What is Corporate Tax UAE?

Corporate tax is levied on the taxable income (net profit) of business establishments resident in the United Arab Emirates. The new taxation policies came into effect on June 1, 2023, with most companies being fully taxable by January 1, 2024.

Background of Corporate Tax UAE

Entrepreneurs and investors globally have always considered the UAE as one of the most lucrative places to set up a new business.

Both large companies and startups have favoured the UAE due to the country’s exceptionally stable political environment, strategic location, fabulous business infrastructures and, most importantly, what was the 0% corporate tax regime.

According to the International Monetary Fund (IMF), the UAE has the fifth-largest economy in the Middle East. The country has historically depended on its revenue from oil and natural resources but has been gradually becoming less dependent on oil in recent years.

Is Corporate Tax the Same as VAT?

When the UAE government first announced the introduction of corporate tax, many businesses incorrectly viewed it as being similar to Value Added Tax (VAT). However, corporate tax and VAT are very different.

The main difference is that corporate tax is mandatory for every company in the UAE, whereas VAT only applies to companies once they reach certain thresholds.

VAT is a consumption tax levied on the sale of goods and services. The customer pays it at the time of purchase. On the other hand, corporate tax is levied on businesses’ taxable income.

Companies will have to pay corporate tax on their annual net profits. Businesses collect VAT from customers when selling a product or service and then remit it to the government.

Corporate tax will be paid directly to the government and calculated by considering the net income of the company, not the total revenue or sales volume.

So, now that we know what corporate tax is in the UAE, let’s find out further details about the taxation process.

Who Will Be Subject to Corporate Tax UAE?

The general rule is that every company in the UAE will be subject to corporate tax, including free zone companies. There are a few, very specific exemptions which are outlined further below.

More specifically, According to the UAE Ministry of Finance (MOF), the below individuals/corporations will be liable to pay Corporate Tax in the UAE:

• Corporations and other legal entities based in the UAE or having their primary management and operations within the UAE.
• Individuals engaged in a Business or Business Activity within the UAE.
• Foreign legal entities that maintain a Permanent Establishment in the UAE, as detailed in Section 8 of Corporate Tax Law.

All of these business entities operating within the UAE are subjected to the new tax regime from June 1, 2023, and onwards. The tax calculation of the period of businesses will differ based on how they report their financial year, as follows:

• Businesses that report financial years from July 1 will start tax calculation from July 1, 2023.
• Businesses that report financial years from January 1 will start tax calculation from January 1, 2024.

Apart from a few specific exceptions, all commercial activities that take place within the UAE will have to register and file the corporate tax.

How Much Is the Corporate Tax UAE?

MOF, the regulatory body for the UAE corporate tax, has devised a taxation policy with three taxation tiers, which are:

• Businesses with net yearly profit up to AED 375,000: Subject to a 0% tax rate
• Businesses with net yearly profit above AED 375,000: Subject to a 9% tax rate
• Large multinational companies: Companies with total global revenue over EUR 750 million (equivalent to AED 3.15 billion) will pay a minimum of 15% corporate tax. This is in line with Pillar Two of the OECD Base Erosion and Profit Shifting Project which aims to ensure large multinational enterprises pay the appropriate taxes.

Corporate Tax Registration

In order to register for Corporate Tax in the UAE, you can access the Federal Tax Authority’s (FTA) website. On this platform, you must fill out the required forms and submit the necessary documents.

The documents that will need to be provided will include the entity’s Emirates ID, trade license, passport, financial records, details of business activities and corporate structure. Once the forms and documents have been submitted, the authorities will review the application and, if approved, provide the company with a tax registration number (TRN), signifying their official registration.

Approvals usually arrive within 20 days, however, if additional information is required, it will take another 20 days. At Virtuzone, we will assist you with your application through the FTA.

UAE Corporate Tax: Exempt Persons

The MOF has also announced a few exemptions for certain entities. If your business or institutional venture falls under one of those exemptions, you won’t have to file a tax report or pay taxes. The exempt entities are:

• Any governmental or public entities that include both federal and regional offices, departments, divisions, and all other public institutions.
• Businesses that deal with the extraction or mining of natural resources in the UAE. As those businesses are already subject to Emirate-level taxation, they won’t have to file the corporate tax report separately.
• Any organisations that work for charitable and social causes. However, such businesses must register as social or charity organisations with the MOF. Those who are eligible must first apply to relevant authorities to obtain a formal clearance before applying for MOF registration. These organisations must meet the conditions stipulated in Cabinet Decision No.37 of 2023.
• Real estate and other regulated investment funds. Similar to charitable organisations, such funds must apply to MOF and the Federal Tax Authority (FTA) to obtain a formal exemption approval.
• Any UAE companies fully owned and controlled by the UAE government and listed with a ministry-level decision to receive the tax exemption.
• Public or private pension or social security funds. These organisations must meet the conditions stated in Ministerial Decision No.115 of 2023.

UAE Corporate Tax: Exempt Income

In addition to the above-listed exemptions, MOF has also announced that companies may qualify for tax income exemptions in the following cases:

• Earnings from dividend payments or other profit distributions received from UAE-incorporated or resident juridical persons as per Article 22 of the Corporate Tax Law.
• Earnings from dividend payments or other profit distribution received from a Participating interest in a foreign juridical person.
• Capital gains from the selling of shares of a subsidiary company under their ownership.
• Foreign exchange gains/losses or capital gains earned from a domestic or foreign participating interest.
• Earnings made by non-residents from the operation or leasing of ships or aircrafts in international transportation.
• Earnings made by a Permanent Establishment or foreign branch where an election has been made to claim the ‘Foreign Permanent Establishment’ exemption.

To qualify for deductions from earnings from dividend payments, the UAE company must own at least a 5% share of the subsidiary company operating abroad. The ownership requirement also varies for a few countries.

For instance, in the case of the UK, the UAE shareholder entity must own at least 10% of the UK company’s ordinary share for ten consecutive months to be eligible for a tax-deductible earning.

Corporate Tax for Freezone Persons

Freezone Persons—entities established in a UAE Free Zone—can qualify for a zero percent tax rate on specific conditions. 

To be a Qualifying Free Zone Person (QFZP) and avail the 0% CT rate, an entity must:

• Derive “Qualifying Income”
• Maintain adequate economic substance in the Free Zone
• Not elect to be subject to standard CT rates.
• Comply with transfer pricing requirements.

Qualifying Income includes: 

• Income derived from transactions with other Free Zone Persons 
• Domestic and foreign sourced income from any of the ‘Qualifying Activities’ specified in Ministerial Decision No. 139 of 2023. 
• The definition of qualifying activities encompasses a broad range, including manufacturing, processing, fund management, logistics, and more, as outlined in Ministerial Decision No. 265 of 2023

Qualifying Income does not include income derived from performing any of the ‘Excluded Activities’ that are also specified in the above mentioned Ministerial Decision

Notably, a QFZP’s non-qualifying income must not exceed the de minimis threshold of five percent of total revenue or AED 5 million, whichever is lower.

Free Zone Persons are encouraged to review their operations in light of these updated regulations to ensure compliance and understand their eligibility as a QFZP under the CT Law.

Corporate Tax for Freelancers

Where a person is operating a business under their own person – so there is no separate legal entity such as a company – they will fall under the corporate tax regime once their annual revenue reaches AED1m.

The UAE and Dubai are attractive destinations for many freelancers, thanks to the easy taxation and the availability of many affordable and flexible coworking spaces.

However, to practise as an independent professional or freelancer in the UAE, you will need a professional licence as a freelancer.

Corporate Tax for Groups

Two or more taxable entities, upon meeting specific criteria (outlined below), can request to establish a ‘Tax Group’ and be viewed as a singular entity for Corporate Tax considerations.

For the establishment of a Tax Group, the parent firm and its branches must:

• Be resident legal entities within the jurisdiction.
• Operate on the same fiscal year and adhere to identical accounting practices in their financial documentation.

Furthermore, for a Tax Group formation, the primary enterprise must:

• Possess a minimum of 95% of the subsidiary’s equity.
• Command a minimum of 95% of the voting privileges within the subsidiary.
• Lay claim to at least 95% of the subsidiary’s earnings and overall assets.

Such ownership, voting rights, and entitlements can be secured either directly or indirectly via branch entities. However, a Tax Group must not consist of an Exempt Entity or a Qualifying Free Zone Entity.

For calculating the taxable earnings of a Tax Group, the leading company should compile combined financial statements for every subsidiary within that Tax Group for the appropriate tax duration. Operations between the primary company and its subsidiaries, as well as between the subsidiaries themselves, would be disregarded when computing the Tax Group’s taxable earnings.

Tax Income Deductions 

Typically, costs associated with generating taxable revenue can be deducted. Although there are specific limitations and exclusions outlined in the Corporate Tax Regulations, the timing of deductions can differ based on the nature of the expense and the accounting approach used.

For assets that have long-term value, the expenditure is often accounted for through either depreciation or amortisation over the asset’s useful lifespan. If a cost serves both personal and business functions, it must be divided appropriately.

Only the business-related segment of the expenditure is considered to be solely for the benefit of the entity’s taxable operations. The business expenses that will be deducted are:

• Donations to any charity that is listed in Cabinet Decision No. 37 of 2023.
• Businesses can report their financing and interest costs as tax-deductible income. However, this only applies to businesses with a Net Interest Expenditure above AED 12 million. These businesses will be allowed to deduct interest expenditure up to the greater of 30% of their adjusted earnings before depreciation, amortisation, tax and interest (EBITDA) or AED 12 million. The taxation authority has placed this cap to discourage businesses from relying heavily on high-risk debt financing and instead focus more on equity financing. Without the cap, many companies might attempt to secure a high quantity of debt to avoid taxation.
• Any payment of a royalty made to a foreign group company, as long as the payment was necessary and made at arm’s length (neither party influencing the other).
• Irrecoverable input Value Added Tax.
• Remuneration will usually be deductible. However, the amount that may be deductible varies in the following circumstances. When remuneration is paid to an owner or director (or someone who is related to the director or the owner). The remuneration should reflect the market rate for the services performed (anything above the market rate will not be deductible). Additionally, when a corporation remits a management fee to its parent company or another affiliated entity, the transfer pricing regulations will be considered to guarantee the fee aligns with market rates. Payments exceeding these market rates will not be eligible for deduction.
• Businesses can report their losses as future tax-deductible expenses. This hinges on whether the taxable entity has chosen to record profits and deficits based on a realisation basis. If a selection hasn’t been made, the tax approach should align with the accounting method. Hence, revaluation profits and deficits recorded in the financial statements will be taxable under Corporate Tax for the applicable tax duration. If the taxable entity has chosen to account for profits and deficits using the realisation method, then any value changes in the asset or liability beyond its initial cost won’t be considered for Corporate Tax calculations.
• Costs associated with entertaining employees are typically tax-deductible for corporate tax reasons, as long as they are spent on business-related activities. However, only 50% of the expenditure will be deductible.
• Doubtful debts can be deducted as expenses, consistent with the guidelines set by the International Financial Reporting Standards (IFRS).
• Government, business set up and licence renewal fees and charges.

Additional Tax Exemptions

In addition to the above-listed exemptions, MOF has also announced that companies may qualify for tax income exemptions in the following cases:

• Earnings from dividend payments or other profit distributions received from UAE-incorporated or resident juridical persons as per Article 22 of the Corporate Tax Law.
• Earnings from dividend payments or other profit distribution received from a Participating interest in a foreign juridical person.
• Capital gains from the selling of shares of a subsidiary company under their ownership.
• Foreign exchange gains/losses or capital gains earned from a domestic or foreign participating interest.
• Earnings made by non-residents from the operation or leasing of ships or aircrafts in international transportation.
• Earnings made by a Permanent Establishment or foreign branch where an election has been made to claim the ‘Foreign Permanent Establishment’ exemption

To qualify for deductions from earnings from dividend payments, the UAE company must own at least a 5% share of the subsidiary company operating abroad. The ownership requirement also varies for a few countries.

For instance, in the case of the UK, the UAE shareholder entity must own at least 10% of the UK company’s ordinary share for ten consecutive months to be eligible for a tax-deductible earning.

Tax Deduction for Companies with Foreign Branches

The UAE government will also allow the foreign company branches located in the UAE to choose one of the following options:

• If companies have a branch of office in another country, they can claim a foreign tax credit for the amount of tax paid in that country. The upper limit for a foreign tax credit is the lesser of the foreign tax paid and the UAE Corporate Tax due on the corresponding revenue. Surplus foreign tax credits cannot be transferred to a previous or subsequent tax period.
• Alternatively, the companies may apply for an exemption based on the profit made by their foreign branches outside the UAE.

The Administration of Corporate Tax UAE

The UAE Ministry of Finance (MOF) has authorised the Federal Tax Authority (FTA) to administer the taxation process and act as a regulatory compliance body. Businesses will have to file their corporate tax once every year, along with their financial report.

Most medium and large businesses in the UAE usually follow the International Financial Reporting Standards or IFRS. The FTA, however, accepts several other ways to keep the tax filing process simple for businesses and professionals.

How to File a Corporate Tax and Financial Report

As discussed above, the Federal Corporate Tax Authority requires all companies to register with them for tax filing purposes. After completing a financial year, businesses will get nine months to complete their tax filing and financial reporting.

Outlined below are sample timelines for registration, submission, and payment due dates for entities with a Tax Period (Financial Year) that concludes on either the 31st of May or the 31st of December.

Probable Implications of Corporate Tax UAE

The introduction of corporate tax will help the UAE economy become more diversified and sustainable in the long term. It will also make the country more attractive to foreign investors.

It should be noted that the UAE is not the first country in the Middle East and Gulf region to introduce corporate tax. Several countries have it already with the following rates:

• Saudi Arabia: 20%
• Oman: 15%
• Qatar: 10%
• Bahrain: 46% for a few specific sectors related to natural resource extraction, 0% for others
• Kuwait: 15%

Now, let’s take a look at the corporate tax rates of some other economic regions.

• Montenegro: 9%
• Gibraltar: 12.5%
• Ireland: 12.5%
• Liechtenstein: 12.5%
• Hong Kong: 7.5-16.5%
• Singapore: 17%
• San Marino: 17%

The UAE’s tax rate of 9% is still lower than many of the competing regional and global economies.

Wrap-Up: Corporate Tax UAE

To keep your UAE business compliant with tax policy changes, it’s essential to stay updated with the latest announcements from the UAE government. You can also seek professional help from our tax advisors to ensure your business is structured in the most efficient way to handle the corporate tax payable.

Virtuzone has a team of vetted professionals who can help your business register with all relevant tax authorities and ease your business management. Get in touch with Virtuzone today!