Whether Individuals With 1 Million AED Turnover Should Pay Corporate Tax in UAE?
The taxation structure in the United Arab Emirates (UAE) has gained a lot of attention in recent times. There are various speculations regarding whether individuals and business activities registered in the UAE with an annual turnover exceeding 1 million AED are liable to pay corporate income tax. Let’s explore more about this topic in this blog.
Speculations Around 1 million AED Threshold
There has been ongoing speculation regarding whether individuals and businesses in the UAE could face corporate tax obligations if their annual turnover exceeds 1 million AED. Recently, the UAE Ministry of Finance provided clarity on this issue by announcing a new Cabinet decision.
As per Cabinet Decision No. (49) of 2023, business owners in the country will be subject to corporate tax only if their combined turnover in a calendar year exceeds Dh1 million (around $272,294). The aim of the decision is to clarify how the corporate tax regime will apply to UAE residents and non-residents.
Importantly, the Ministry has confirmed that personal income from sources like employment, investments, and real estate will not be taxed. So corporate tax liability will arise solely based on business or licensed commercial activity income earned by a taxpayer.
For instance, if a sole proprietor generates over 1 million AED in annual revenues from their combined retail business registered in the mainland UAE, the profits of that business would now be subject to the 9% corporate tax rate.
However, rental incomes or returns from personal investments would fall outside the tax net as per the clarification. Proper segregation of individual and commercial sources of earnings is therefore important. This move provides certainty to small businesses that were uncertain about crossing the speculated 1 million AED thresholds. It maintains the UAE’s growth-focused approach without disincentivizing entrepreneurship and encourages more firms to set up locally.
The decision is testimony to the government’s aim of adopting a clear, consistent, and stable regulatory regime that fosters investment. Keeping personal incomes like employment compensation tax-free also protects individual taxpayers.
Recently, the UAE issued its federal corporate tax law imposing a 9% rate on taxable annual profits exceeding 375,000 AED. Small businesses with revenues below that were kept tax-exempt. Additionally, in April 2023, the Ministry launched a Small Business Relief program exempting firms with under 3 million AED in annual revenue from tax liabilities for an initial period until the end of 2026. This provides headroom for SME growth.
Keeping these broader context points in mind, the new Cabinet Decision provides much-needed clarity. It establishes that crossing an annual turnover mark alone does not automatically trigger corporate tax exposure for individuals in their personal capacity. Tax responsibilities will emerge only from income streams covered under the tax law, like profits generated via business operations. Maintaining robust books of accounts segregating commercial and personal activities is thus important.
Overall, individuals operating registered businesses in the UAE can breathe easy knowing that exceeding 1 million AED in revenues will not by itself land them in a tax liability trap. Proper strategic compliance continues to be advised, though, to pre-empt uncertainties.
Consultants specializing in the UAE market can help entities and entrepreneurs incorporate, file necessary registrations, and handle reporting requirements upon commencing operations. The technology solutions offered by them simplify regulatory adherence remotely.
In conclusion, through this new Decision, the UAE Ministry of Finance has provided the necessary clarification. As long as commercial revenues are appropriately ring-fenced, individual business owners will not have to worry about corporate taxation due to high personal turnovers alone. The nation’s pro-business ecosystem is thereby reinforced further.
Proper entity segregation and knowing the distinction between corporate and personal tax obligations is key. Overall, the UAE’s stable business-conducive regime is expected to continue with calibrated fiscal reforms if needed.
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