Impact of Corporate Tax on Individual Salary in UAE

The United Arab Emirates (UAE), renowned for its favorable tax environment, recently introduced a federal corporate tax (CT) on business profits. Effective from June 1, 2023, this change has sparked questions and concerns among individuals, particularly regarding the potential impact of CT on individual salaries in the country. In this blog, we will delve into the specifics of the new corporate tax regime and its effects on individuals earning income through various channels within the UAE.

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Corporate Tax Exemptions in the UAE

Before exploring the implications of CT on individual salaries, it is crucial to understand the exemptions under the UAE’s corporate tax regime. The good news is that individuals earning money in their personal capacity, such as through salaries and investment incomes, are exempt from corporate tax as long as the income-generating activity does not require a commercial license.

Exemptions from Corporate Tax in UAE:

– Salaries: Income earned from any kind of job, whether in the private or governmental sector, remains untaxed under this new tax regime.

– Interest and Savings: Corporate tax does not apply to interest or other income derived from bank accounts or savings programs.

– Investment Income: Income from sources like stock dividends, profits from selling assets, and interest received from the personal ownership of shares or other assets is exempt from corporate tax in the UAE.

Key Points on the Impact of Corporate Tax on Salaries

 Tax Threshold

The UAE government has set a tax threshold stating that income up to AED 375,000 is exempt from taxation. This threshold provides significant tax relief to many individuals earning salaries in the country.

 Tax Rate

For income exceeding the AED 375,000 threshold, a flat tax rate of 9% applies. This rate is competitive and relatively low compared to many other jurisdictions.

Impact on Individuals with a Commercial License

Individuals are exempt from paying CT on their salaries unless their activities are considered “commercial in nature.” Those holding or obliged to have a commercial license/permit, including a freelance license/permit, will be subject to corporate tax.

For example, a real estate agent engaging in economic activities such as leasing, selling, or transferring properties in the UAE must have a valid license and may therefore be taxed under the UAE CT Law.

Scope of Wages and Employment

Since individual salaries are not taxed in the UAE, business owners might consider drawing salaries from their companies to reduce net taxable profits. However, this requires an employment contract and proof that the wages are remuneration for work, not just profit from the business. This can be complex and may need a thorough economic analysis, which, if favorable, could lead to an exemption from CT on their salaries.

Latest Clarification on Corporate Tax and Individual Salary

Cabinet Decision No. (49) of 2023 clarifies that an individual’s salary will not be affected by corporate tax unless they engage in any business activity. Businesses will fall under corporate tax and compliance requirements only if they have a combined turnover of AED 1 million in a calendar year.

For instance, if an individual’s business in the UAE has a combined turnover of more than AED 1 million, it will be subject to corporate tax. However, rental income earned by the individual will not be taxed under CT as it is outside the scope of CT.

Conclusion

Dubai continues to maintain its attractiveness by providing a favorable tax-free environment for foreign natural persons and legal entities. The UAE offers the possibility of receiving a 100% tax-free salary and other tax-free personal income, provided the income-generating activity does not require a commercial license. These exemptions for earnings such as salary, interest, savings, and investment income safeguard the financial well-being of individuals in the UAE.

Individuals can be confident that their salaries and personal income streams will largely remain unaffected by the CT Law, as tax authorities continue to clarify various components of the corporate tax framework. This allows individuals to benefit financially from working and investing in this vibrant and business-friendly nation.

How Unicorn Global Solutions Can Help

Unicorn Global Solutions, a leading accounting firm, has a team of experts with dynamic knowledge of all the tax regulations prevailing in the UAE. Our team can solve your tax problems with innovative solutions and ensure compliance with all the authority’s requirements. We provide not only tax solutions but also a robust framework that enables your business to thrive without facing future complications. To learn more about our varied services, feel free to contact us now.  Text us on WhatsApp or call us today.

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