Coporate Tax UAE
Corporate TAX in UAE
In January 2022, the Ministry of Finance announced that the UAE government would be introducing a Federal Corporate Tax (CT) on the net profits of businesses. The Corporate Tax in the UAE will take effect starting from June 1, 2023. Corporate Tax, also known as Corporate Income Tax or Business Profits Tax, will be applicable from or after June 1, 2023, depending on the financial year followed by the businesses. From that point forward, all businesses across the country, except for the exempted ones, will be subject to CT. Corporate tax is a direct tax levied on net income. Currently, the UAE has the lowest tax rate in the region, set at 9%, compared to other GCC countries. During the G7 countries’ meeting in 2021, Gulf countries, including the UAE, agreed to introduce a global minimum corporate tax rate of 15%. However, the UAE opted for a 9% rate instead of 15% to minimize the direct impact on entrepreneurs. While business entities are subject to this direct tax, individuals earning income in their personal capacity, without needing a commercial license, are not taxed.
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Corporate Tax Services UAE
In the United Arab Emirates, corporate tax is applied as follows:
- Net profit up to AED 3,75,000 is tax-free.
- 9% tax on net profits in excess of AED 375,000
- Different tax slabs for multinational corporations in line with OECD Pillar 2’s base erosion and profit shifting
Significance Corporate Tax Services UAE
The primary goal of Corporate Tax in the UAE is to support the development of a sustainable economy, enhance corporate governance, and thereby strengthen the nation’s economic foundation. By introducing corporate tax, the UAE government aims to reinforce the country’s position as a global business and investment hub. This tax is expected to accelerate the nation’s progress toward achieving its strategic objectives. Most importantly, the implementation of corporate tax in the UAE reaffirms the country’s commitment to upholding international standards for tax transparency and combating harmful tax practices.
Why Choose UAE?
Even with the introduction of corporate tax, the UAE remains well-positioned as a highly competitive global market for business. When compared to other nations, the UAE boasts one of the lowest corporate tax rates. For instance, France has a corporate tax rate of 26.5%, the United States is at 21%, and India imposes 25% for businesses with a gross turnover up to 400 crore and 30% above that threshold. The Gulf Cooperation Council (GCC) countries have long attracted foreign investments due to their strategic geographic location and favorable tax policies. As a result, the UAE stands out as an attractive destination for global investors, offering the lowest corporate income tax rate among both competitive and GCC nations.
Scope of UAE Corporate Tax
Corporate tax in the UAE will apply to the following:
- Every business and individual conducting business activities under a commercial license in the UAE.
- Free zone businesses: The UAE corporate tax regime will continue to honor the current corporate tax incentives for free zone businesses, provided they comply with all legal requirements and do not have offices on the UAE mainland.
- Foreign entities and individuals, but only if they conduct trade or business in the UAE on an ongoing or regular basis.
- Banking operations.
- Companies engaged in real estate management, construction, development, agency, and brokerage activities.
Exemptions for Corporate Tax in UAE
The UAE Corporate taxes are exempt for the following entities:
- Businesses engaged in the extraction of natural resources as these businesses will remain subject to the current Emirate level Corporate Taxation
- Dividends and capital gains earned by a UAE business from its qualifying shareholdings
- Qualifying intra-group transactions and reorganisations will not be subjected to CT, provided that the necessary conditions are met.
- An individual’s earnings, salary, and other employment income, whether received from the public or the private sector,
- Interest and other income earned by an individual from bank deposits or saving schemes
- A foreign investor’s income earned from dividends, capital gains, interest, royalties, and other investment returns
- Investment in real estate by individuals in their personal capacity
- Dividends, capital gains or other income earned by individuals from owning shares or other securities in their personal capacity
Taxable Income
In the ever-evolving business environment of the United Arab Emirates (UAE), understanding the intricacies of taxable income and corporate taxation is essential for businesses operating within the country. This is where Aebiaccountax can provide expert guidance on UAE tax regulations, helping businesses comply with the law while effectively optimizing their tax liabilities.
The UAE’s taxation system imposes corporate taxes on specific entities, making it crucial for businesses to fully understand the regulations to ensure compliance and minimize tax liabilities.
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Corporate Tax Rate
In January 2022, the UAE Ministry of Finance announced the implementation of Corporate Tax at a standard rate of 9%. The tax structure is divided as follows:
- A 0% tax rate applies to taxable income up to AED 375,000.
- A 9% tax rate applies to taxable income exceeding AED 375,000.
- For large multinationals meeting specific criteria, a separate tax rate (yet to be determined) will apply.
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UAE Sourced Income
Under the UAE Corporate Tax (CT) law, income can be classified as UAE-sourced income based on several criteria. In the second category, income derived from a non-resident that is linked to or attributable to a Permanent Establishment (PE) in the UAE is considered UAE-sourced income. For instance, if a UK-based company operates a branch in the UAE and an Italian supplier provides services to that branch, the supplier’s income will be taxable in the UAE. The third category covers income generated from activities, contracts, or assets located in the UAE. This includes services provided or utilized in the UAE, interest secured against UAE property, and insurance premiums related to assets or residents in the UAE. While residents are taxed on their worldwide income, including UAE-sourced income, non-residents are taxed only on their UAE-sourced income and income related to their UAE PE or nexus.
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Corporate Tax on Free Zones
The Corporate Tax Law introduces the concept of a “Qualifying Free Zone Person” (QFZP), which refers to a free zone company or branch that:
- Maintains sufficient economic substance in the UAE.
- Earns eligible income (as specified by a Ministerial Decision).
- Complies with transfer pricing regulations.
- Meets any additional conditions set by a Ministerial Decision.
While a QFZP is still subject to Corporate Tax (CT), its qualifying income may be taxed at a 0% rate. However, a QFZP has the option to opt out of this preferential regime and pay the regular CT rate.
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Tax Losses and Implications
Corporate income tax is imposed when a company’s revenue exceeds its expenses. However, during challenging periods, such as the ongoing COVID-19 pandemic, businesses may incur losses, even as they remain responsible for overhead expenses. Proper tax treatment of corporate losses is essential for maintaining fairness within the tax system. Most countries impose limits on how many years losses can be carried forward or backward to offset taxable income. Tax losses can hold value during acquisitions, but regulations are in place to prevent their misuse. Ultimately, these losses can be applied to offset past and future income, offering financial benefits to companies.
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Basic points to be remembered before calculating corporate tax
The corporate tax (CT) rates in the UAE vary based on the type of taxpayer. For individuals and juridical persons, the applicable tax rates are as follows:
Qualifying Free Zone Persons benefit from:
- 0% for taxable income up to AED 375,000.
- 9% for taxable income exceeding AED 375,000.
The CT law is effective for businesses with tax periods beginning on or after June 1, 2023. It applies to both resident and non-resident taxable persons. Resident taxable persons include legal entities established in the UAE, individuals conducting business within the UAE, and foreign entities that are effectively managed and controlled from the UAE. Non-resident taxable persons include those with a permanent establishment in the UAE, who generate UAE-sourced income, or have some connection to the UAE.
Taxable persons in the UAE are taxed on their worldwide income, whereas non-residents are taxed only on income attributable to their UAE activities or state-sourced income not connected to a permanent establishment. Certain entities and activities are exempt from corporate tax, including UAE government entities, specific government-owned companies, businesses involved in the extraction of UAE natural resources, and investment funds that meet certain criteria.
The CT regime also applies to companies and branches registered in free zones. Qualifying free zone persons must maintain adequate substance in the UAE, generate qualifying income, refrain from electing to be subject to corporate tax, and comply with transfer pricing regulations.
Calculating taxable income involves adjusting the accounting net profit or loss based on standalone financial statements. Exempt income and deductions, such as dividends and capital gains from participating interests, are also considered, while non-deductible expenditures, including fines and penalties, are excluded.
Losses incurred can be offset against taxable income in subsequent financial periods, subject to specific limitations. Provisions for transferring losses and regrouping relief are available for eligible entities.
The CT regime includes transfer pricing rules governing transactions between related parties and connected persons, requiring compliance based on the arm’s length principle as outlined in the OECD Transfer Pricing Guidelines. Related parties include individuals connected through kinship or ownership structures and legal entities with at least 50% ownership or control.
Companies must maintain comprehensive transfer pricing documentation, including a local file detailing intercompany transactions and a master file containing global information about multinational groups. The General Anti-Abuse Rules (GAAR) may apply to counteract transactions that lack valid commercial justification or aim primarily to secure a corporate tax advantage.
To ensure compliance and maximize tax efficiency, keep these key points in mind when calculating corporate tax in the UAE. For expert guidance and support, partner with Aebiaccountax. Our team will help you navigate the complexities of UAE tax regulations and optimize your tax strategy. Reach out to us today!
Income Exempted from UAE Corporate Tax
The following entities are eligible for exemptions as per UAE regulations:
- UAE Federal/Emirate Government Entities, along with their departments, agencies, authorities, and other public institutions.
- Government-owned UAE companies are listed in a Cabinet Decision, provided they are wholly owned and controlled.
- Businesses involved in the extraction of UAE natural resources and related non-extractive activities.
- Public benefit entities listed in a Cabinet Decision.
- Investment funds meeting the prescribed conditions.
- Public or private pension or social security funds that meet specific requirements.
- UAE juridical persons wholly owned and controlled by certain exempted entities after fulfilling certain conditions.