What You Need to Know About UAE Corporate Tax
The Ministry of Finance in the United Arab Emirates introduced a federal Corporate Tax (CT) on business profits in January 2022. UAE's corporate tax rules went into effect on June 1, 2023.
Getting to grips with the revised rules will be crucial for business owners to avoid breaking the law. BBG member Zyla Accountants is here to help and is currently registering clients for the new tax requirements.
Here's what you need to know about Corporate Tax in the UAE and how it impacts your business.
Why did the UAE introduce a corporate tax?
Corporate Tax is often seen as a disadvantage for businesses. Prior to the introduction of CT, foreign businesses were encouraged to establish themselves in the UAE due to the lack of direct taxation. In contrast, the UAE introduced a Corporate Tax.
This new CT is part of an overall effort to streamline the UAE's tax system and meet international standards. The changes began with the introduction of Value Added Tax (VAT) in 2018, followed by economic substance rules (ESR) and country-by-country reporting regulations in 2019.
The goal is not to deter international businesses, but to attract them by bringing the UAE up to global standards.
How much is the UAE corporate tax rate?
Taxable income exceeding AED 375,000 will be subject to a 9% corporate tax rate. Income below this threshold will be taxed at 0%.
Resident Taxable Persons
Taxable income below AED 375,000 - 0%
Taxable income exceeding AED 375,000 - 9%
Qualifying Free Zone Persons
Qualifying Income - 0%
Taxable Income that does not meet the Qualifying Income definition - 9%
Businesses are subject to UAE Corporate tax based on their residency status. Resident legal entities are taxed on their worldwide income, whereas natural persons are only taxed on income derived from their UAE business.
Businesses are subject to UAE Corporate tax based on their residency status. Resident legal entities are taxed on their worldwide income, whereas natural persons are only taxed on income derived from their UAE business.
Does Corporate Tax apply to everyone?
UAE Corporate Tax applies to the following "Taxable Persons":
- Businesses and other legal entities that carry out their activities in the UAE
- Individuals who conduct businesses or business activities in the UAE (details of who would qualify to be under this category are yet to be issued by the Cabinet Decision)
- Non-resident legal entities (i.e. foreign companies) with a permanent establishment in the UAE
Legal entities established in a UAE Free Zone are also subject to corporate tax as "Taxable Persons" and must follow the Corporate Tax Law. Qualifying Free Zone Persons, however, would have an imposed rate of 0% on Qualifying Income and 9% on Taxable Income that is not Qualifying Income.
Who is a non-resident person?
Individuals who are not residents of the UAE, but have a Permanent Establishment in the UAE, or generate income from the state, are considered non-residents.
Who is a resident person?
For Corporate Tax purposes, companies, businesses and other legal persons incorporated or formed under the laws of the UAE are considered Resident Persons.
If they are managed and controlled in the UAE, foreign companies and other legal entities can also be treated as residents for Corporate Tax purposes.
Individuals who earn income from a business activity conducted in the UAE will also qualify as Resident Persons for Corporate tax purposes.
How do you define a permanent establishment?
A permanent establishment is a fixed place or business in the UAE, such as an office, branch, factory, or warehouse.
Whether a non-resident has a Permanent Establishment depends on the specific facts and circumstances of the business. For example, the nature and duration of the business activities, the degree of control and management exercised, and the presence of assets or personnel in the UAE.
Corporate tax exemptions apply to what types of income?
Dividends and capital gains earned from domestic and foreign shareholdings will generally be exempt from Corporate Tax. These types of income are exempt from double taxation as a result of this exemption.
In certain circumstances, a Resident Person can choose not to include income from foreign Permanent Establishments in UAE Corporate Tax calculations.
Should I pay UAE Corporate Tax?
The UAE CT includes a participation exemption for dividends and capital gains earned on subsidiary shares sold. Additionally, UAE companies with foreign branches will be able to either claim a foreign tax credit or an irrevocable exemption for their foreign branch profits. In this way, multinational companies and foreign businesses can remain interested in business in the UAE.
A UAE shareholder company must own at least 5% of the shares of the subsidiary in order to qualify for exemption. Compared to other jurisdictions, this rate is competitive.
Losses incurred in one financial period may also be offset against future taxable income, up to a maximum of 75%.
Groups of UAE resident entities can be treated as one taxable unit if the parent company holds at least 95% of the shares. It is, however, not allowed for members of the group to be exempt individuals or entities located in free zones.
