The United Arab Emirates (UAE) is known for its business-friendly policies and tax-free environment, which has made it an attractive destination for foreign investors and businesses. However, the UAE has recently introduced a new tax law that has significant implications for businesses operating in the country. It was introduced as part of the UAE’s efforts to diversify its revenue sources and reduce reliance on oil revenues. In this blog post, we will discuss the UAE Corporate Tax (CT) and to whom it is applicable.
The UAE Corporate Tax is a form of a direct tax on the profits generated by juridical persons incorporated in the UAE and juridical persons effectively managed and controlled in the UAE, as well as foreign juridical persons that have a permanent establishment in the UAE. Individuals will be subject to CT only if they are engaged in a business or business activity in the UAE, either directly or through an unincorporated partnership or sole proprietorship.
The tax is applicable to all companies operating in the UAE, with the exception of UAE federal and emirate governments and their departments, authorities and other public institutions; certain wholly government-owned companies; businesses engaged in the extraction of UAE natural resources and related non-extractive activities that are subject to emirate-level taxation after meeting certain conditions; listed public benefit entities; certain investment funds; specified public or private pension or social security funds and some certain juridical persons that are wholly-owned and controlled by certain exempted entities and qualifying free zone person.
However, a “qualifying free zone person” who meets certain criteria, including maintaining sufficient substance in the UAE, generating qualifying income as determined by the cabinet decision, adhering to transfer pricing regulations, and not opting to be subject to CT, don’t have to pay any tax on qualifying income. If the taxable person fails to meet any of these conditions, they will no longer qualify as a “qualifying free zone person” and subject to CT at 9% on a qualifying amount that does not meet the qualifying income definition.
In addition, if the taxable income is equal to AED 375,000 or less the tax rate applicable is 0%. Further small businesses with revenue below a certain threshold can claim ‘small business relief’ and be treated as having no taxable income during the relevant tax period and may be subject to simplified compliance obligations. To claim small business relief, an election must be made to the Federal Tax Authorities.
The Corporate Tax rate in the UAE is currently set at 9% of taxable profits exceeding AED 375,000. The tax is calculated on the company’s financial statements, which must be prepared in accordance with international accounting standards. Taxable profits are calculated by deducting expenses from the company’s revenue. However, certain expenses such as qualifying dividends and capital gains, income arising on intra-group transfers, certain unrealized gains and losses, transfers of tax losses within the group where relevant, incentives or tax reliefs, deductions which are not allowable for tax purposes, or any other adjustments as specified by law are not deductible.
The tax is payable annually and will be effective from the financial year starting on or after June 1, 2023. For example, if a business has a calendar year as a financial year starting from January 1 and ending on December 31, CT will be applicable starting from January 1, 2024. If a business has a financial year starting from July 1 and ending on June 30, then CT will be applicable from July 1, 2023. Penalties apply for late filing or failure to file tax returns.
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. The UAE Corporate Tax has significant implications for businesses operating in the country. It is important for businesses to understand the tax laws and regulations and to comply with them to avoid penalties and fines. It is recommended that businesses seek the advice of tax professionals to ensure compliance with tax laws and regulations.