UAE Corporate Tax Explained: Everything You Should Know

The UAE has recently introduced a new federal corporate tax (CT) system that will apply to all businesses operating in the country, except for some exempt entities. The new CT system will be effective for financial years starting on or after 1 June 2023.

Who is subject to corporate tax?

The UAE corporate tax law defines a taxable person as any person who carries on a business in the UAE, whether resident or non-resident. A resident person is a person who is incorporated, registered or established in the UAE, or who has a place of effective management in the UAE.

A taxable person is subject to corporate tax on their taxable income derived from their business in the UAE. Taxable income is the net income or profit of the taxable person after deducting allowable expenses and losses. The taxable income of a non-resident person is limited to the income attributable to their permanent establishment (PE) in the UAE. A PE is a fixed place of business or an agent acting on behalf of the non-resident person in the UAE.

What are the corporate tax rates?

The UAE corporate tax law establishes two rates of corporate tax, depending on the taxable income of the taxable person:

Zero per cent (0%) rate: businesses whose taxable income does not exceed AED 375,000 will enjoy a 0% corporate tax rate.
Nine per cent (9%) rate: businesses whose taxable income exceeds AED 375,000 are subject to a 9% corporate tax rate.

The 9% corporate tax rate is one of the lowest in the world and well below the global average corporate tax rate of 23.5%. The UAE corporate tax regime aims to be competitive and attractive for businesses and investors.

How to comply with the UAE corporate tax regime?

The UAE corporate tax law requires taxable persons to register with the Federal Tax Authority, file annual corporate tax returns, pay corporate tax due, and keep proper books and records for at least 10 years. The Federal Tax Authority will be responsible for administering and enforcing the UAE corporate tax regime, and will issue further guidance and regulations on the implementation and compliance aspects of the law.

The UAE corporate tax law also introduces anti-avoidance rules to prevent abusive tax arrangements and practices that aim to reduce or avoid corporate tax liability. The Federal Tax Authority will have the power to disregard or re-characterize such arrangements or practices and impose penalties on the persons involved.

Benefits and Exemptions in the UAE CT Law

The UAE Corporate Tax Law introduces various benefits and exemptions to facilitate business operations. Key measures include:

Small business relief: Businesses with annual revenue below AED 3,000,000 can apply for relief, subject to specific requirements.
Free zone companies: Qualifying entities in designated free zones enjoy a 0% corporate tax rate on their qualifying income.
Transfers within a qualifying group: No profit or loss is accounted for in calculating taxable income for qualifying transfers within a group with at least 75% ownership.
Business Restructuring Relief: Eligible transactions related to business restructuring are exempt from tax liabilities.

What income is exempt from corporate tax?

The UAE corporate tax law provides for some types of income that are exempt from corporate tax, regardless of the status of the entity earning them. The following income is exempt from corporate tax:

Dividends and other profits distributions received by a taxable person from another taxable person
Capital gains derived from the disposal of shares or other equity interests in another taxable person
Income derived from activities carried out outside the UAE
Income derived from activities carried out in a free zone that is specified in a Cabinet Decision
Income derived by an entity that is wholly-owned by UAE nationals and carries on certain activities specified in a Cabinet Decision

The UAE corporate tax regime is a game-changer for the region and a catalyst for economic transformation. Businesses and investors operating in or looking to enter the UAE market should familiarize themselves with the new CT system and its implications, and seek professional advice on how to optimize their tax position and comply with their obligations.

Considering the dynamic legal structure in the UAE, the Corporate Tax Law provides various benefits and exemptions for ease of doing business. These include small business relief, 0% corporate tax for qualifying free zone entities, transfers within a qualifying group, and business restructuring relief.

Our firm offers comprehensive tax services tailored to your needs, including tax planning, return preparation, bookkeeping, and advisory services. Contact us to optimize your tax position and ensure compliance with the UAE corporate tax regime.