The Ultimate Guide to Corporate Tax in the UAE

The Ministry of Finance (MoF) in the United Arab Emirates (UAE) introduced a federal Corporate Tax (CT) on business profits in January 2022. The rules on corporate tax in UAE will become effective from June 1, 2023. 

This is a big change for businesses, which means business owners and accountants will need to get to grips with the new rules to avoid breaking the law. Keep reading for the ultimate guide to CT in the UAE and what it might mean for your business.

Table of Contents

1. The history of Corporate Tax in the UAE
2. Why has the UAE introduced a Corporate Tax?
3. What is the UAE Corporate Tax Rate?
4. Who has to pay the Corporate Tax?
5. What is Withholding Tax in the UAE? 
6. Who is a non-resident person?
7. Who is a resident person?
8. What is a Permanent Establishment?
9. What is a Free Zone Person? 
10. What is a Qualifying Free Zone Person?
11. What is the Corporate Tax imposed on?
12. What income is exempt from Corporate Tax?
13. What expenses are deductible?
14. How to prepare for Corporate Tax?
15. Corporate Tax timelines
16. Corporate Tax ready checklist
17. Make sure your business is ready for tax time

The history of corporate tax in the UAE

Historically, the UAE has not had a CT scheme in place. CT, also called Corporate Income Tax (CIT) or Business Profits Tax in other parts of the world, taxes the net income of corporations and other entities.

Although the UAE formerly had no formal corporate taxation for businesses, there have been several recent changes that aim to modernize the country’s tax system. 

Prior to the new rule, some individual Emirates imposed a CT on enterprises in specific industries, namely oil and gas. Rates went up to 55%. In other areas, tax-free zones were available for those seeking tax holidays and exemptions of 15-50 years.

However, at the beginning of 2022, the MoF sought to revolutionise taxation in the UAE by introducing a direct CT, effective from the 2023 financial year.

Why has the UAE introduced Corporate Tax?

Many people consider CT a disadvantage to business. Previously, the lack of CT encouraged foreign businesses to set up camp on UAE soil, attracted by the absence of direct taxation. However, the UAE has introduced federal CT despite this.

The new CT is part of an overall effort to streamline the UAE tax system and meet international standards. The changes began with the addition of Value Added Tax (VAT) in 2018, followed by economic substance rules (ESR) and Country-by-Country Reporting (CbCR) regulations in 2019. 

As a result, the new CT regime is a continuation of the nation’s mission to modernize taxation by introducing “a competitive CT regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties, [which] will cement the UAE’s position as a leading jurisdiction.” 

Thus, the aim is not to deter international businesses, but to attract them by bringing the UAE in line with global standards.

Everything you need to know about UAE Corporate Tax 

CT tax applies to UAE-incorporated companies, including LLCs, PSCs, PJSCs, and any other legal entities. It will also be levied on foreign legal entities with a permanent establishment (PE) in the UAE or that are tax residents through management and control in the UAE.

Keep reading to learn everything you need to know about Corporate Tax in the UAE.

What is the UAE Corporate Tax Rate?

The Corporate Tax rate will be charged at a 9% rate on Taxable Income exceeding AED 375,000. Taxable Income below this threshold will be subject to 0%.

Excluding Bahrain, the UAE CT regime is the lowest in the GCC region, with the standard rate of 9%.

Tax residency is the crucial determining factor in whether businesses are subject to UAE CT. Resident legal entities will be taxed on their worldwide income, whereas natural persons will only be taxed on income from business conducted in the UAE. 

Who is subject to Corporate Tax?

Corporate Tax applies to the following “Taxable Persons” in the UAE:

• 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 comply with the requirements of the Corporate Tax Law. However, people considered as Qualifying Free Zone Persons would have an imposing 0% on Qualifying Income and 9% on Taxable Income that is not Qualifying Income. 

Non-resident persons without a Permanent Establishment in the UAE or who earn a UAE-sourced income unrelated to their Permanent Establishment may be subject to Withholding Tax at a rate of 0%. 

What is Withholding Tax in the UAE? 

Withholding Tax is a form of Corporate Tax collected by the payer on behalf of the recipient of the income and typically applies to cross-border payments of dividends, interests, royalties and other types of incomes across multiple tax systems.

In the UAE, the withholding tax rate of 0% may apply to certain types of UAE-sourced income paid to non-residents.

Who is a non-resident person?

Non-residents are legal individuals who don’t qualify as Resident Persons and have a Permanent Establishment in the UAE or generate income from State sources.

Who is a resident person?

Companies, businesses and other legal persons that are incorporated, formed or recognised under the laws of the UAE will be considered Resident Persons for Corporate Tax purposes.

Foreign companies and other legal entities may also be treated as Resident Persons for Corporate Tax purposes if they are managed and controlled in the UAE.

Natural persons (individuals) will also qualify as Resident Persons for Corporate tax purposes if their income is from a business activity that has been carried out in the UAE.

What is a Permanent Establishment?

Permanent Establishment refers to a fixed place or business in the UAE such as an office, branch, factory or warehouse. 

Determining whether a non-resident has a Permanent Establishment will depend on the specific facts and circumstances of the business and its activities in the country. 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.

What is a Free Zone Person? 

A Free Zone Person is a juridical person or legal entity established or registered in a designated Free Zone in the UAE. This may include a branch of a Non-Resident Person registered in a Free Zone. 

A Free Zone Person that can be a Qualifying Free Zone Person may benefit from a 0% Corporate Tax Rate on their “Qualifying Income” only.

What is a Qualifying Free Zone Person?

A Qualifying Free Zone Person is a Free Zone Person that meets all of the following criteria:

• Maintains adequate substance in the UAE, which means that the business or company in the UAE must be managed in the UAE, have adequate employees and physical assets and incur adequate and appropriate expenses within the country.
• Obtains and generates Qualifying Income
• Has not chosen to be subject to the standard Corporate Tax rate
• Complies with the transfer pricing requirements under the Corporate Tax Law

It is important to keep in mind that the Minister may prescribe additional conditions that a Qualifying Free Zone Person must meet. 

What is the Corporate Tax imposed on?

The Corporate Tax is imposed annually on the Taxable Income earned by a Taxable Person in a Tax Period. The Corporate Tax liability will be calculated by the Taxable Person on a self-assessment basis and will be done by filing a Corporate Tax Return with the UAE Federal Tax Authority.

What income is exempt from Corporate Tax?

Some types of income such as dividends or capital gains earned from domestic and foreign shareholdings will generally be exempt from Corporate Tax. The main purpose of this exemption is to prevent double taxation for these types of income. 

There may also be cases where a Resident Person can choose to not take into account income from foreign Permanent Establishment for UAE Corporate Tax purposes under certain conditions. 

Read More: E-Trader License in Dubai - What it is and how to get one

What expenses are deductible?

In essence, all legitimate business expenses incurred during a specific tax period would be deductible although the timing of the deduction may vary for different types of expenses and the accounting method used. For capital assets, for example, the expenditure would usually be recognised by the method of depreciation or amortisation deductions during the economic life of the asset or benefit. 

Expenses with dual purposes, for example, personal and business purposes, will need to be calculated based on the percentage that was incurred for the business. 

Certain expenses which are deductible under general accounting principles may not be fully deductible for Corporate Tax purposes. Some examples of these expenses include: 

Do I have to pay UAE corporate tax?

There are some exemptions to UAE CT, including a participation exemption on dividends received and capital gains earned from the sale of subsidiary shares. Plus, the UAE will allow foreign branches of UAE companies to either claim a foreign tax credit or an irrevocable exemption for their foreign branch profits. This aims to ensure that the UAE remains an attractive business prospect for multinationals and foreign businesses.

The primary condition for exemption is that the UAE shareholder company must own at least 5% of the subsidiary’s shares. This is a competitive rate compared to other jurisdictions.

Businesses can also offset losses incurred in one financial period against the taxable income of future periods, up to a maximum of 75%. 

Groups of UAE resident entities can form a tax group, treated as a single taxable unit if the parent company holds at least 95% of the share capital. However, no member of the group can be an exempt person or a free zone entity. 

How to prepare for Corporate Tax?

All Taxable Persons will be required to register for the Corporate Tax and obtain a Corporate Tax Registration Number. 

For each taxation period, businesses must prepare and submit a CT return, alongside any necessary supporting records. Businesses do not need to pay CT in advance in the UAE.

The Federal Tax Authority (FTA) is responsible for the administration, collection, and enforcement of UAE CT, but it is yet to issue clearer guidelines on how the complete process will work. Before June 2023, the FTA will publish guidelines for registering and filing CT returns on its website.

Keep the CT timelines in mind

Use the Corporate Tax ready checklist

You can take some extra steps to ensure that you are prepared and ready for the CT, just follow the checklist below:

1. Read the Corporate Tax Law and supporting information available on the MoF and FTA websites
2. Use the information from this article and other sources to determine if your business will be subject to Corporate Tax and if so, from what date (Tip - Check the infographics above)
3. Understand the requirements for your business under the Corporate Tax Law, for example:
4. If your business needs to register for Corporate Tax and when is the date to do so
5. What are the accounting and tax periods for your business
6. The date when you will need to file your Corporate Tax return
7. What elections or applications your business would have to make for Corporate Tax purposes
8. What are the financial records and information your business will need to keep for Corporate Tax purposes
9. Finally, check the Ministry of Finance and Federal Tax Authority websites regularly for further information and guidance on the Corporate Tax regime in the UAE.

Make sure your business is ready for tax time

Small and medium businesses can prepare for the upcoming change with QuickBooks accounting software.

The automated system can help with accounting, invoicing and more to ensure all affairs are in order, and ready for you to fill out a tax return with ease.

Make sure that all of your financial records are in place with the reporting feature, this will help you to categorise your income and expenses, create profit and loss statements and custom balance sheets, and ensure all of your business information is in one place.

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Disclaimer: This page is provided for general information purposes only and does not constitute accounting, tax, business, or legal advice. You should always consult your own advisors for advice relating to your business or situation. Always consult the MOF directly as information changes from time to time: https://mof.gov.ae/corporate-tax/

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