Understanding Corporate Tax in the United Arab Emirates
Effective June 1, 2023, the Ministry of Finance of the United Arab Emirates (UAE) has instituted a Corporate Tax on business profits. This pivotal tax reform is designed to bolster the growth of small and medium-sized enterprises (SMEs). By establishing an initial statutory tax rate of 9% on corporate profits that exceed AED 375,000 (approximately $102,000). Conversely, profits falling below this specified threshold will be exempt from taxation.
Compliance with this new Corporate Tax framework is obligatory for all eligible companies operating within the UAE. This involves the submission of annual tax returns and the maintenance of accurate accounting records. All in accordance with the pertinent laws and regulations.
The introduction of Corporate Tax in the UAE serves a dual purpose: it is aligned with the country’s strategic objectives and aims to expedite its ongoing growth and transformation. Leveraging the UAE’s extensive array of double taxation treaties, the new tax structure ensures competitive positioning in compliance with global standards. Further cementing the UAE’s reputation as a premier destination for business and investment.
Reflective of the UAE’s stature as a global financial and economic hub, the Corporate Tax Code has been meticulously crafted. Incorporating globally accepted best practices and well-established concepts. Consequently, the UAE Corporate Tax Law is designed to be transparent in its implications and straightforward in its application.
Corporate Tax Rate in the United Arab Emirates (UAE)
The Corporate Tax in the UAE is structured around a headline rate of 9% levied on taxable income exceeding AED 375,000. For taxable income below this threshold, a 0% tax rate is applied. The specific tax rates can be broken down into two primary categories:
- For Resident Taxable Entities:
- A 0% corporate tax rate applies to taxable income that does not exceed AED 375,000. (This amount is subject to confirmation through a forthcoming Cabinet Decision.)
- A 9% corporate tax rate is applied to taxable income that exceeds AED 375,000.
- For Entities in Qualifying Free Zones:
- A 0% corporate tax rate is levied on Qualifying Income.
- A 9% corporate tax rate is imposed on taxable income that does not fall under the definition of Qualifying Income.
Scope of Tax Applicability in the UAE
The Corporate Tax is applicable to a range of entities and business activities:
- Commercially Licensed Businesses: All businesses and individuals engaged in activities under a commercial license in the UAE are subject to Corporate Tax.
- Free Zone Businesses: The existing Corporate Tax incentives for free zone businesses will continue to be honored. Provided that these businesses comply with all regulatory requirements and do not operate in the UAE’s mainland.
- Foreign Entities and Individuals: The Corporate Tax applies to foreign entities and individuals only if they are conducting trade or business activities in the UAE in a regular or ongoing manner.
- Financial Institutions: Banking operations are also subject to the Corporate Tax.
- Real Estate and Construction Sector: Businesses involved in real estate management, construction, development, agency, and brokerage activities are within the purview of the Corporate Tax regime.
By understanding the nuances of the Corporate Tax rate and its applicability, businesses can better navigate the UAE’s taxation landscape.
Who is Subject to Tax?
The term “Taxable Persons” refers to specific entities and individuals who are generally liable for corporate tax in the United Arab Emirates (UAE). Below are the categories of taxpayers subject to UAE corporate tax regulations:
Domestic and Foreign Entities
- Corporations and other legal entities incorporated or effectively managed within the UAE are subject to corporate tax.
- Individuals conducting business or participating in commercial activities in the UAE are also liable for corporate tax, in accordance with upcoming Cabinet Decisions.
- Non-resident legal entities that maintain a permanent presence in the UAE are categorized as non-resident juridical persons and are subject to corporate tax.
Entities in Free Zones
- Legal entities operating within a UAE Free Zone are designated as “Taxable Persons” for corporate tax purposes. However, entities meeting the criteria for being a “Qualifying Free Zone Person” may be eligible for a 0% corporate tax rate on their qualifying income.
Withholding Tax on Non-Residents
- Non-resident individuals without a permanent establishment in the UAE may be subject to a withholding tax rate of 0% on specific income categories. This tax is collected at the source for the benefit of the income recipient and is applicable to various forms of international income such as dividends, interest, and royalties.
Qualifying Free Zone Persons
Entities operating in free zones can qualify for a 0% corporate tax rate, provided they meet the qualifications and standards specified in Article 18 of the UAE Corporate Tax Law.
Exemptions on Taxable Income
Certain types of income and associated expenses are exempt from being calculated as taxable income:
- Profit distributions, including dividends, received from a resident juridical person.
- Income from a participating interest in foreign legal entities, inclusive of dividends and other profit distributions.
- Additional income generated from a participating interest.
- Income generated by a foreign permanent establishment that meets the legal criteria.
- Income received by a non-resident entity from the operation of ships or aircraft in international transport, provided it complies with applicable laws.
This document serves as a general overview and is subject to changes in the UAE corporate tax laws and regulations.
Entities Exempt from Corporate According to Article 4 of the Corporate Tax Law
Pursuant to Article 4 of the Corporate Tax Law of the United Arab Emirates, the entities listed below are exempt from corporate taxation:
a) Government Entities: Any organization that operates as an arm of the government.
b) Government-Controlled Entities: Organizations where the government maintains significant control or influence.
c) Entities Engaged in Extractive Industries, provided they meet the following criteria:
- Hold, either directly or indirectly, rights, concessions, or licenses granted by local governmental authorities to conduct extractive operations.
- Are effectively subject to taxation as per the relevant Emirate-specific legislation.
- Have formally notified the Ministry, adhering to the format and procedures as specified by the Local Government.
Entities Engaged in Non-Extractive
d) Entities Engaged in Non-Extractive Natural Resource Operations, subject to the following conditions:
- Possess, either directly or indirectly, rights, concessions, or licenses issued by local governmental authorities to operate within the non-extractive natural resource sector.
- Derive income solely from entities involved in business or business activities.
- Are effectively subject to taxation in compliance with the legislation of a specific Emirate, as outlined in Clause 6 of this Article.
- Have communicated their status to the Ministry, following the form and procedures outlined by the Local Government.
e) Qualifying Public Benefit Entities: Organizations that meet the criteria for contributing to the public good.
f) Qualifying Investment Funds: Investment funds that meet specific eligibility criteria.
g) Public or Private Pension and Social Security Funds: These must be under the regulatory oversight of the competent authorities within the UAE and must meet any additional conditions as set forth by the Minister.
h) Juridical Entities Incorporated Within the UAE: These are entities wholly owned and controlled by an exempt person and involved in:
- Conducting activities that either wholly or partially correspond with those of the exempt entity.
- Exclusively holding assets or investing funds for the benefit of the exempt entity.
- Carrying out functions that are supplementary to the activities performed by the exempt entity.
i) Any Additional Categories: As may be specified through a formal decision issued by the Minister.
This guideline serves to clarify the entities that are exempt from corporate taxation under the current UAE Corporate Tax Law.
Criteria for Designation as a Qualifying Free Zone Entity
A “Qualifying Free Zone Entity” is eligible for a special Corporate Tax rate of 0% specifically on its “Qualifying Income.” To be designated as a Qualifying Free Zone Entity, the following criteria must be satisfied:
- Establish and maintain substantial presence within the United Arab Emirates (UAE);
- Generate “Qualifying Income”;
- Forego the option to be taxed at the standard Corporate Tax rates; and
- Adhere to the transfer pricing guidelines stipulated under the Corporate Tax Law.
It should be noted that the Minister may impose additional requirements on a Qualifying Free Zone Entity.
- The tax period is defined as a twelve-month period during which a taxable entity is required to file financial statements.
- Subject to regulations set forth by the Federal Tax Authority (FTA), the duration of each tax period can be adjusted upon formal request by the taxpayer.
Corporate Tax Implications for Non-Resident Companies
Non-resident companies with a permanent establishment in the UAE are required to pay Corporate Tax on revenue and any income derived from activities within the jurisdiction of the UAE Government. This includes, but is not limited to, revenue generated from the sale of products or the provision of services.
However, there are certain exemptions:
- Revenue obtained from operating aircraft in international airspace and ships in international waters is not subject to Corporate Tax for non-residents.
- Income acquired through an investment manager related to real estate or other types of investments is also exempt from Corporate Tax for non-residents.
By understanding these stipulations, entities can better navigate the Corporate Tax landscape in the UAE.
MP Elites Consulting: Your Premier Partner for Corporate Tax
Many organizations and individuals may not be fully aware of the critical actions required to ensure compliance with tax regulations. In such cases, the role of expert Corporate Tax Consultants becomes indispensable to avert legal complications. Entrusting your tax matters to a seasoned Corporate Tax Consultant ensures not only timely payments but also bolsters your reputation as a responsible taxpayer. Our Corporate Tax Consultants in the UAE bring a wealth of knowledge and expertise in advising clients on tax optimization strategies. Utilizing legal channels and applicable exemptions. Furthermore, we continually adapt our clients’ tax approaches to comply with the latest tax laws and guidelines.
Our Skilled Corporate Tax Consultants Provide a Comprehensive Suite of Services, Including:
- Strategic Tax Architecture
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- In-depth Guidance for Upcoming Financial Transactions
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Leverage our expert tax consultation services to navigate the intricate landscape of taxation efficiently and effectively.