In January 2022, the UAE Ministry of Finance announced the introduction of federal Corporate Tax (CT) on business profits in the country, and it will be effective for financial years starting on or after June 2023
Who is subject to corporate Tax?
Corporate Tax applies to the following “Taxable Persons”:
- UAE companies and other juridical persons incorporated or effectively managed and controlled in the UAE.
- Natural Persons (individuals) who conduct a business or business activity in the UAE as specified in a Cabinet Decision to be issued; and
- Non-resident juridical persons (foreign legal entities) that have a Permanent Establishment in the UAE
Juridical persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons” and will need to comply with the requirements set out in the Corporate Tax Law. However, a Free Zone Person that meets the conditions specified for a Qualifying Free Zone Person can benefit from a Corporate Tax rate of 0% on their Qualifying Income.
To be considered a Qualifying Free Zone Person, the Free Zone Person must:
- Maintain adequate substance in the UAE.
- Derive ‘Qualifying Income’
- Not have made an election to be subject to Corporate Tax at the standard rates; and
- Comply with the transfer pricing requirements under the Corporate Tax Law.
- Any additional conditions prescribed in course.
Non-resident persons that do not have a Permanent Establishment in the UAE or that earn UAE sourced income that is not related to their Permanent Establishment may be subject to Withholding Tax (at the rate of 0%). Withholding tax is a form of Corporate Tax collected at source by the payer on behalf of the recipient of the income. Withholding taxes typically apply to the cross-border payment of dividends, interest, royalties, and other types of income.
What is the Corporate Tax rate?
Corporate Tax will be levied at a headline rate of 9% on Taxable Income exceeding AED 375,000. Taxable Income below this threshold will be subject to Corporate Tax of 0%.
Corporate Tax will be charged on Taxable Income as follows:
Resident Taxable Persons: 0% on Taxable Income not exceeding AED 375,000 and 9% on Taxable Income exceeding AED 375,000.
Qualifying Free Zone Persons: 0% on Qualifying Income and 9% on Taxable Income that does not meet the Qualifying Income definition.
Who is exempt from Corporate Tax?
Certain types of businesses are exempt from Corporate Tax given their importance and contribution to the social fabric and economy of the UAE. These are known as Exempt Persons and include:
- Government Entities or specified Government Controlled Entities
- Extractive Business and Non-extractive Natural Resources Business if notified to Ministry of Finance, subject to compliance of certain conditions.
- Qualifying Public Benefit Entities if listed in the Cabinet Decision
- Public and private Pension and social security funds, qualifying Investment Funds, Wholly owned and controlled UAE subsidiaries of a Government Entity or a Government Controlled Entity or a Qualifying Investment Fund, or a public or private pension or social security fund, if approved by Federal Tax Authority, subject to meeting of certain conditions.
How the resident person and non-resident person subject to Corporate Tax?
The Corporate Tax Law taxes income on both residence and source basis. The applicable basis of taxation depends on the classification of the Taxable Person.
- A “Resident Person” is taxed on income derived from both domestic and foreign sources (i.e. residence basis).
- A “Non-Resident Person” will be taxed only on income derived from sources within the UAE (i.e. source basis).
Residence for Corporate Tax purposes is not determined by where a person resides or is domiciled but instead by specific factors that are set out in the Corporate Tax Law. If a Person does not satisfy the conditions for being either a Resident or a Non-Resident person then they will not be a Taxable Person and will therefore not be subject to Corporate Tax.
Companies and other juridical persons that are incorporated or otherwise formed or recognized under the laws of the UAE will automatically be considered “Resident Person” for Corporate Tax purposes. This covers juridical persons incorporated in the UAE under either mainland legislation or applicable Free Zone regulations, and would also include juridical persons created by a specific statute (e.g. by a special decree).
Foreign companies and other juridical persons may also be treated as Resident Persons for Corporate Tax purposes where they are effectively managed and controlled in the UAE. This shall be determined with regard to the specific circumstances of the entity and its activities, with a determining factor being where key management and commercial decisions are in substance made.
Natural persons will be subject to Corporate Tax as a “Resident Person” on income from both domestic and foreign sources, but as long as such income is derived from a Business or Business Activity conducted by the natural person in the UAE. Any other income earned by a natural person would not be within the scope of Corporate Tax.
Non-Resident Persons are juridical persons who are not Resident Persons and have a Permanent Establishment in the UAE; or derive income sourced in UAE.
Non-Resident Persons will be subject to Corporate Tax on Taxable Income that is attributable to their Permanent Establishment.
Certain income sourced in UAE by a Non-Resident Person that is not attributable to a Permanent Establishment in the UAE will be subject to Withholding Tax at the rate of 0%.
The main purpose of the Permanent Establishment concept in the UAE Corporate Tax Law is to determine if and when a foreign person has established sufficient presence in the UAE to warrant the business profits of that foreign person to be subject to Corporate Tax.
Which income is subject to Corporate Tax?
Corporate Tax is payable on Taxable Income earned by a Taxable Person in a Tax Period.
Corporate Tax would generally be imposed annually, with the Corporate Tax liability calculated by the Taxable Person on a self-assessment basis. This means that the calculation and payment of Corporate Tax is done through the filing of a Corporate Tax Return with the Federal Tax Authority by the Taxable Person.
The starting point for calculating Taxable Income is the Taxable Person’s accounting income (i.e. net profit or loss before tax) as per their financial statements. The Taxable Person will then need to make certain adjustments to determine their Taxable Income for the relevant Tax Period. For example, adjustments to accounting income may need to be made for income that is exempt from Corporate Tax and for expenditure that is wholly or partially non-deductible for Corporate Tax purposes.
When the tax is payable?
The tax is payable annually and will be effective from the financial years starting on or after June 1, 2023. For example, if a business has calendar year as a financial year starting from January 1 ending on December 31, CT will be applicable starting from January 1, 2024. If a business has financial year starting from July 1 ending on June 30, then CT will be applicable from July 1, 2023. Penalties apply for late filing or failure to file tax returns.
How to register, file and pay the Corporate Tax?
All Taxable Persons (including Free Zone Persons) will be required to register for Corporate Tax and obtain a Corporate Tax Registration Number. The Federal Tax Authority may also request certain Exempt Persons to register for Corporate Tax.
Taxable Persons are required to file a Corporate Tax return for each Tax Period within 9 months from the end of the relevant period. The same deadline would generally apply for the payment of any Corporate Tax due in respect of the Tax Period for which a return is filed. It means there is no necessity to pay the tax in advance.
Businesses may face challenges while preparing for UAE CT. We are here to address these challenges and help in smooth implementation of this taxation scheme. Our range of UAE CT related services are as follows:
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