Do Dividends Reduce Corporation Tax?

LAST READ: FEB 22 2024 | Author: RENUKA

WHAT IS CORPORATION TAX OR CORPORATE TAX?

To supplement and aid a country’s economy and maintain a financial regulatory system in the business community, companies are subjected to a category of tax against their taxable profits. This kind of tax is known as the corporation tax or corporate tax. In 1894, the US enacted the first corporate tax, which was promptly challenged in court and declared to be illegal. Corporate tax was once again implemented in 1913, beginning with a pitifully low tax rate of 1% and rising to 15% within ten following years. Corporate tax continues to be a topic of controversy to varied degrees.


The United Arab Emirates has been a hub for businesses from all over the world. It is a country where the world meets. A great number of global businesses of all sizes operate in UAE for decades availing a large number of benefits in the market of which the absence of corporate tax used to be one. 


In January 2022, the Ministry of Finance of the United Arab Emirates announced that from the start of the next fiscal year which will be from June 1st, 2023, all businesses operating within the UAE will be liable to pay corporation tax at a certain rate against their taxable revenues. The main motive of this decision of corporate tax introduction in the country as per the Ministry of Finance is to expedite the strategic goal of development and transformation and further reinforce the nation's status as a premier global hub for investment and business.

do dividends reduse corporation tax

WHAT WILL BE THE RATE FOR CORPORATE TAX IN UAE?

According to the latest Corporate Tax regime in UAE, for now, there are three different scenarios that define the rate for the corporate tax at which businesses will be liable. These three scenarios are:

  • Scenario 1 – If your business generates a yearly revenue of up to or less than AED 375,000, you will be liable to pay the corporate tax at the rate of 0%.
  • Scenario 2 – If your business generates a yearly revenue of more than AED 375,000, you will be liable to pay the corporate tax at the rate of 9%.
  • Scenario 3 – Large multinationals operating in the United Arab Emirates are subjected to a different corporate tax rate which is not yet officially disclosed by the Federal Tax Authority. It is however predicted to be 15% as that is the lowest effective tax rate according to the Pillar Two of the OECD.

WHAT ARE THE EXEMPTIONS FOR CORPORATE TAX IN UAE?

There are certain categories of income that are exempted from the Corporate Tax legislation in the UAE. The first one is the businesses that are involved in the extraction of natural resources in UAE, however, they will continue to be taxed at the Emirate level taxation policies. The second is the income generated from dividends and capital gains through valid shareholdings and the third is the eligible intra-group transactions by the businesses in UAE.

DO DIVIDENDS REDUCE THE CORPORATION TAX?

A UAE corporate shareholder will typically be free from corporation tax on dividends received and capital gains gained from the sale of stock of a subsidiary firm under the anticipated corporate tax regime. The goal of this participation exemption is to prevent double taxation of business profits, which would otherwise occur when initial profits are passed to the subsidiary firm or when the UAE shareholder company sells partnership company shares.


The corporate tax UAE will not be applied to any domestic profits received from UAE-based businesses. Profits made by a Free Zone entity that benefits from the 0% corporation tax regime are among the exempted domestic dividends.


The UAE's corporate tax legislation exempts dividends paid by foreign firms along with the gains on capital after the sale of shares whether the corporations were inside or outside of the UAE.   To be eligible for this participation exemption, the UAE shareholder company must possess a minimum of 5% of the assets of the subsidiary company.


Employment income and other personal income obtained by an individual, such as dividends, shall be excluded from the corporation tax under Article 3.5 of the UAE corporate tax Public Consultation Document. Both citizens of the UAE and foreigners are covered by this clause. This indicates that dividend income and realized capital gains held by individual shareholders would not be subject to corporate tax in the United Arab Emirates. Additionally, this exemption covers those who might or might not; live in UAE. Before June 1st, 2023, businesses can avail guidance on these areas from the UAE's best tax consultants and experts.

LOOKING FOR CORPORATE TAX CONSULTATION IN DUBAI?

You can better prepare by becoming aware of the categories of income excluded from the UAE's corporate tax legislation. You can evaluate the potential effects of corporate tax on your company by getting expert assistance from corporate tax advisors in Dubai. The team of the top business tax consultants in Dubai is happy to help and guide you about every detail relating to the UAE's newest corporate tax regime.

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