Understanding Corporate Tax in UAE
Truth be told – the United Arab Emirates is no more a corporate tax-free country. Although one of the lowest, the Emirates has a Corporate Tax policy in place now according to which corporations all across the UAE will be subject to pay corporate income tax at the rate of 9% on falling under the taxable income slab in line with the UAE Federal Decree-Law No. 47 of 2022 on taxation of corporations and businesses (the “Corporate Tax Law”). With the help of this blog, we will not just shed light on the key aspects of the newly introduced CIT in the UAE but also answer some of the most common questions that our tax advisors come across on a daily basis.
Corporate Income Tax (CIT): An Overview
Sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax”, Corporate Tax is a kind of direct tax charged on the net income of corporations and other businesses on surpassing a specific threshold set by the Government of the country where they are operating. It is generally imposed on businesses at the federal, state, and local levels. And the tax rates vary from place to place, industry to industry and level to level around the world. For instance, the standard CIT rate for UAE businesses operating on a federal level is 9%.
Introduction of Corporate Tax in the UAE
Announced on 31st January 2022 by the UAE Ministry of Finance for the first time, Federal Corporate Tax (CT or CIT) will be effective for financial years starting on or after 1 June 2023. Until 2021 the country had no federal corporate tax regime and used to levy only State-level corporate tax on industries carrying emirate-level gas and oil concession pacts and foreign bank branches.
Objective Behind the Move
- The introduction of a federal CT regime is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation. The certainty of a competitive CT regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties, will cement the UAE’s position as a leading jurisdiction for business and investment.
- Given the position of the UAE as an international business hub and global financial centre, the proposed UAE CT regime will build from best practices globally and incorporate principles that are internationally known and accepted. This ensures that the UAE CT regime will be readily understood rather than introducing new concepts that would need to be evaluated by investors.
- The introduction of a federal CT regime will also provide a basis for the UAE to execute its support of the global minimum effective tax rate as proposed under “Pillar Two” of the OECD Base Erosion and Profit Shifting project.
Corporate Tax Rate in the UAE
Corporate Tax is determined through tax decrees under which CIT is payable under a progressive rate system, with rates up to 55%. According to Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses issued by the UAE, the headline rate at which the federal corporate tax will be levied is 9% which can go up to 15% for large multinationals falling under Pillar Two. The chosen corporate tax rates are the lowest in the six-nation Gulf Cooperation Council to continue to maintain UAE’s magnificence for businesses.
Minimum Threshold to be Eligible for Corporate Tax in the UAE
Keeping small and medium enterprises and start-ups on the pedestal, the threshold for Corporate Tax calculation has been decided at AED 375,000 Taxable Profit. On exceeding the threshold, UAE-registered corporations are subject to a federal CIT at the rate of 9%. Companies with taxable profits below the threshold are taxed at the rate of 0% under the CIT system.
Corporate Tax Exemptions in the UAE
The corporate tax applies to taxable persons in the UAE who can be either residents, certain non-residents or free zone persons making profits of more than Dh 375,000 per annum. As per the new CT regime, free zone companies in UAE which fulfil all conditions specified in the Executive Regulations of the UAE Corporate Tax Law will be exempt from corporate tax. Corporations engaged in natural resource extraction activities are also exempted and will continue to pay CT in line with the existing emirate-level taxation law. Government entities, pension funds, investment funds and public benefit organisations are also beyond the scope of corporate tax. The non-residents are also subject to 9% of CT if they have a permanent establishment in UAE as well as income from the sale of goods, provision of services etc. in the country. Furthermore, all taxable persons shall be obligated to preserve records and documents for at least 7 years following the end of the tax period.
Corporate Tax Compliance in the UAE
Whether you are running a small company or a big corporation, tax compliance is of utmost importance for organisations in the UAE. This simply means you must pay your taxes on time in the right amount. Being aware of the current rules and legislation around corporate tax in the country in which you operate will ensure you are paying the correct amount. If your business is subject to corporate tax in the UAE, you will need to file tax returns and pay any taxes owed on a regular basis. It is vital to carefully review the tax laws that apply to your business and to seek professional advice if you are unsure of your corporate tax obligations in the UAE. To ensure compliance with corporate tax laws in the UAE, it is important to keep accurate records of your business’s financial transactions and to ensure that all taxes owed are paid on time. Failure to comply with UAE tax laws can result in penalties, fines, and other legal consequences.
Wrapping Up: Key Takeaways on Corporate Tax in the UAE
- The Corporate Tax Law supplies the legislative ground for the introduction and implementation of a Federal Corporate Tax (“Corporate Tax”) in the UAE.
- The policy shall apply to companies that start their financial year on or after June 1, 2023.
- Corporate income taxes, similar to other taxes, go to the government as a source of income.
- A 0% tax rate will be applicable on taxable earnings up to AED 375,000, in an attempt to support small businesses and start-ups.
- The corporate tax in the UAE has been set at a standard statutory tax rate of 9%.
- Corporate tax will not apply to personal income from employment, real estate and other investments, or to any other income generated by individuals that do not originate from a business or other type of commercial activity licensed or permitted to be undertaken in the UAE.
- Corporate tax is based on taxable income after eligible expenses have been subtracted.
- Businesses will only need to file one corporate tax return each financial year and will not be needed to make advance tax payments or prepare provisional tax returns.
- UAE entities must adhere to Transfer Pricing rules and requirements, in reference to the regulations to be published and OECD transfer pricing guidelines.
- Free zone entities will be under the scope of UAE CT and required to register and file a CT return but will continue to benefit from CT holidays / 0% taxation if they comply with all regulatory requirements and do not conduct business with mainland UAE.
- UAE Corporate Tax will be applied equally to all categories of profits and other (net) income reported in the financial statements compiled in agreement with internationally accepted accounting standards.
Minimizing Corporate Tax Liability in the UAE
The secret formula to reduce corporate tax liability is – the more the non-taxable income, the lower the Corporate Tax Liability. This simply means reducing the taxable profits mindfully which can be done by adopting the below-mentioned practices:
- Utilise deductions
- Structure of the Business in a proper way
- Choose the right Tax advantages
- Make contributions to CSR activities
- Defer income and accelerate expenses
- Ensure all deadlines are met
- Invest in plant and machinery (P&M)
- Capital allowances on property
- Claim all business expenses
- Use directors’ personal allowance effectively
- Emphasize on employee benefits such as pension contributions, healthcare insurance, travel allowances, HRA (house rent allowance), WFH (work from home) allowance, children education allowances, etc.
- Offer employee stock option schemes
- Claim business mileage and expenses
- Claim all cost of sales. For instance, cost of raw material, operational cost, marketing expenses, etc.
- Claim cost of overheads. For example, insurance premium, energy & utility charges, depreciation of fixed assets, etc.
- Invest in R& D department
- Maximise capital allowances
- Make use of business losses. Carryover the losses to future years.
- Disposal of assets at the right time
- Claim Creative Industries Relief
- Claim all available loss reliefs
- Subscriptions and training costs
- Pay for a staff party or event, and last but not least…
Simply consult with expert corporate tax consultants in UAE such as Adam Global. Our experts help to plan the tax liability of a business and also outline the different methods and strategies to reduce the tax burden.
The Impact of Corporate Tax on Businesses in the UAE
UAE has structured the new CT regime to incorporate best practices globally and minimize the compliance burden on businesses. The country will benefit from the decision in terms of foreign direct investment as a host of investors prefer countries with locally standardized tax systems aligned with global taxation standards. However, unequivocally, the new tax might force corporations that are not privileged with tax incentives unlike select free zone establishments to increase their selling prices which will ultimately impact the end consumers just like VAT does. On the other hand, the launch of the new tax can be beneficial for MSMEs not meeting the minimum threshold set to qualify for corporate taxation as they might not need to raise their prices and can remain competitive in their respective industry. However, forward-thinking SMEs might want to take their business to countries with lower or no corporate taxes at all. Overall, the new tax will have a positive impact on government revenue and help modernise the economy.
The Downside: Additional Work for Businesses
- Excessive documentation
- Work around reducing taxable income
- Requirement of review of systems and processes
- Mandatory audit requirement
- Compliance Requirement
The Bright Side
- Increase in the FDI to the UAE
- Shift of investors to free zones offering tax holidays
- Systematic taxation system on corporations
- Growth in Government revenue leading to reduced financial deficit
- More control on the country’s economy
- The taxation regime will be more aligned with international standards now
- Uniform business landscape as all the companies operating in the country will be following the corporate tax law, not just foreign bank branches and oil companies
Meet Your Tax Consultant in Dubai, UAE
Running a business means you have to juggle a lot of things together and keep up to date with changes to the regulations around taxes that affect business operations. Which can be challenging and time-consuming. Therefore, it is highly advisable to seek tax advice from experts in the field such as Adam Global Auditing & Accounting. Armed with a team of highly knowledgeable and experienced UAE tax law experts who have in-depth, specialised knowledge of current legislation, we under the name of Adam Global, have been providing specialised tax services to a wide array of organisations of almost every size and type in the region for a little more than two decades. Undoubtedly, the implementation of the Federal corporate tax is going to be a sliding-door shift not just for the once-known-as-tax-haven country but also for businesses in the UAE. And our corporate tax advisors in Dubai can help you prepare for the transition so you may start your next financial year (2023-24) smoothly, efficiently and effortlessly while minimising the impact of the new tax regime on your business and remaining compliant with the UAE Corporate Taxation Law.
Dial +971 50 911 0516 or simply click here to book your free consultation with our tax advisors in Dubai with hands-on expertise in dealing with corporate tax to embrace the change with a smile and adjust to the new system with ease.
Frequently Asked Questions
Why Corporate Tax has been implemented in the UAE?
The primary objectives behind bringing Corporate Tax to the UAE are
- To cement the country’s position as a world-leading hub for business and investment
- Meet international standards for tax transparency and preventing harmful tax practices
- To speed up the UAE’s development and transformation to attain its strategic objectives
- To diversify sources of income
Can the implementation of federal corporate tax impact large-scale businesses in the UAE?
As corporate profits are going to be taxed now by the UAE Government, companies eligible to pay corporate tax might accordingly increase the selling prices of their products and services to recoup the share of profit margins lost to the UAE government in the name of corporate income tax.
What is the minimum threshold for UAE corporate tax?
At present, AED 375,000 annual Taxable Profit is the minimum threshold to qualify for Corporate Tax in the UAE. Entities crossing the threshold are liable to pay a 9% tax to the UAE government.
Is the UAE’s 9% Corporate Tax the lowest in the world?
No, it’s the third lowest Corporate Tax in the world. Barbados and Turkmenistan sit at the lowest CIT, with 5.5% and 8% respectively.
Is the Corporate Tax levied in other countries as well?
Except for 10-15 countries including Anguilla, Bahamas, Bahrain, Bermuda, Cayman Islands, Guernsey, Isle of Man, Vanuatu, Jersey and Turks and Caicos Islands the Corporate Income Tax is levied by every country. The global average corporate tax rate is 23.64%.
Do I have to pay 9% tax if my salary is above Dh 375,000 in the UAE?
No. Salaried individuals are not subject to Corporate Tax.
Who is exempted from Corporate Tax in the UAE?
Corporate Tax in the UAE shall be levied on profits accrued by the corporations and not on the total turnover. Under certain conditions, the following entities in the UAE will be exempt from CIT:
- A person engaged in the exploitation of UAE natural resources (both extractive and non-extractive)
- Government and Government-controlled entities
- Qualifying public benefit entities
- Charities and public benefit organizations
- Pension or social security funds
- Qualifying investment funds
The exemption may extend to an entity incorporated in the UAE that is wholly owned and controlled by an exempt person if it:
- Undertakes part or whole of the activity of the exempt person
- Holds assets or invests funds for the benefit of the exempt person
- Conducts activities ancillary to those of the exempt person
- Certain exemptions (including for qualified investment funds) will be subject to an application process to the Federal Tax Authority (FTA)
Is corporate tax applicable to non-UAE residents also?
Depends on the type of income. For instance, if a non-resident’s income is earned through an investment manager on real estate or any other investment or from operating aircraft, and ships in international space they are not subject to corporate tax. On the other hand, if they have a permanent establishment in UAE as well as on state-sourced income (i.e., from the sale of goods, provision of services etc.) in the Emirates, they are liable to pay the CIT.
Is Corporate Tax applicable to entities registered in a UAE free zone?
Yes, all free zone entities in the UAE are subject to Corporate Tax.
Is Corporate Tax applicable to branches of foreign and UAE companies?
Yes, all branches registered in the UAE are subject to UAE CT.
Are government-owned entities subject to UAE Corporate Tax?
It is too early to say whether government-owned establishments in the UAE will benefit from any preferential Corporate Tax treatment. Further details on exemptions and exclusions from CT are expected to be provided in due course. Be informed that the qualifying government-owned entities will not fall under the 15% GMT (under the Pillar Two category). Considerably, entities owned by the UAE government whose principal purpose is to execute a government function and not to conduct business will not be subject to the Pillar Two rules. It can be expected that the UAE CT regime may mirror this approach and provide similar exemptions for governmental entities in the UAE.
Are dormant companies in the UAE subject to Corporate Tax?
Yes, dormant companies are expected to register and file tax returns.
Do partnerships such as Limited Liability Partnerships come under the UAE CT regime?
Usually, partnerships are not regarded as separate taxable entities, but considering the flow of income which passes through and is taxed in the hands of the partners only, partnerships can be subject to the UAE CT as the tax regime incorporates international best practices.
Are freelancers in the UAE subject to corporate tax?
Individuals holding the freelance permit, under the self-sponsorship and earning income in excess of the threshold will be subject to corporate tax.
What is the corporate tax rate for multinational giants in UAE?
Large UAE multinational companies that are categorised under ‘Pillar 2’ of the OECD BEPS project will be subject to a minimum of 15% CIT.
Will the federal UAE CT apply to the branches of foreign banks (that are currently taxed at the rate of 20%) as an additional tax?
It is too early to say but it is predicted that the bank branches (i.e. 20% tax) will continue to pay CT as per the existing Emirate-level taxation regime.
What is the concept of a “Qualifying Free Zone Person” (QFZP) under the UAE CIT regime?
Introduced by UAE Corporate Tax, the concept of a “Qualifying Free Zone Person” (QFZP) is broadly defined as a company or branch registered in a free zone that:
- Maintains sufficient substance in the UAE
- Derives qualifying income (to be specified through a Ministerial Decision)
- Suffice transfer pricing requirements
- Fulfils any other conditions to be prescribed through a Ministerial Decision
A QFZP will still be subject to CT but may benefit from a 0% rate on its qualifying income. A QFZP can choose to forego this preferential regime and be subject to the standard CT rate.
Are UAE company branches required to file separate CT returns from their parent companies in the mainland and free zone?
Branch companies in the UAE may not need to file UAE CT separately if their parent companies are filing, as they are not seen as separate legal entities.
How is Taxable Income of a Tax Group calculated?
To compute the Taxable Income of a Tax Group, the parent company must organise consolidated financial accounts wrapping each subsidiary that is a member of the Tax Group for the relevant Tax Period. Transactions between the parent company and each group member and transactions between the group members would be eliminated for the purposes of calculating the Taxable Income of the Tax Group.
When CIT returns should be filed in the UAE?
All the taxable entities in the UAE will be required to file their Corporate Tax return no later than nine months from the end of the relevant tax period.
Is there any other exception given to start-ups or small enterprises except the minimum threshold?
As of now, for start-ups, we can see only one exception taxable income of AED 375,000 that would not be subjected to corporate tax and are not sure if further exemptions will be granted to start-up companies operating from the UAE.
How to prepare for Corporate Tax?
- First things first, go through the websites of the Ministry of Finance and the Federal Tax Authority detailing Corporate Tax Law to gain in-depth knowledge about Corporate Tax in the UAE.
- Now determine whether your business will be subject to Corporate Tax and if so, from what date in 2023.
- Comprehend the requirements for your business in line with the Corporate Tax Law, including, for example:
- Whether and by when your business must register for Corporate Tax;
- What is the accounting / Tax Period for your company;
- Starting from when your corporation would need to file a Corporate Tax return;
- What elections or applications your establishment may or should make for Corporate Tax purposes;
- What financial information and records does your enterprise have to maintain for Corporate Tax purposes.
- Keep checking the websites of the MoF and the FTA regularly for any updates on the Corporate Tax regime.