The United Arab Emirates (UAE) recently issued the Federal Decree on the taxation of corporations and businesses in the country. The Federal Decree provides rules for determining taxable income, the definition of the taxable person, the taxability of the Qualifying Free Zone (QFZ) Person, and much more. The new rules will come into effect from June 1, 2023.In an email interaction with FE PF Desk, Dr Suresh Surana, Founder of RSM India, explained the key points Indians living and working in Dubai or planning to move to the UAE should know in view of the new rules. Edited excerpts:
Salaried persons not covered under new taxation rules
The new taxation rules will apply to persons having business income only. Individuals earning salary income in the UAE will not be covered under the new taxation rules. So if you are having a job or planning to take up a job in Dubai/UAE, new taxation rules will not impact you.
Exemption up to AED 375,000 on business income in Dubai/UAE
There is a threshold of AED 375,000 (approx. Rs 84 lakh) provided under the new law before taxation kicks in. Exemptions may also be provided to small businesses in due course (yet to be notified). Many finer aspects of the new rules are yet to be clarified.
Qualifying income in QFZ to be taxed under new Corporate Tax rules
In the UAE, a significant part of the business is in Qualifying Free Zone wherein only qualifying income shall be subject to Corporate Tax (CT). Therefore, Indians planning to move to UAE should closely follow the developments to understand the status of exemption to their proposed line of business.
Which Indian company will be considered a resident of the UAE
An Indian company may be considered a resident of the UAE if it is effectively managed and controlled from the UAE. Therefore, this aspect needs close evaluation as otherwise, this may lead to double taxation. It may be mentioned that, unlike India, the income of an unincorporated partnership in UAE would be taxed in the hands of a partner and as such the taxation in the hands of such partners in UAE needs to be carefully analysed.
What is the tax rate under the new UAE Corporate Tax (CT) regime
UAE Corporate Tax (CT) regime provides for 9% corporate tax on taxable income exceeding AED 375,000 from the financial year starting on or after 01 June 2023.
A Resident Person, which is a juridical person, is subject to Corporate Tax on its Taxable Income derived in UAE or from outside UAE, as would be specified.
The Taxable Income of a Resident Person, which is a natural person, is the income derived from UAE or from outside UAE insofar as it relates to the Business or Business Activity conducted by the natural person in the State, as would be specified.
Only UAE residents engaged in business activity to be taxed
It seems that only natural persons, or those who are UAE residents and engaged in business activity, would be covered by the new taxation rules. In other words, while salary, dividend, etc. is exempt in the hands of an individual, a resident individual carrying business activity in UAE would be subject to CT.
UAE-sourced income (sale of goods, provision of services, interest, income from property, disposal of shares, etc.) could be taxed if the individual qualifies as a non-resident in UAE.
Exemption for business in QFZ
The new taxation rule provides an exemption for businesses operating in Qualifying Free Zone Person (‘QFZP’). However, one has to wait for further clarity on the Qualifying exempt Income. The law also features Transfer Pricing provisions in case of cross-border and domestic related party transactions, accordingly setting up appropriate transfer pricing policies and annual documentation should be considered by businesses.
The law provides that relief from CT may be provided to small businesses basis revenue threshold on an election basis. However, threshold and related conditions are yet to be provided.