As the UAE transitions into a more diversified economy, the introduction of the UAE Corporate Tax marks a pivotal change for businesses operating in the region. Effective from June 1, 2023, the corporate tax law aims to align the country with global tax standards while maintaining its appeal as a business-friendly destination.
While the headline tax rate is set at a competitive 9% on taxable income above AED 375,000, the law includes a range of exemptions and deductions that provide relief and flexibility for businesses, particularly SMEs and startups. In this blog, we’ll unpack the critical exemptions and allowable deductions under the UAE corporate tax framework and guide you through what businesses need to know for smooth compliance.
Overview of UAE Corporate Tax
Under the new regime:
- Tax Rate: 0% on net profits up to AED 375,000
- 9% on profits above AED 375,000
- Applicability: All entities registered and operating in the UAE (including Free Zone entities under specific conditions), with certain exemptions
- Mandatory: Corporate tax registration is required for all taxable persons
If you’re not already in the loop, UAE Corporate Tax registration is now a legal requirement, and penalties may apply for delayed compliance.
Who Is Exempt from UAE Corporate Tax?
The law provides for a range of exempt persons who are not subject to corporate tax. These include:
1. Government Entities and Government-Controlled Entities
Fully owned UAE government bodies carrying out sovereign or mandated activities are exempt from corporate tax.
2. Extractive and Non-Extractive Natural Resource Businesses
Companies engaged in oil, gas, and other extractive industries—already taxed under emirate-level rules—are excluded from corporate tax, provided they meet regulatory conditions.
3. Public and Regulated Private Pension Funds
Approved pension and social security funds are exempt under the law.
4. Qualifying Investment Funds
Funds meeting certain transparency, regulatory, and investor criteria can apply for exemption.
5. Free Zone Entities (Qualifying Free Zone Persons)
Entities based in designated Free Zones can benefit from a 0% tax rate on qualifying income, provided they meet specific substance, income-source, and regulatory requirements.
Key Deductions That Reduce Your Taxable Income
Businesses subject to UAE Corporate Tax can reduce their taxable income through various allowable deductions, enhancing tax efficiency.
1. Business Expenses
Ordinary and necessary expenses wholly incurred for the business—such as salaries, rent, marketing costs, etc.—are deductible.
2. Interest Expense
Interest on business loans is deductible, subject to a cap (30% of EBITDA) and anti-avoidance rules.
3. Depreciation of Assets
The cost of capital assets can be depreciated over their useful life as per accepted accounting standards.
4. Bad Debts
Amounts that are genuinely unrecoverable and written off may be deductible.
5. Entertainment Expenses
50% of eligible entertainment expenses (e.g., meals with clients) can be claimed.
6. Research and Development (R&D)
Expenditure on innovation, patents, and qualifying R&D activities may be deductible or incentivized further.
Non-Deductible Expenses
Certain expenses are specifically disallowed under the UAE Corporate Tax regime:
- Penalties and fines (other than compensation)
- Dividends paid to shareholders
- Bribes and other illicit payments
- Personal expenses not related to business
- Withdrawals by business owners
Importance of Accurate Registration and Compliance
Every taxable business must complete corporate tax registration in UAE through the Federal Tax Authority (FTA) portal. Even if your business income is zero, qualifying for a 0% tax rate or claiming exemption registration is still mandatory.
Accurate registration ensures:
- Legal compliance
- Eligibility for deductions and exemptions
- Financial transparency and record keeping
- Avoidance of administrative penalties
How Corporate Tax Consultants Can Help
Understanding which expenses qualify for deductions and ensuring compliance with reporting timelines can be complex. This is where experienced corporate tax consultants in Abu Dhabi/Dubai come in.
They help with:
- Corporate tax assessment and impact analysis
- Registration and filing assistance
- Deductions optimization and documentation
- Representation during FTA audits
- Guidance on Free Zone compliance
Conclusion
Navigating the new UAE Corporate Tax system doesn’t have to be overwhelming. With a clear understanding of available exemptions and deductions, businesses can stay compliant while minimizing tax liability and improving financial planning.
Whether you’re an SME, a Free Zone company, or a growing enterprise, it’s time to reassess your tax strategy. Early preparation, accurate documentation, and professional support can make all the difference.
Auditac International offers specialized corporate tax services tailored for UAE-based businesses. From UAE Corporate Tax registration to deduction optimization, our team ensures full compliance and financial efficiency. Connect with Auditac International today for expert tax support designed to grow your business with confidence.
