royalty payments, and interests. UAE resident persons are exempt from withholding tax for all transactions between them.
What income types incur withholding tax?
In the UAE, withholding tax affects payments made to non-residents for services rendered or work performed within the country. This includes income from royalty fees and professional technical service fees such as management, consulting, legal advice, and engineering services. In addition, any dividends paid to non-residents are also subject to withholding tax. The rate of tax applied to non-residents changes yearly and is usually between 5% – 20%.
What taxes are paid in the UAE?
The UAE has no personal income tax, with the majority of taxes paid by businesses. There are a few more indirect taxes that could be imposed on companies, such as withholding tax and Value Added Tax (VAT), currently set at 5% on goods and services for businesses.
There is also an excise tax on tobacco products and carbonated beverages of 100%. Additionally, there are several other taxes associated with certain activities such as property and asset transfer taxes, taxes on oil and gas companies and customs duties. And lastly, businesses are also subject to the withholding tax system outlined above.
It’s important to consult with a corporate tax consultant or accountant to ensure that all relevant fees and taxes are taken into account before conducting business in the UAE.
What Is a Qualifying Free Zone Person under UAE Corporate Tax Law?
Qualifying free zone persons are eligible for 0% corporate tax on a qualifying income basis. If you meet the conditions outlined by Article 18 of the Corporate Tax Law, you then qualify as a free zone person.
Final Thoughts on Withholding Tax in the UAE
The United Arab Emirates is dedicated to helping businesses thrive and grow. The UAE government provides numerous resources and initiatives that support entrepreneurs in achieving success. With its robust economy, the UAE offers an ideal environment for expanding your business ventures.
For current and future business owners, it’s important to stay informed on changes to corporate tax laws, including the rules on withholding tax. This will ensure your business is always compliant with the latest regulations. If you have any questions regarding withholding tax rules in the UAE, it is always recommended to seek professional advice from a qualified accounting professional or tax advisor.
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