Things to know about Corporate Tax in the UAE
For many years, the United Arab Emirates (UAE) has attracted businesses due to its favourable tax policies. However, a significant change took place in June 2023 with the introduction of a federal corporate tax. This move marked a new era in the UAE’s economic framework, making corporate tax compliance a crucial aspect of business operations.
“BASIC TAX INFORMATION BULLETIN“
What is Corporate Tax?
Corporate tax is a direct tax imposed on a company’s net profits. In the UAE, understanding and adhering to the corporate tax regime is essential to ensure smooth business operations and avoid legal consequences. Key components of this system include tax rates, taxable income, exemptions, deductions, filing procedures, and penalties.
This guide will provide a comprehensive overview of everything businesses need to know about corporate tax in the UAE.
Corporate Tax in the UAE: An Overview
Corporate tax—also known as company or federal tax—is levied on the income or capital of legal entities operating within the UAE. Introduced in 2023, the UAE’s corporate tax applies to the net profits of most businesses across all emirates.
Corporate Tax Rates
- 9%: Standard rate for taxable income exceeding AED 375,000 (approximately USD 102,000).
- 0%: Applies to taxable income up to AED 375,000, offering relief to smaller businesses.
Exceptions:
- Foreign banks: May be taxed at a flat 20% under specific emirate-level laws.
- Oil and gas companies: Subject to separate tax agreements.
- Multinational Enterprises (MNEs): Those falling under OECD BEPS 2.0 with global revenues exceeding AED 3.15 billion (around USD 860 million) may be taxed differently.
Who is a Taxable Person?
A “taxable person” under the UAE corporate tax law includes entities required to register, file returns, and potentially pay corporate tax. These include:
- Resident Persons: UAE-incorporated companies, foreign companies managed in the UAE, and individual businesses with annual UAE turnover above AED 1 million.
- Non-Resident Persons: Foreign companies with a permanent establishment or income sourced from the UAE.
UAE-Sourced Income: Income generated through a permanent establishment in the UAE is taxable, depending on the type of income and any relevant Double Taxation Agreements (DTAs).
How Corporate Tax Works
Businesses must file annual tax returns detailing their taxable income, calculated by subtracting allowable expenses and deductions from total income. The net amount is taxed according to applicable corporate tax rates.
The introduction of corporate tax aims to strengthen the UAE’s economy, attract foreign investments, and support economic diversification.
Taxable Income: What’s Included
Taxable income generally includes:
- Business Profits: Revenue from operations minus business expenses.
- Capital Gains: Profits from selling assets like real estate or investments.
Steps to Calculate Taxable Income:
- Determine Gross Revenue: Includes all income (sales, commissions, fees).
- Subtract Allowable Expenses, such as:
- Cost of goods sold (COGS)
- Salaries and wages
- Rent and utilities
- Advertising and marketing costs
- Depreciation and amortization
- Interest on business loans (within limits)
- Calculate Profit or Loss:
- Profits are taxable.
- Losses may be carried forward to offset future profits (subject to conditions).
Corporate Tax in Free Zones
Businesses operating in designated Free Zones with Qualifying Free Zone Person (QFZP) status are eligible for a 0% tax rate on Qualifying Income—income from business within the Free Zone and with other QFZPs.
However, this benefit does not apply to:
- Income from Excluded Activities
- Income through a Permanent Establishment outside the Free Zone (e.g., mainland UAE or foreign countries)
For accurate assessment, companies should consult Free Zone authorities or tax professionals.
Corporate Tax Exemptions
Entities exempt from UAE corporate tax include:
- UAE government entities
- Extractive industries (e.g., oil, gas, minerals)
- Qualifying public benefit entities
- Certain qualifying investment funds
- Free Zone businesses (with limitations and compliance requirements)
Even Free Zone businesses must register and file tax returns, regardless of exemption.
Small Business Relief (SBR)
The UAE’s Small Business Relief initiative helps qualifying businesses reduce their tax burden.
Key Features:
- 0% tax on profits up to AED 375,000
- Available for businesses with annual revenue not exceeding AED 3 million (valid until Dec 31, 2026)
- Not applicable to financial institutions or holding companies
When to Choose SBR:
If your revenue is under AED 3 million, opting for SBR can simplify compliance by eliminating the need to file detailed returns—even if profits fluctuate around the AED 375,000 mark.
Key Features of UAE Corporate Tax
- Standard Rate: 9% on profits above AED 375,000
- 0% Rate: Profits up to AED 375,000
- Basis of Calculation: UAE GAAP and IFRS accounting standards
- Exemptions: Capital gains, dividends (in certain cases)
- Allowable Deductions: Legitimate business expenses, R&D costs
- Annual Filing: Mandatory for all taxable persons
Tax Year Applicability:
- If a business’s financial year starts on or after June 1, 2023, corporate tax applies in that same year.
- If the financial year started before June 1, 2023, tax will apply from the next financial year.
Examples:
- Year starting August 1, 2023 → Tax applicable from August 2023
- Year starting February 1, 2023 → Tax applicable from February 2024
Frequently Asked Questions
- Who is subject to UAE corporate tax?
All resident persons and non-resident entities with a permanent establishment or UAE-sourced income are liable for corporate tax. - Are Free Zone businesses exempt?
Only Qualifying Free Zone Persons benefit from a 0% rate on qualifying income. Other income may be taxed at 9%. - What happens if I don’t pay corporate tax?
Penalties and fines will apply for non-compliance, late filing, or non-payment. - What deductions are allowed?
Ordinary and necessary business expenses related to generating income are generally deductible. - Are specific records required?
Yes. Accurate records such as financial statements, receipts, and invoices must be maintained. - How much corporate tax is charged?
- 0% on profits up to AED 375,000
- 9% on profits exceeding AED 375,000
- Is corporate tax registration mandatory?
Yes, all taxable persons, including Free Zone entities, must register with the FTA and obtain a Corporate Tax Registration Number. - What is “Qualifying Income”?
Income earned by a QFZP through eligible activities within a Free Zone that qualifies for the 0% corporate tax rate. - How can businesses reduce their corporate tax liability?
- Utilize tax exemptions and incentives
- Structure operations efficiently
- Maintain accurate records
- Hire a certified tax consultant
- Ensure timely tax return filing
For expert guidance and compliance assistance, consider working with tax professionals such as FMA Auditors, who can help optimize your corporate tax strategy.
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