Corporate Tax

Corporate Tax in UAE

The UAE has implemented a new Corporate Tax system, applicable to businesses operating here starting June 1st, 2023. This tax on net business income boasts one of the world's lowest rates and is designed to streamline compliance. The revenue generated will strengthen the UAE's economic standing, while the system itself promotes transparency and adheres to international standards. Entrepreneurs can rest assured, as the UAE remains dedicated to supporting startups and small businesses

UAE Corporate Tax: Who Pays and How Much?

The UAE’s new corporate tax system has two main components:
  • Standard Rate: This applies to most businesses operating in the UAE. The rate is set at a competitive 9% for taxable income exceeding AED 375,000 (around USD 102,000).
  • Multinational Enterprise (MNE) Rate: Large multinational companies with global revenue exceeding AED 3.15 billion (around USD 860 million) may qualify for a different tax rate under specific international tax rules (OECD’s BEPS 2.0 framework).

Who's Included?

The corporate tax applies to a broad range of businesses and activities:
  • Businesses with a Commercial License: Any company operating commercially in the UAE, regardless of nationality, will be subject to the tax.
  • Free Zone Companies: Businesses within designated Free Zones can qualify for tax benefits, but only if they meet specific regulations and don’t conduct mainland UAE business.
  • Foreign Businesses with UAE Operations: Foreign companies with a physical presence or management control in the UAE will also be subject to the tax.
  • Financial Services: Banks and other financial institutions fall under the corporate tax umbrella.
  • Key Sectors: Construction, development, real estate, agencies, and brokerage activities are all included in the scope of corporate tax.
This simplified explanation provides a clearer understanding of who pays the tax and the applicable rates.

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Exemptions from Corporate Tax in the UAE

The United Arab Emirates (UAE) provides various exemptions and benefits within its corporate tax framework. Below is an overview:  Automatically Exempt:
  • Government entities and their controlled entities (as listed by the government).
May Be Exempt (Upon Application to Ministry of finance):
  • Businesses involved in extracting natural resources (oil, gas, etc.) or related non-extractive activities.
Exempt after Federal Tax Authority (FTA) Approval
  • Qualifying public benefit entities (e.g., charities, educational institutions).
  • Public and private pension and social security funds.
  • Qualifying investment funds.
  • Wholly-owned UAE subsidiaries of certain exempt entities (e.g., government entities, qualifying investment funds).
Additional Tax Advantages:
  • Businesses need not pay corporate tax on dividends or capital gains from qualifying shareholdings.
  • Certain intra-group transactions and reorganizations within a company structure may be exempt under specific conditions.
What’s Always Tax-Free (for Individuals):
  • Individual salaries and other employment income (Public or Private).
  • Interest and savings income from personal bank accounts.
  • Investment income of foreign investors (dividends, capital gains, etc.).
  • Personal real estate investments.
  • Dividends, capital gains, and other income from personal ownership of shares or securities.
The UAE’s new corporate tax system brings both opportunities and considerations for businesses operating in Free Zones and beyond. Here’s a simplified breakdown
Free Zone Benefits (with Conditions): The UAE intends to honor existing Free Zone benefits for companies that:
  • Don’t do business with the UAE mainland.
  • Meet specific requirements to qualify as a “Qualified Free Zone Person” (QFZP). These requirements include:
  • Maintaining a substantial presence in the UAE (substance test).
  • Generating “Qualifying Income” (income defined as exempt under the tax law).
  • Not electing to be subject to the standard corporate tax rate.
  • Complying with transfer pricing regulations.
  • Free Zones are still required to file annual corporate tax returns.
Impact on Multinational Companies (MNCs):
  • The UAE aims to attract MNCs with its competitive tax rates. This might seem counter-intuitive, but the UAE hopes its transparent and dynamic business environment will be a draw.
Mergers & Acquisitions (M&A):
  • M&A activity could be impacted in positive ways:
  • Qualified ownership structures might lead to tax-free dividends and capital gains for investors.
  • However, increased due diligence will be necessary to ensure proper handling of inherited tax liabilities.
  • Businesses should review their structures and activities to optimize their strategies under the new tax law.
Foreign Direct Investment (FDI): The corporate tax represents another step in the UAE’s rapid evolution. The government aims to diversify the economy beyond oil and gas and position itself as a tech and innovation hub. The UAE remains attractive to skilled professionals with tax-free salaries and personal investment income. Increased Costs: While some benefits remain, the overall cost of living and doing business might increase slightly. Registration, Filing, and Payment:
  • All taxable entities (including Free Zone companies) and some exempt entities must register for a Corporate Tax Registration Number.
  • Tax returns and payments are due within nine months of the end of each tax period.
Key Points About UAE Corporate Tax: Here’s a simplified breakdown of who pays UAE corporate tax and what types of income are exempt:
  • Individuals: Your salary, real estate income, investments, and other personal income (not related to UAE business) are not subject to corporate tax.
  • Non-residents: You’ll only pay tax on income directly earned in the UAE or from a permanent establishment (PE) in the country.
  • Business Profits: The tax applies to a company’s adjusted accounting net profit.
  • Free Zone Businesses: Companies operating in Free Zones can still qualify for tax benefits if they meet specific criteria.
  • Natural Resources: Extraction of natural resources remains subject to separate emirate-level taxation (not corporate tax).
Reduced Tax Rates or Exemptions:
  • Dividends and Capital Gains: Under certain conditions, these can be exempt from corporate tax.
  • Withholding Tax: Domestic, cross-border payments and specific transactions may have a 0% withholding tax rate.
Tax Benefits for Groups:
  • Tax Groups: Companies within the UAE can form tax groups under specific conditions.
  • Loss Transfer: Tax losses from one profitable company in a group can be transferred to offset tax burdens in another company within the group (conditions apply).
  • Group Relief: Eligible intra-group transactions and restructuring can benefit from tax relief.
  • Foreign Tax Credit: Companies can receive credit for taxes paid elsewhere against their UAE tax liability on foreign income.
Tax Calculations and Reporting:
  • Transfer Pricing: Follows OECD guidelines.
  • Accounting Standards: International accounting standards apply, with some relaxations for specific taxpayers.
  • Simplified Reporting: Start-ups and small businesses may have simplified financial and tax reporting options.

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Jumeira Consultants: Your Trusted Partner!

Our tax specialists can help you navigate these changes and ensure your business is compliant. We can answer your questions and provide the support you need to adapt to the new tax environment.

For expert guidance on UAE Corporate Tax, Jumeira Consultants offers a dedicated team of tax professionals. Reach out to us at info@jumeiraconsultants.com or call us +971 52 809 8408 to discuss your specific needs.

FAQ

No, not for personal income. Salary, rental income, investments, and other personal income (not related to business activity) are exempt.

Yes, for business income. If you have a commercial license and run a business in the UAE, you’ll likely be subject to corporate tax on your business income.

  • Employment income
  • Rental income from UAE real estate investments
  • Investment income (dividends, etc.)

These partnerships are considered “transparent” for tax purposes. The income “flows through” to the individual partners, who are then taxed on their share of the profits, not the partnership itself.

  • Federal and Emirate governments, departments, authorities, and other public institutions
  • Wholly government-owned UAE companies with specific functions (listed by the government)
  • Businesses extracting natural resources (subject to separate emirate-level tax)
  • Registered charities and public benefit organizations
  • Public and regulated private social security and retirement pension funds
  • Certain investment funds meeting specific criteria

Maintain a substantial presence in the UAE (substance test)

Comply with all regulations set by their Free Zone authority

  • The UAE is considering offering alternative financial reporting standards and mechanisms to determine taxable income. This aims to reduce compliance costs for startups and smaller businesses.
  • Treatment of Unrealized Gains and Losses

Capital items: Unrealized gains or losses on assets like buildings or equipment don’t affect taxable income.

Revenue items: Unrealized gains or losses on sales or purchases do affect taxable income.

To claim exemption, your UAE company must: Own at least 5% of the shares in the subsidiary company. The foreign subsidiary must be subject to corporate tax (or a similar tax) at a rate of at least 9%.

UAE companies can choose one of two options: Claim a foreign tax credit for taxes already paid in the foreign branch country. Elect for an exemption on their foreign branch profits.

Certain expenses cannot be deducted from your taxable income, including: Payments made to related parties in a Free Zone with a 0% tax rate on that income. 50% of entertainment costs for customers, shareholders, suppliers, etc. Administrative penalties, recoverable VAT, and donations to non-approved charities.

Yes, tax losses can be carried forward indefinitely, but with conditions:

Shareholder Continuity: At least 50% of the company’s shares must be held by the same shareholders throughout the period when the loss is incurred and when it’s used to offset future taxable income.

Change in Ownership: If ownership changes by more than 50%, losses can still be carried forward if the new owners continue the same or a similar business.

Listed Companies: Continuity requirements don’t apply to businesses listed on a recognized stock exchange.

Audits are not mandatory solely for corporate tax. Existing company laws determine audit requirements. However, Free Zone companies seeking the 0% CT rate will need to have audited financial statements.

Businesses must maintain financial and other records that support the information in their CT return and other documents submitted to the Federal Tax Authority (FTA). This also applies to certain exempt entities to verify their exemption status.

Tax returns and supporting schedules must be submitted to the FTA within nine months of the end of the relevant tax period.

To avoid double taxation, the UAE offers a “Foreign Tax Credit.” This allows companies to credit taxes paid in a foreign country against their UAE CT liability on foreign-sourced income that hasn’t been otherwise exempted.

The maximum foreign tax credit is the LOWER of: The tax paid in the foreign country. The UAE CT is payable on the foreign-sourced income.

No. Only foreign tax credits can be used forward or back to other tax periods. There’s also no mechanism for getting a refund on unused credits.