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UAE CORPORATE TAX

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With the UAE’s new corporate tax law, many companies are encountering unfamiliar regulations and procedures. Our team of tax experts is here to help you navigate these changes effectively. We offer assistance in understanding how corporate tax applies to your business, leveraging available tax exemptions and reliefs, and ensuring you meet all compliance deadlines to avoid penalties.

From the initial registration of your business for corporate tax to adhering to accounting standards and filing your corporate tax returns, our experienced team is ready to guide you through every step of the process. We aim to make the transition smooth, efficient, and cost-effective for your business.

Must Know

To comply with the new corporate tax scheme in the UAE, every business must:

  1. Register for Corporate Tax: Begin registration from June 2023 onwards.
  2. Maintain Accounting Records: Ensure records adhere to the required reporting standards, such as IFRS.
  3. File a Corporate Tax Submission: Submit your corporate tax filings to the Federal Tax Authority.

While not all businesses will be liable for paying corporate tax, all must complete these steps to determine eligibility for any potential tax exemptions

Corporate tax advice

Our experts will provide comprehensive advice on all corporate tax considerations affecting your business. This includes identifying available tax exemptions and guiding you on how to benefit from them.

Corporate tax registration

Our team will assist in registering your business for corporate tax with the Federal Tax Authority (FTA) and ensure that all your corporate tax obligations are met on time.

Corporate tax returns

Our team will assess your corporate tax position, ensure the best tax outcome for your business, and handle all necessary submissions with the Federal Tax Authority (FTA) throughout the year.

What is Corporate Tax in the UAE?

Corporate tax is levied on the taxable income (net profit) of business establishments resident in the United Arab Emirates. The new taxation policies came into effect on June 1, 2023, with most companies being fully taxable by January 1, 2024.

Background of Corporate Tax in the UAE

The UAE has long been a top destination for entrepreneurs and investors due to its stable political environment, strategic location, and impressive business infrastructure. Historically known for its 0% corporate tax regime, the UAE has now introduced corporate tax as part of its efforts to diversify its economy away from oil dependency.

Is Corporate Tax the Same as VAT?

Corporate tax and VAT are different. Corporate tax is mandatory for all companies in the UAE and is based on the net income of the business. In contrast, VAT is a consumption tax applied to the sale of goods and services, and only companies meeting certain thresholds need to comply.

Who Will Be Subject to Corporate Tax in the UAE?

The general rule is that every company in the UAE, including those in free zones, will be subject to corporate tax, with specific exemptions detailed by the UAE Ministry of Finance (MOF). This includes:

  • Corporations and other legal entities based in the UAE or with primary management and operations within the UAE.
  • Individuals engaged in business or business activities within the UAE.
  • Foreign legal entities with a permanent establishment in the UAE.

Tax Calculation and Reporting

  • Businesses with financial years starting from July 1 will begin tax calculations from July 1, 2023.
  • Businesses with financial years starting from January 1 will begin tax calculations from January 1, 2024.

All commercial activities within the UAE, except for specific exemptions, will be required to register for and file corporate tax.

How Much Is the Corporate Tax in the UAE?

The UAE Ministry of Finance (MOF) has established a tiered corporate tax system with the following rates:

  1. Businesses with Net Yearly Profit up to AED 375,000:

    • 0% Tax Rate: Businesses in this category are not subject to corporate tax, promoting support for small and medium-sized enterprises (SMEs).

  2. Businesses with Net Yearly Profit Above AED 375,000:

    • 9% Tax Rate: This rate applies to profits exceeding AED 375,000, providing a balance between encouraging business growth and ensuring fair tax contributions.

  3. Large Multinational Companies:

    • 15% Tax Rate: Companies with total global revenue exceeding EUR 750 million (approximately AED 3.15 billion) will be taxed at a minimum of 15%. This is in line with the OECD’s Pillar Two initiative aimed at curbing base erosion and profit shifting by multinational enterprises.

Corporate Tax Registration

To register for Corporate Tax in the UAE, follow these steps:

  1. Access the Federal Tax Authority’s (FTA) Website:

    • Visit the FTA’s official website and complete the required registration forms.

  2. Submit Required Documents:

    • You will need to provide:
      • Emirates ID
      • Trade license
      • Passport
      • Financial records
      • Details of business activities
      • Corporate structure information

  3. Application Review and Approval:

    • The FTA will review your application. If approved, you will receive a Tax Registration Number (TRN). This process typically takes about 20 days, but may extend if additional information is needed.

  4. Assistance from Dawleygroup:

    • Dawleygroup can assist with the application process and ensure all required documents are correctly submitted.

UAE Corporate Tax: Exempt Persons

Certain entities are exempt from corporate tax, including:

  1. Governmental and Public Entities:

    • This includes federal and regional offices, departments, and public institutions.

  2. Businesses in Natural Resource Extraction or Mining:

    • These businesses are already subject to Emirate-level taxation and do not need to file a separate corporate tax report.

  3. Charitable and Social Organisations:

    • Charitable organisations must register with the MOF and meet specific criteria to qualify for exemption under Cabinet Decision No.37 of 2023.

  4. Real Estate and Regulated Investment Funds:

    • Must apply to the MOF and FTA for exemption approval.

  5. UAE Government-Owned Companies:

    • Companies fully owned and controlled by the UAE government and listed with a ministry-level decision.

  6. Public or Private Pension/Social Security Funds:

    • Must meet conditions outlined in Ministerial Decision No.115 of 2023.

UAE Corporate Tax: Exempt Income

In addition to exempt entities, certain income types are also exempt from corporate tax:

  1. Earnings from Dividends:

    • Dividends or profit distributions received from UAE-incorporated or resident juridical persons.

  2. Earnings from Foreign Juridical Persons:

    • Dividends or profit distributions from a participating interest in foreign juridical persons.

  3. Capital Gains from Subsidiary Shares:

    • Gains from selling shares in a subsidiary company.

  4. Foreign Exchange Gains/Losses:

    • Gains or losses from foreign exchange or capital gains from domestic or foreign participating interests.

  5. Earnings from International Transportation:

    • Earnings by non-residents from operating or leasing ships or aircraft for international transportation.

  6. Foreign Permanent Establishment Exemption:

    • Earnings made by a Permanent Establishment or foreign branch if the ‘Foreign Permanent Establishment’ exemption is claimed.

For dividend payment deductions, the UAE company must hold at least a 5% share in the subsidiary abroad. The exact ownership requirement can vary by country; for example, in the UK, the UAE shareholder must own at least 10% of the UK company’s ordinary shares for ten consecutive months to qualify for a tax deduction.

 

Corporate Tax for Free Zone Persons

Free Zone Persons—entities established within a UAE Free Zone—can qualify for a 0% corporate tax rate under certain conditions. To be classified as a Qualifying Free Zone Person (QFZP) and benefit from the 0% corporate tax rate, an entity must meet the following criteria:

  1. Derive Qualifying Income:

    • Income must be from transactions with other Free Zone Persons.
    • Income must come from ‘Qualifying Activities’ as outlined in Ministerial Decision No. 139 of 2023. Qualifying Activities include manufacturing, processing, fund management, logistics, and other activities specified in Ministerial Decision No. 265 of 2023.

  2. Maintain Adequate Economic Substance:

    • The entity must demonstrate substantial economic activity within the Free Zone.

  3. Not Elect to be Subject to Standard Corporate Tax Rates:

    • The entity must choose to retain the 0% tax rate rather than opting for the standard corporate tax rates.

  4. Comply with Transfer Pricing Requirements:

    • The entity must adhere to transfer pricing rules to ensure that transactions between related parties are conducted at arm’s length.

Qualifying Income excludes income derived from ‘Excluded Activities’ specified in the relevant Ministerial Decisions. Additionally, a QFZP’s non-qualifying income must not exceed the de minimis threshold of 5% of total revenue or AED 5 million, whichever is lower.

Free Zone Persons should review their operations to ensure compliance with these regulations and to understand their eligibility for the 0% tax rate.

Corporate Tax for Freelancers

Freelancers operating as individuals, without a separate legal entity, will fall under the corporate tax regime once their annual revenue reaches AED 1 million. The UAE is known for its favorable environment for freelancers, with easy taxation processes and affordable coworking spaces.

To operate as an independent professional or freelancer in the UAE, you will need a professional license.

Corporate Tax for Groups

Entities that wish to form a ‘Tax Group’ must meet the following criteria:

  1. Residency and Fiscal Year:

    • All entities within the group must be resident legal entities and operate on the same fiscal year with uniform accounting practices.

  2. Ownership and Control:

    • The parent company must own at least 95% of the subsidiary’s equity.
    • The parent must hold at least 95% of the voting rights and claim 95% of the subsidiary’s earnings and assets.

    Ownership, voting rights, and entitlements can be held directly or indirectly through branch entities. However, a Tax Group cannot include an Exempt Entity or a Qualifying Free Zone Entity.

Taxable Earnings Calculation for a Tax Group:

  • The parent company should consolidate the financial statements of all subsidiaries within the Tax Group.
  • Transactions between the parent and subsidiaries, as well as between subsidiaries, should be disregarded for the purpose of calculating the Tax Group’s taxable earnings.

Understanding and complying with these requirements is essential for forming a Tax Group and optimizing tax outcomes.

 

 

Tax Income Deductions

In the UAE, businesses can typically deduct costs associated with generating taxable revenue, though specific limitations and exclusions apply under the Corporate Tax Regulations. The timing of these deductions varies based on the nature of the expense and the accounting approach used. Here’s a detailed look at deductible expenses:

  1. Depreciation and Amortisation:

    • For assets with long-term value, expenditures are generally accounted for through depreciation or amortisation over the asset’s useful lifespan.

  2. Personal and Business Expenses:

    • If an expense serves both personal and business purposes, it must be divided appropriately. Only the business-related portion is deductible.

  3. Business Expenses:

    • Donations: Donations to charities listed in Cabinet Decision No. 37 of 2023 are deductible.
    • Interest Costs: Businesses with Net Interest Expenditure exceeding AED 12 million can deduct interest expenses up to the greater of 30% of their adjusted earnings before depreciation, amortisation, tax, and interest (EBITDA) or AED 12 million. This cap aims to discourage excessive debt financing.
    • Royalties: Payments made to foreign group companies, provided they are necessary and made at arm’s length.
    • Irrecoverable VAT: Input VAT that cannot be recovered is deductible.
    • Remuneration: Deductible if it reflects market rates. Excessive remuneration paid to owners, directors, or affiliated entities may not be deductible. Management fees must comply with transfer pricing regulations.
    • Losses: Businesses can deduct losses as future tax-deductible expenses based on their accounting method. Revaluation profits and deficits may be taxable if the realisation method is used.
    • Entertainment Costs: Costs associated with entertaining employees are deductible up to 50%.
    • Doubtful Debts: Deductible according to IFRS guidelines.
    • Government Fees: Fees related to business setup, licensing, and renewal are deductible.

Additional Tax Exemptions

Besides the standard deductions, certain income types are exempt from corporate tax:

  1. Dividend Payments:

    • Earnings from dividends or profit distributions received from UAE-incorporated or resident juridical persons.
    • Earnings from dividends or profit distributions from a participating interest in a foreign juridical person.

  2. Capital Gains:

    • Capital gains from selling shares of a subsidiary company.

  3. Foreign Exchange Gains:

    • Foreign exchange gains/losses or capital gains from domestic or foreign participating interests.

  4. International Transportation Earnings:

    • Earnings from non-residents operating or leasing ships or aircraft in international transportation.

  5. Foreign Permanent Establishment:

    • Earnings made by a Permanent Establishment or foreign branch where the ‘Foreign Permanent Establishment’ exemption has been elected.

Eligibility for Dividend Deductions:

  • To qualify for deductions on dividend earnings, a UAE company must own at least a 5% share of the subsidiary operating abroad. Ownership requirements may vary by country, such as a 10% share in the UK for ten consecutive months.

Tax Deduction for Companies with Foreign Branches

Foreign branch offices in the UAE have two options:

  1. Foreign Tax Credit:

    • Claim a credit for foreign taxes paid, capped at the lesser of the foreign tax paid or the UAE Corporate Tax due on the corresponding revenue. Surplus credits cannot be carried forward or backward.

  2. Exemption:

    • Apply for an exemption based on profits earned by foreign branches outside the UAE.

Administration of Corporate Tax in the UAE

The UAE Ministry of Finance (MOF) has authorized the Federal Tax Authority (FTA) to oversee the taxation process and ensure regulatory compliance. Businesses must file their corporate tax annually along with their financial reports.

Most medium and large businesses in the UAE follow International Financial Reporting Standards (IFRS). The FTA accepts various accounting methods to simplify the tax filing process for businesses and professionals.

Filing Corporate Tax and Financial Reports

Businesses must register with the FTA for tax purposes. After the end of a financial year, they have nine months to complete their tax filing and financial reporting.

Sample Timelines:

  • For entities with a Tax Period ending on May 31:

    • Registration Deadline: As applicable.
    • Submission Deadline: February 28.
    • Payment Due Date: February 28.

  • For entities with a Tax Period ending on December 31:

    • Registration Deadline: As applicable.
    • Submission Deadline: September 30.
    • Payment Due Date: September 30.

Businesses should ensure they meet these deadlines to avoid penalties and stay compliant with UAE corporate tax regulations.

 

 

Probable Implications of Corporate Tax in the UAE

The introduction of corporate tax in the UAE represents a significant shift in the country’s economic landscape. Here’s a detailed look at the implications:

Economic Diversification and Sustainability

  1. Enhanced Economic Diversification:

    • Revenue Generation: Corporate tax will provide the UAE with a new revenue stream, reducing its reliance on oil and natural resources. This will support various sectors, including infrastructure, healthcare, and education.
    • Sustainable Growth: The additional revenue will contribute to more sustainable economic development, funding public projects and social initiatives.

  2. Attractiveness to Foreign Investors:

    • Business Environment: The introduction of corporate tax is expected to enhance the UAE’s reputation as a transparent and business-friendly environment. This aligns with global best practices and can attract foreign investment.
    • Regulatory Framework: A clear and structured tax regime can make the UAE more appealing to multinational corporations looking for stable and predictable tax policies.

Regional Comparisons

The UAE’s corporate tax rate of 9% places it in a competitive position compared to other countries in the Middle East and Gulf region:

  • Saudi Arabia: 20%
  • Oman: 15%
  • Qatar: 10%
  • Bahrain: 46% for specific sectors (natural resource extraction), 0% for others
  • Kuwait: 15%

International Comparisons:

Globally, the UAE’s corporate tax rate remains relatively competitive:

  • Montenegro: 9%
  • Gibraltar: 12.5%
  • Ireland: 12.5%
  • Liechtenstein: 12.5%
  • Hong Kong: 7.5-16.5%
  • Singapore: 17%
  • San Marino: 17%

While the UAE’s rate is higher than some jurisdictions, it remains lower than many other global economies, maintaining its attractiveness as a business hub.

Wrap-Up: Corporate Tax UAE

To navigate the new corporate tax landscape effectively:

  1. Stay Updated:

    • Monitor Announcements: Keep abreast of updates and changes from the UAE government to ensure compliance with the latest tax regulations.

  2. Seek Professional Advice:

    • Expert Guidance: Engage with tax professionals to ensure your business is structured efficiently to handle corporate tax obligations. Expert advice can help in understanding tax implications, optimizing tax positions, and ensuring compliance.

  3. Utilize Professional Services:

    • Dawleygroup: Our team of vetted professionals at Dawleygroup is equipped to assist with corporate tax registration, compliance, and management. We provide tailored solutions to streamline your tax processes and help your business adapt to the new tax regime.

Contact Dawleygroup today to get comprehensive support for navigating the UAE’s corporate tax requirements and to ensure your business remains compliant and well-positioned for future success.

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FAQs

Our team of experts fields common questions from people all over the globe about corporate tax in the UAE.

Corporate tax is a direct tax imposed on the net income or profit of corporations and other entities from their business activities.

The UAE corporate tax will take effect based on the financial year adopted by the business, starting from either June 1, 2023, or January 1, 2024.

Corporate tax will apply to all businesses and individuals operating under a commercial license in the UAE, including free zone businesses not operating in the UAE mainland, as well as foreign entities engaged in trade or business within the UAE. This tax will also cover various business activities such

Exemptions from corporate tax cover a range of scenarios, including businesses engaged in extracting natural resources, UAE-based companies receiving dividends or capital gains from qualifying shareholdings, intra-group transactions and reorganizations that meet specific criteria, individual earnings, interest, and income from bank deposits or savings accounts, certain investment returns for foreign investors, and personal investments in real estate.

The corporate tax rates in the UAE are structured as follows:

  • 0% for taxable income up to AED 375,000
  • 9% for taxable income exceeding AED 375,000

Additionally, large multinational corporations meeting certain criteria, as outlined in Pillar Tw

The Federal Tax Authority (FTA) oversees the administration, collection, and enforcement of corporate tax in the UAE.

All companies in the UAE, including those in free zones, are required to register for corporate tax, maintain accounting records, and submit tax returns.

For the majority of companies in the UAE, which is around 95%, the financial year will commence on January 1, 2024.

Most businesses in the UAE are required to adhere to International Financial Reporting Standards (IFRS) for their accounting practices.

Yes, every company in the UAE must file a tax return, even if they qualify for tax exemptions. This filing is essential to demonstrate compliance with corporate tax regulations.

Dawleygroup is committed to preparing 10,000 companies for tax compliance and is offering a Free Tax Ready package valued at AED 5,000. This package includes complimentary tax registration, three months of free accounting services, and a compliance guarantee.

The tax compliance guarantee covers fines incurred for late registration or late filing of the annual return. It does not cover fines incurred before January 1, 2024, or fines related to overdue payments. To benefit from this guarantee, businesses must provide all required information at least 45 days before the registration or filing deadlines.

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