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UAE Corporate tax changes effective June 1st, 2023, taxable individuals and businesses will be subject to a corporate tax on their net income or profit from business activities. 

UAE’s corporate tax will be levied at a rate of 9% on the net profits (calculated as revenue minus expenses) of all businesses generating more than 375,000 AED annually (approximately USD $100,000). Businesses earning less than this amount will continue to enjoy a 0% tax rate.

In addition to the general corporate tax, the UAE has also mandated that large multinational corporations with profits exceeding EUR 750 million will be subject to a 15% tax rate in accordance with the Global Minimum Corporate Tax Rate agreement.

Implementing federal corporate tax in the UAE advances the country’s standing as a leading global hub for trade and investment while promoting growth and transformation. Our guide below covers the latest tax laws and regulations to ensure compliance and avoid harmful tax practices in line with international standards for tax transparency.

WHO IS ENTITLED TO PAY CORPORATE TAX IN UAE TAXATION?

Corporate tax UAE is applicable to:

• Individuals (foreign or resident) who conduct business or engage in professional activity in the UAE.
• UAE-incorporated entities.

 Foreign legal entities with a permanent establishment in the UAE; and foreign legal entities that are managed and controlled in the UAE.

Dividends, interest, royalties, capital gains, service fees, and other UAE-sourced income generated by a foreign person will not subject them to corporate tax duties in the UAE without a permanent establishment there.

Effective Date

The corporate tax will be in effect for financial years beginning on or after 1 June 2023.

Any business that adopts a fiscal year that begins on June 1 and ends on May 31, 2024, will be subject to UAE corporate tax as of that date. By the end of 2024, the first tax return submission will be mandatory. 

Any corporation that adopts a calendar year that begins on January 1 and ends on December 31, 2023, will be subject to corporate tax beginning on January 1 of the following year. Filing will probably be required in the middle of 2025.

WHO ARE THE UAE RESIDENTS AND NON-RESIDENTS?

Taxable persons, who might be either residents or non-residents, are subject to the corporation tax (residence for corporate tax is a concept defined in the UAE corporate tax law and is not impacted by where a person resides).

Under UAE corporate law, a resident person is a legal person who has been incorporated or established (including free zone entities). It also encompasses any person conducting business in the UAE and any foreign legal entity that is effectively managed and controlled there.

On the other hand, a non-resident person refers to an individual who does not have residency in the UAE but has a permanent establishment in the country. Non-resident individuals are considered to be subject to a 0% withholding tax when they receive income from a UAE-based source.

WHO IS NOT SUBJECTED TO UAE CORPORATE TAX?

Exemptions include government-owned, government-controlled, public, private, and pension funds, as well as qualified investment funds and public benefit companies. 

Businesses involved in the extraction of the UAE’s natural resources and in the non-extractive parts of the value chain of natural resources that are subject to emirate-level taxation will fall outside the purview of the UAE corporate tax regime, according to a presentation by the Ministry of Finance UAE.

Subsidiary businesses entirely owned by an exempt person may be eligible for corporate tax in UAE exemptions (for example, a holding company used by an investment fund to hold a certain asset). Such organizations are eligible to petition for corporate tax exemption through the UAE Federal corporate Tax Authority.

Free zone companies in the UAE can enjoy a 0% corporate tax rate, provided they comply with all regulatory requirements. This applies to free zone companies that conduct trade with the mainland. 

Both non-resident and resident individuals and businesses in the UAE may be subject to corporate tax policies.

Free Zones Corporate Tax

As part of its commitment to these businesses, companies registered in Free Trade Zones and not conducting trade with the mainland will enjoy a 0% tax rate (or exemption) until the end of the designated tax holiday period. It is important to note that all businesses operating in Free Trade Zones must file an annual corporate tax return.

For companies with a presence in both the Mainland UAE and Free Trade Zones, or those operating under the dual license scheme, it is crucial to consider the potential impact on their business model.

Free zones will be subject to the legal requirements for administrative and compliance supervision as well as the corporation tax framework in the UAE. On “qualified income,” Qualifying Free Zone Persons (QFZPs) can take advantage of a corporate tax rate of 0%. 

Income that is taxable but not qualified will be taxed at the standard corporate rate of 9%.

The free zone must meet the following requirements in order to be considered a QFZP:

• Keep the UAE’s substance up to par;
• The creation of “qualified income” (to be defined in a Cabinet decision);
• Not chosen to “opt-out” of the corporation tax scheme in the free zone;
• Follow the documentation and transfer price rules
• Meet any additional requirements the government may impose

Non-taxable income streams

For the purposes of corporate taxes in the UAE, a variety of income streams would be regarded as non-taxable, including.

• Dividends or other profit distributions from residents or formed legal entities in the UAE.
• Dividends or other profit distributions received from foreign legal entities with a foreign ownership interest of more than 5% where all requirements for the “participation exemption” are met and the taxpayer has possessed the stake for at least 12 months.
• Certain other income (such as capital gains, foreign exchange gains/losses, and impairment gains or losses) received from entities owned at least 5% by UAE residents or foreign legal entities, provided that the taxpayer has held the ownership interest for at least 12 months and that all requirements for the “participation exemption” are satisfied.
• Income from a foreign branch or foreign permanent establishment where the “Foreign Permanent Establishment exemption” has been elected to be claimed.

Tax Reliefs

Taxpayers may take advantage of a number of tax reliefs under the corporate tax legislation by fulfilling certain requirements:

• Tax Loss Relief: This relief enables tax losses to be carried forward without restriction and offset against the taxable income of future periods, up to 75% of the taxable income.
• Transfer of Tax Losses: Where there is 75% common ownership, resident corporations in the UAE may be allowed to transfer tax losses to another taxable person.
• Business Restructuring Relief: Gains or losses from qualified restructuring transactions, including business mergers, legal mergers, entity divides, and other such events, may be deducted from taxable income.
• Small Business Relief: Residents of the UAE who are taxpayers may choose to receive small business relief if their income does not exceed a threshold determined by a ministerial decision and their revenue for the relevant tax period and the two prior tax periods they are eligible for small business relief.

REQUIREMENTS OF UAE CORPORATION TAX PAYER

• Taxpayers must register with the FTA for corporate tax and receive a corporate tax registration number (TRN)
• In order to use financial statements as the foundation for their company tax filings, taxpayers must produce them in accordance with accounting standards recognized in the UAE.
• For some taxpayers, an audit or certification of their financial statements may be required.
• Taxpayers must keep all records and paperwork associated with their tax return for at least seven years after the conclusion of the applicable tax period.
• Nine months after the taxpayer’s fiscal year ends is the deadline for filing a corporate tax return with the FTA and paying corporate tax.
• Penalties will apply to taxpayers who don’t follow the corporate tax regime. However, there will be no penalty for registering beyond the deadline.

If you want to establish a new company here, refer to company registration in UAE for more information.