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

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

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

However, with 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 UAE, how will this impact freelancers?

Mohammad Al Dahbashi, the Managing Partner of ADG Legal, said holders of the new freelance permit, issued under the new labor law for self-sponsored ex-pats, should not be subject to corporate tax on their individual 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 further details await from the government to confirm whether the corporate tax will be applicable only to businesses, especially with the new freelance permit that allows individuals to work without the need for a sponsor nor a valid employment contract.

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

Where will the UAE’s Corporate Tax be applicable?

It will be applied across all the emirates, as it is a federal tax. As a result, the Federal Tax Authority will be responsible for the administration, collection, and enforcement of the corporate tax. The UAE Ministry of Finance will remain the “Competent Authority” for purposes of bilateral/multilateral agreements and the international exchange of information for tax purposes.

Who will be subject to the tax?

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

As a result:

1. All activities undertaken by a legal entity will be deemed “business activities” and hence be within the scope of the corporate tax.
2. 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 UAE will also be subject to the corporate tax. This includes freelance workers who carry out their activities with a business license or a permit.
3. Foreign entities and individuals conducting a trade or business in the UAE “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 regime will continue to honor the incentives currently being offered to those businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.

Specific sectors subject to the UAE’s corporate tax are businesses engaged in banking operations, real estate management, construction, and development, agency, and brokerage activities.

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

Who is exempted from the corporate tax?

For individuals, the following income should not be taxed:

1. Salary and other 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 carry out such activity in the UAE.
3. Dividends, capital gains, and other income earned from owning shares or other securities in a personal capacity.
4. Interest and other income earned from bank deposits or saving schemes.

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

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

Generally, foreign investors’ income from dividends, capital gains, interest, 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 regime.

When is the UAE CT applicable?

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

Which income will be taxed?

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

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

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

Tax credits

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

Additionally, UAE businesses will need to comply with 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 Dh375,000 (approx. USD 102,000);

9% for taxable income above Dh375,000; and

A different tax rate for large multinationals that meet specific 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 operates in its home country, as well as in other countries through a foreign subsidiary, branch, or 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 UAE’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 consolidated global revenues higher than EUR750 million (approx. Dh3.15 bn).

Fiscal unity

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

What still needs to be clarified by the UAE Government?

Many aspects remain unclear. Further guidelines are under preparation and will be issued in due course by the UAE Government. Specifically, we look forward to being provided with more details on:

1. Corporate Tax (online) registration, compliance, and filing rules for both businesses and individuals (including the ones established in Free zones),
2. Definition of “ongoing or regular” business activities for the application of the UAE’s corporate tax to Foreign entities and individuals,
3. The notion of “qualifying shareholdings” of a UAE 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 generally, any other potential tax exemptions and exclusions.

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News Courtesy:khaleejtimes.com