Corporate Tax in the UAE
The corporate tax UAE is a federal tax marking a significant shift in the tax regime. The Federal Tax Authority (FTA) administers and enforces this tax, with the Ministry of Finance acting as the Competent Authority for multilateral and bilateral agreements, as well as international contracts. This guide analyzes corporate tax in detail, providing insights into its general aspects in the UAE.
Tax Rate and Thresholds
Businesses with an annual income exceeding AED 375,000 (approx. $102,110) fall under the taxable category, with a statutory tax rate of 9%. Income below AED 375,000 is taxed at 0%, which helps minimize the tax burden on small businesses and start-ups.
Income
| Income | Tax Rate | Details |
| Below AED 375,000 | 0% | taxable income up to 375,000 AED is not taxed, small businesses and start-ups in this threshold |
| Over AED 375,000 | 9% | A 9% tax applies to companies with taxable income exceeding AED 375,000. Targets more profitable entities. |
Tax in Free Zones
| Entity Type | Tax Rate | Details |
| Qualifying Free Zone Entities | 0% | Entities meeting specific criteria in free zones are not taxed on their income. |
| Non-Qualifying Income | 9% | Entities not meeting the criteria may be subject to the ordinary 9% tax rate on their taxable income. |
Taxpayers Types
Resident Entities
- Natural individuals having business in the UAE.
- Legal entities incorporated in the UAE.
- Non-UAE entities conducting main activities in the UAE.
Non-Resident Taxpayers
- Foreign individuals with no business establishment in the UAE but having public revenue or connections to the UAE must pay corporate tax.
Tax Base Calculation
The tax base includes business profits, state revenues, and specific provisions under UAE Corporate Tax Law. Adjusted income is determined based on income statements per UAE GAAP, with modifications for items like unrealized gains or losses, tax-exempt income, and allowable expenses.
Exemptions and Special Provisions
Exempt Entities
The following entities do not need to pay corporate tax:
- UAE Federal and Emirate Governments
- Companies owned by the government
- Businesses involved in natural resources
- Approved public benefit organizations
- Eligible investment funds
- Public or private pension and social security schemes
- Juridical Persons Controlled by UAE Exempt Entities
- Charities/Public Benefit Organizations
- Foreign Charities/Public Benefit Organizations
Some of these entities must apply for exemption with the FTA.
Categories of Exemption
UAE Corporate Tax General Exemptions include:
- Income Below AED 375,000
- Individual Income Exemptions
- Freelance Professionals
- Small Businesses are Tax Exempted in case below threshold
- Businesses involved in Natural Resources
- Qualifying Public Benefit Entities
- Private Social Security & Pension Funds
- Government Entities
- Entities Controlled by Government
Business Owner Taxation
Business with AED 1 million or above annual revenue is subject to corporate tax. For example, a business owner with AED 500,000 in profits annually is exempt from corporate tax on those profits.
Requirements for Filing and Registration
Businesses liable to corporate tax must:
- Get tax registration number while registering with Federal Tax Authority
- Tax return filing with the nine months period after the conclusion of the tax year.
- Tax groups' parent companies are responsible to file a single tax return for the tax group.
Taxable Income
Taxable income is determined based on several factors as outlined in Article 20 of Federal Decree-Law No. 47 of 2022, including:
- Losses and realized gains in respect of liabilities and assets
- Reliefs, exempt income, and deductions.
- Transactions with connected persons and related parties
- Tax loss relief provisions.
- Incentives and special reliefs for qualifying business activities.
Small Business Relief
Resident taxable persons (excluding Qualifying Free Zone Persons and multinational enterprise groups) with total revenue of AED 3 million or less can opt to be treated as not having derived taxable income during a specific tax period.
Option Validity and Loss Carry Forward Impact
Tax periods from 1 June 2023 through 31 December 2026 are eligible for this option. Opting for this forfeits the ability to carry forward tax losses and net interests, as outlined in Article 21 of FDL 47/2022.
Exempt Income: Profits and Gains
- Income that qualifies as exempt includes profits and gains such as dividends, profit distributions, and gains from the sale of shares received from resident juridical persons.
- Income from participating interests in foreign juridical persons, under specific conditions.
- Income from the ownership interest in permanent establishments of non-resident persons, as outlined in Article 23.
Taxation on Natural Persons & Non-Resident Juridical and
State Sourced Income UAE:-State sourced UAE Income is the income from business activities related to a permanent establishment in the UAE.With state sourced UAE income is subject to corporate tax whether natural persons or non-resident juridical persons. They may claim foreign tax credits if taxed on the same income in another jurisdiction at an equal or higher rate.
Permanent Establishment: Nexus with Non-Resident Entities
As per Article 14 of FDL 47/2022, a permanent establishment is defined as a place where a non-resident conducts business in the UAE. It includes:
- Getting a TRN (tax registration number) from tax authority
- Declaring tax as required.
- Maintaining financial accounts and records for seven years.
State-Sourced Income of Non-Resident Entities
Non-resident entities are subject to tax on income sourced from the UAE, which includes earnings from resident persons connected to a permanent establishment within the UAE.Article 13(2) of FDL 47/2022 outlines the income and expenditure classified as UAE state-sourced for non-resident taxable persons.
Deductions
Deductions include:
- Sharing of overhead costs related to tax-exempt income.
- Separating expenses incurred for non-business-related activities.
- Differentiating between capital and revenue expenditure.
- Claiming 50% of entertainment expenses related to customers, suppliers, or shareholders.
Foreign Tax Credit Regime
The foreign tax credit system enables taxpayers to deduct taxes paid abroad from their UAE corporate tax obligations.
Transfer Pricing and Tax Grouping
Transfer Pricing
Transactions between associated entities must be on an arm’s length basis to avoid eroding the tax base.
Tax Grouping
Multi-entity tax groups may be created to manage the company’s tax more effectively, provided they meet the criteria established by UAE Corporate Tax Law.
Small Business Support
Small businesses with taxable income under a specified threshold for two consecutive years will be recognized as having no taxable income. This flexibility helps adjust the threshold as needed, benefiting small businesses.
Administration and Filing
The FTA is responsible for administering corporate tax, including filing returns, assessment, and compliance. Companies should adhere to deadlines to avoid penalties.
Expenses Related to Earning Revenue
Operating expenses necessary for generating taxable income are allowed in the year of the expense. Non-business-related expenses and losses not considered business losses are not deductible.
Interest Expense Deduction
Interest expenses can be deducted up to 30% of the accounting profit, provided specific conditions are met.Interest expense incurred by affiliated entities is not deductible.
Entertainment
Businesses can deduct only 50% of entertainment expenses related to customers, suppliers, or shareholders.
Transactions Between Related Parties
Articles 34 through 36 of the Corporate Tax Law address transactions between related parties. These transactions must adhere to the Arm’s Length Principle, as recommended by the OECD, to ensure they are priced appropriately. The law also outlines acceptable transfer pricing methods and conditions for adjustments by the Federal Tax Authority (FTA). Additionally, it defines key terms such as ‘Related Party,’ ‘Connected Person,’ and ‘Control.’
Tax Losses
Carry Forward of Losses
Article 37 allows tax losses to be carried forward and offset against future income up to 75%. However, losses incurred before the start of corporate tax computation cannot be deducted.
Limitations
Article 38 permits the carry forward of tax losses between periods for taxable persons, subject to certain conditions. Article 39 imposes limitations on the carry forward of losses in cases of changes in ownership or business activity exceeding 50%.
Tax Groups: Formation and Taxation
Articles 40 to 42 detail the formation and taxation of tax groups. A resident parent company can request to form a tax group with other resident entities if specific conditions are met. These conditions include excluding exempt entities, free zone qualifying entities, and ensuring all group members use the same financial year-end and accounting standards.
Payable Corporate Tax and Settlements
Articles 43 cover the computation, amount, and payment of corporate tax. Withholding tax and foreign tax credits are among the credits available to meet tax liabilities, which must be paid in AED. Any outstanding taxes must be settled as per Article 48.
Withholding Tax Credit and Foreign Tax Credit
A withholding tax credit can be used to reduce corporate tax liability for a specific period. Foreign tax credits can also be claimed, but they cannot exceed the corporate tax due for that period. All related documents must be maintained.
Corporate Tax Refund and Payment
The stipulated period is 9 months from the conclusion of the tax period to settle payable tax. If the excess withholding tax credit exceeds the payable corporate tax, it may be recovered. Refunds may also be issued if the FTA determines that extra tax has been paid.