Explained: Does corporate tax apply to freelancers?

‘Corporate Tax’ can better be understood as a form of direct tax levied on the net income or profit of a corporation or business entity. It is also commonly referred to as ‘business profit tax’ or ‘corporate income tax’. The United Arab Emirates has now introduced, for the first time, federal corporate tax in the country. Announcing the new tax regime, the ministry of finance (MOF) has released a set of key pointers that serve as guidelines for the applicability of the corporate tax, which would be enforced from 1 June 2023 onwards (‘UAE Corporate Tax’). The corporate tax law in itself is awaited to be issued.

The UAE corporate tax will apply to all business and commercial activities in the UAE, except for the commercial activity of extraction of natural resources, which would still be taxed as per emirate specific taxation. The Federal Tax Authority (FTA) established in 2016, shall be the government entity responsible for the administration, collection and enforcement of the corporate tax regime in the UAE. Further, the Ministry of Finance will remain the competent authority for purposes of international tax agreements, treaties etc., including the exchange of information for tax purposes.

Taxable Threshold:

The UAE corporate tax will apply to a certain portion of the total income generated, which is referred to as the ‘taxable income’. The taxable income could be determined by taking into account the net profit of a given business entity after having adjusted certain deductibles. More information is awaited on the exact criteria applicable.

The corporate tax will be applicable on a taxable income above AED 375,000.

Thus, for a taxable income up to AED 375,000, applicable corporate tax will be 0%.

The corporate tax rates applicable for income above AED 375,000 include:

• 9% for taxable income above AED 375,000; and
• a different tax rate for large multinational companies that meet certain specific criteria.

As discussed above, the UAE corporate tax shall be made applicable to all business and commercial activities conducted in the UAE. The only exemptions that have been clarified at present by the MOF concern the commercial activity of extraction of natural resources as there is a separate emirate level taxation applicable for the said activity. In short, all nature of business activities carried out in the UAE, under a trade license or permit, including income earned under freelancer permits (provided taxable income exceeds AED 375,000), shall be included within the scope of applicability of the UAE corporate tax regime. Thus, if you are a freelancer, who is licensed in the UAE and earning a taxable income in excess of AED 375,000, you are subject to the UAE corporate law and required to pay the applicable corporate tax.

Other exemptions to the UAE Corporate Law:

• Individual salaries and employment income are exempted from being taxed for both public and private sector employees.
• Investments made by individuals in real estate or capital gains received from the personal investment made through shares or debentures, in the form of dividends, investment returns will not be taxed as long as it is in their personal capacity.
• Businesses registered in the free zones in the UAE will be included under the UAE corporate tax regime, however, only to the extent that they conduct their business within the UAE. For business activities outside the UAE, the corporate tax exemption granted to such business entities will continue to be honored under the new corporate tax regime as well.

The UAE corporate tax will apply from the financial year starting from 1 July 2023 and ending on 30 June 2024. However, for a business that as its financial year starting from 1 January 2023 and ending on 31 December 2023, will become subject to the UAE corporate tax starting from 1 January 2024. This requires businesses and individuals to start planning ahead, whether it concerns the implementation of the measures, imparting training for their staff or ensuring a compliance policy. Of course, the UAE corporate law is still awaited to be published, and a thorough review of the same to understand the threshold parameters and the applicable tax rate is a given mandatory step ahead.

Introduction of the new corporate law can have a multifold effect on foreign direct investment following into the UAE, wherein the investors are particular about the profits, for existing entities the concerns could be about the applicability of the pretax and post-tax returns and double tax treaties amongst others. Having introduced the new corporate tax regime for the first time in the country, the UAE now aims to implement international best practices in creating a leading global center for investment and businesses while accelerating the country’s strategic objectives for further advancement. The new changes also reaffirm the country’s commitment to meeting international standards for tax transparency and in curbing negative tax practices.