A Comprehensive Guide to Corporate Tax in the UAE: Everything You Need to Know

The basic concept of corporate tax is to help the UAE achieve its strategic goals and run its development and modification. The reliability of a competitive Corporate Tax UAE system in line with international standards and the UAE’s vast network of double taxation agreements will strengthen the UAE’s position as a leading authority for business and investment. However, it imposes corporate taxes on oil companies and foreign banks. In addition, excise duties are charged on specific goods that are generally harmful to human health or the environment. Tax is mostly applicable to services and goods.

Given the UAE’s status as an international business and financial center, the UAE’s corporate tax regime is based on world-class best practices and incorporates internationally renowned and recognized principles. This ensures that the corporate tax regime in the UAE is easy to understand and has clear implications.

What is Corporation Tax (CT)?

Corporations tax directly taxes corporations and other entities’ net income or business profits. By introducing Corporate Tax, the UAE aims to:

• Establish its position as a leading global business and investment center.
• Accelerate development and transformation to achieve strategic goals.
• Assures its commitment to meeting global tax transparency standards and preventing harmful tax practices.

Tax rate on Taxable income

To regulate the taxable income of a tax group, the parent company must prepare consolidated financial statements covering each subsidiary that is a member of the tax group for the relevant tax period. Transactions between the parent company and the individual group members and transactions between group members are disregarded when calculating the taxable income of the taxable group.

• Taxable income not exceeding the amount prescribed by the decision of the Council of Ministers.
• Qualifying Income for Qualifying Persons in Free Zones
• Taxable income exceeding the amount prescribed by the decision of the Council of Ministers.
• Ineligible Income for Eligible Free Zone Persons.

Here are some key points:

• The UAE has introduced a federal corporate tax (CT) system that will be effective for financial years starting on or after 1 June 2023.
• The standard CT rate will be 9% for businesses with a net annual profit of or over AED 375,000 and a rate of 0% for businesses with net annual profits under AED 375,000.
• The CT will apply to resident and non-resident persons who carry on a business in the UAE through a permanent establishment.
• The CT will not apply to certain entities exempt by law, such as government entities, extractive businesses, public benefit entities, pension funds, investment funds, etc.
• The CT will be imposed on the net income or profit of the taxable person from their business after deducting certain allowable expenses such as salaries, rent, depreciation, interest, etc.
• The CT will not be imposed on certain types of exempt income, such as dividends, capital gains, interest income from deposits or loans, etc.
• The taxable person will be required to file a CT return and pay the CT due within six months from the end of their financial year.
• The UAE Ministry of Finance has designed a comprehensive UAE Corporate Tax eLearn, available for on-demand learning, which will cover the fundamentals of the UAE Corporate Tax and how one can ensure a seamless transition.

What are the benefits of the CT for the UAE economy?

According to some sources, the benefits of the CT for the UAE economy are:

• It encourages economic growth by shielding domestic industries from competitors and attracting foreign direct investment.
• It ensures tax fairness by making all businesses pay their fair share of taxes and reducing tax evasion.
• It is less intrusive than personal income tax as it has a more stable and competitive rate and does not affect individual consumption or savings.
• It helps the UAE achieve its strategic objectives and accelerate its development and transformation by diversifying its revenue sources and enhancing its fiscal sustainability.
• It cements the UAE’s position as a leading jurisdiction for business and investment by adhering to international standards and leveraging its extensive network of double tax treaties.
• It encourages corporate transparency and compliance with the law by requiring businesses to file accurate financial statements, payments, and taxes.
• It encourages investment and job creation by helping businesses remain competitive and profitable.

Who needs to pay corporate tax?

Corporation tax applies to the following “taxpayers”:

• All companies and individuals carrying out business activities in the United Arab Emirates under a business license
• Free Zone Companies (The UAE Cash Transfer Program will continue to honor cash transfer incentives currently offered to Free Zone companies that meet all determined requirements and do not conduct business in the UAE mainland.)
• Only foreign entities and individuals who conduct business or business continuously or regularly in the UAE
• Bank business
• The company manages real estate management, construction, development, agency, and brokerage activities.
• UAE companies and other legal persons incorporated or effectively managed and controlled in the United Arab Emirates;
• Non-resident legal persons (foreign legal entities) (as defined in [Article 8]) with a permanent establishment in the United Arab Emirates.

Legal persons incorporated in the free zones of the UAE are also subject to corporate tax as “taxpayers” and must comply with the requirements stipulated in the corporate tax law. However, anyone in a free zone who meets the criteria to be considered a free zone qualifying person is entitled to a 0% corporate tax rate on their qualifying income.

CTB Exemption The following are the provisions relating to the corporate tax exemption.

Companies operating in the field of natural resource extraction are exempt from cash transfers, as these companies are still subject to emirate taxes levied on existing companies.

UAE companies’ dividends and capital gains from their qualifying CT shares will be exempt. Eligible transactions and restructurings within the group will not be subject to cash transfers, provided the conditions are met.

Non-residents who do not have UAE permanent residence or who earn income not related to their permanent establishment may be subject to withholding tax. Withholding tax is a corporate tax collected at the source by the payer on behalf of the income recipient. Withholding taxes exist in many tax regimes and typically apply to cross-border payments of dividends, interest, royalties, and other types of income.

Rules and Regulations – Corporate Income Tax

Under the emirate-wide tax laws, income tax is paid on a progressive system of tax rates up to a maximum of 55%. In practice, however, these fiscal decrees still need to be implemented. So instead, foreign bank branches are subject to income tax at a 20 % flat rate, based on a separate bank decision at the emirate level. In addition, companies engaged in oil, gas, and petrochemical activities in the UAE are subject to income tax at a rate of 55% or higher under individual concession agreements or tax treaties in the UAE.

The UAE Federal Anti-Terrorism Law will be enacted for financial years on or after June 2023. It will apply throughout the UAE and will apply to all business and commercial activities, except for the following persons (as the case may be):

• Government agencies of the United Arab Emirates;
• Entities controlled by the UAE government;
• Persons engaged in extractive industries in the UAE;
• Those working in the field of non-extractive natural resources in the UAE;
• Eligible nonprofit entities;
• Qualified Investment Fund
• A public pension or social security fund, or a private pension or social security fund, regulated by a competent national authority and subject to such other conditions as the Minister may decide;
• legal entities incorporated in the country and wholly owned and controlled by certain exempt persons; and
• Any other person appointed by the decision of the Council of Ministers.

Prepare and Pay the Corporate taxes.

Preparing to pay corporate taxes accordingly is another task that needs to be tackled, and following these simple steps will come in handy in this regard:

• If and when your business needs to register for corporation tax;
• What is the accounting/tax period for your business;
• When your business is required to file a corporate tax return;
• What options or applications your company can or must make for corporate tax purposes;
• What financial information and records your company must keep for corporate tax purposes;
• Keep visiting the websites of the Ministry of Finance and the Federal Office of Public Finance regularly for more information and guidance on corporate taxation.

All taxpayers (including those in free zones) must register for corporate tax and obtain a corporate tax registration number. In addition, federal fiscal authorities may also require certain tax-exempt persons to register for corporate tax.

Taxpayers must file a corporate tax return for each tax period within nine months of the end of the corresponding period. The same provisions apply to the payment of corporate tax corresponding to the tax period in which the return is filed.

Final thoughts

The fundamentals of UAE corporate taxation mark a major shift in the country’s tax strategy, reflecting its vision to expand the economy and align with global tax policy. The tax will apply to most organizations operating in the UAE.