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Corporate Tax Guidance: Expertly Navigating UAE's New Laws
Many companies navigate unfamiliar laws and processes with the UAE’s new corporate tax law. However, You need not worry, as our team of tax specialists can assist you in comprehending the application of corporate tax to your business, avail tax exemptions and reliefs, and ensure that you comply with the deadlines to avoid penalties.
Our team is well-equipped to lead you through every step of the process, from registering your business for corporate tax to adhering to accounting standards and submitting your corporate tax returns, ensuring the process is smooth, efficient, and cost-effective.
Must Know
To comply with the new corporate tax scheme in the UAE, every business is required to follow these three steps:
- Starting from June 2023, businesses must register for corporate tax.
- Businesses must maintain accounting records according to the required reporting standard, such as IFRS.
- A corporate tax submission must be filed with the Federal Tax Authority.
While not all businesses are obligated to pay corporate tax, they are still required to complete these steps to determine whether they qualify for a tax exemption.
Our UAE Corporate Tax Services
Maximize your corporate tax strategy with our UAE services. Our experts navigate new laws, optimize exemptions, and ensure timely compliance for your business success.
Corporate tax advice
Our experts provide tailored advice on corporate tax considerations, including available exemptions and how your business can benefit from them.
Corporate tax registration
Our team will assist in registering your business for corporate tax with the FTA and manage the deadlines for your corporate tax obligations.
Corporate tax returns
Our team will assess your corporate tax position, ensure the best tax outcome for your business, and file all necessary submissions with the FTA throughout the year.
But it doesn’t have to be this way.
Before you do anything, talk to one of our experts in Dubai. We’ll show you how easy the process is and why we’re the partner of choice for entrepreneurs who want to establish a business in Dubai.
What is Corporate Tax UAE?
Corporate tax is a levy on the taxable income or net profit of business establishments that are resident in the United Arab Emirates. These new taxation policies came into effect on June 1, 2023, and most companies will be fully taxable by January 1, 2024.
Background of Corporate Tax UAE
Global entrepreneurs and investors have always considered the UAE one of the most lucrative places to set up a new business.
Both large companies and startups have favoured the UAE due to the country’s exceptionally stable political environment, strategic location, fabulous business infrastructures and, most importantly, what was the 0% corporate tax regime.
According to the International Monetary Fund (IMF), the UAE has the fifth-largest economy in the Middle East. The country has historically depended on its oil and natural resources revenue but has been gradually becoming less dependent on oil in recent years.
Is Corporate Tax the Same as VAT?
When the UAE government first announced the introduction of corporate tax, many businesses incorrectly viewed it as similar to Value Added Tax (VAT). However, corporate tax and VAT are very different.
The main difference is that corporate tax is mandatory for every company in the UAE, whereas VAT only applies to companies once they reach certain thresholds.
VAT is a consumption tax levied on the sale of goods and services. The customer pays it at the time of purchase. On the other hand, corporate tax is levied on businesses’ taxable income.
Companies in the UAE are required to pay corporate tax on their yearly net profits. In contrast, businesses collect VAT from customers when they sell a product or service and then remit it to the government.
Corporate tax is paid directly to the government and is calculated based on a company’s net income, not its total revenue or sales volume.
Now that we understand corporate tax in the UAE, let us delve further into the taxation process.
Who Will Be Subject to Corporate Tax UAE?
It is important to note that all businesses operating in the UAE will be subject to corporate tax, including those in free zones. However, there are a few specific exemptions, which will be further outlined below.
As per the UAE Ministry of Finance (MOF), the following individuals/corporations will be responsible for paying Corporate Tax in the UAE:
- Corporations and other legal entities based in the UAE or having their primary management and operations within the UAE.
- Individuals engaged in a Business or Business Activity within the UAE.
- Foreign legal entities that maintain a Permanent Establishment in the UAE, as detailed in Section 8 of Corporate Tax Law.
All of these business entities operating within the UAE are subjected to the new tax regime from June 1, 2023, and onwards. The tax calculation of the period of businesses will differ based on how they report their financial year, as follows:
- Businesses that report financial years from July 1 will start tax calculation from July 1, 2023.
- Businesses that report financial years from January 1 will start tax calculation from January 1, 2024.
Apart from a few specific exceptions, all commercial activities in the UAE will have to register and file the corporate tax.
How Much Is the Corporate Tax UAE?
MOF, the regulatory body for the UAE corporate tax, has devised a taxation policy with three taxation tiers, which are:
- Businesses with net yearly profits up to AED 375,000 are Subject to a 0% tax rate.
- Businesses with net yearly profits above AED 375,000 are subject to a 9% tax rate.
- Multinational companies with total global revenue exceeding EUR 750 million (equivalent to AED 3.15 billion) will be required to pay at least 15% corporate tax, according to the guidelines of Pillar Two of the OECD Base Erosion and Profit Shifting Project. The primary objective of this project is to ensure that large multinational enterprises pay their fair share of taxes.
Corporate Tax Registration
To register for Corporate Tax in the UAE, you need to visit the website of the Federal Tax Authority (FTA). The website will require you to complete the necessary forms and submit the required documents, such as your entity’s Emirates ID, trade license, passport, financial records, details of business activities, and corporate structure. Once the forms and documents are submitted, the authorities will review your application and provide you with a tax registration number (TRN) if approved.
The approval process usually takes around 20 days, but it may take an additional 20 days if more information is required. At Gulf Gateway CSP, we can assist you with your application through the FTA.
Companies in the UAE are required to pay corporate tax on their yearly net profits. In contrast, businesses collect VAT from customers when they sell a product or service and then remit it to the government.
UAE Corporate Tax: Exempt Persons
The Ministry of Finance (MOF) has recently declared exemptions for certain entities. Entities that fall under these exemptions won’t be required to file a tax report or pay taxes. The exemptions apply to the following entities:
- Governmental or public entities, including federal and regional offices, departments, divisions, and all other public institutions.
- Businesses involved in extracting or mining natural resources in the UAE are already subject to Emirate-level taxation.
- Charitable and social organizations registered as social or charity organizations with the MOF meet the conditions specified in Cabinet Decision No.37 of 2023.
- Real estate and other regulated investment funds must apply to MOF and the Federal Tax Authority (FTA) for formal exemption approval.
- UAE companies that are fully owned and controlled by the UAE government and listed with a ministry-level decision to receive tax exemption.
- Public or private pension or social security funds that meet the conditions stipulated in Ministerial Decision No.115 of 2023.
UAE Corporate Tax: Exempt Income
In addition to the above-listed exemptions, MOF has also announced that companies may qualify for tax income exemptions in the following cases:
- Earnings from dividend payments or other profit distributions received from UAE-incorporated or resident juridical persons as per Article 22 of the Corporate Tax Law.
- Earnings from dividend payments or other profit distribution received from a Participating interest in a foreign juridical person.
- Capital gains from selling shares of a subsidiary company under their ownership.
- Foreign exchange gains/losses or capital gains earned from a domestic or foreign participating interest.
- Earnings made by non-residents from the operation or leasing of ships or aircraft in international transportation.
- Earnings made by a Permanent Establishment or foreign branch where an election has been made to claim the 'Foreign Permanent Establishment' exemption.
To be eligible for deductions from earnings related to dividend payments, a UAE company must possess at least 5% ownership of a subsidiary company operating outside of the UAE.
The ownership requirement may differ based on the country in question. For example, in the United Kingdom, the UAE shareholder entity must have a minimum of 10% ownership of the UK company’s ordinary share for ten consecutive months to qualify for a tax-deductible earning.
Corporate Tax for Freezone Persons
Freezone Persons—entities established in a UAE Free Zone—can qualify for a zero per cent tax rate on specific conditions.
To be a Qualifying Free Zone Person (QFZP) and avail of the 0% CT rate, an entity must:
- Derive "Qualifying Income"
- Maintain adequate economic substance in the Free Zone
- Not elect to be subject to standard CT rates.
- Comply with transfer pricing requirements.
Qualifying Income includes:
- Income derived from transactions with other Free Zone Persons
- Domestic and foreign-sourced income from any of the 'Qualifying Activities' specified in Ministerial Decision No. 139 of 2023.
- The definition of qualifying activities encompasses a broad range, including manufacturing, processing, fund management, logistics, and more, as outlined in Ministerial Decision No. 265 of 2023
Qualifying Income does not include Income derived from performing any of the ‘Excluded Activities’ that are also specified in the above-mentioned Ministerial Decision.
Notably, a QFZP’s non-qualifying Income must not exceed the de minimis threshold of five per cent of total revenue or AED 5 million, whichever is lower.
Free Zone Persons are encouraged to review their operations in light of these updated regulations to ensure compliance and understand their eligibility as a QFZP under the CT Law.
Corporate Tax for Freelancers
If an individual runs their business under their own name and not as a separate legal entity like a company, they will be subject to corporate tax once their annual revenue exceeds AED1m.
Dubai and the UAE are popular destinations for freelancers due to the simplified tax system and the availability of affordable and flexible Coworking Spaces.
However, to work as an independent professional or freelancer in the UAE, you must obtain a Professional License As A Freelancer.
But remember, you cannot claim back VAT if you offer exempt services.
Corporate Tax for Groups
When two or more taxable entities meet specific criteria, they can request to form a “Tax Group” and be considered as a single entity for corporate tax purposes.
To establish a Tax Group, the parent company and its subsidiaries must meet the following requirements:
- All entities must be legal entities within the same jurisdiction.
- They must operate on the same fiscal year and use identical accounting practices in their financial documentation.
In addition to the above requirements, the parent company must:
- Own at least 95% of the subsidiary's equity.
- Control at least 95% of the voting rights within the subsidiary.
- Claim at least 95% of the subsidiary's earnings and overall assets.
Ownership, voting rights, and entitlements can be secured either directly or indirectly through branch entities. However, a Tax Group cannot consist of an Exempt Entity or a Qualifying Free Zone Entity.
To calculate the taxable earnings of a Tax Group, the parent company should prepare combined financial statements for each subsidiary within the Tax Group for the relevant tax period. Transactions between the parent company and its subsidiaries, and between the subsidiaries themselves, will be disregarded when computing the Tax Group’s taxable earnings.
Tax Income Deductions
Typically, costs associated with generating taxable revenue can be deducted. Although specific limitations and exclusions are outlined in the Corporate Tax Regulations, the timing of deductions can differ based on the nature of the expense and the accounting approach used.
For assets with long-term value, the expenditure is often accounted for through either depreciation or amortisation over the asset’s useful lifespan. A cost must be divided appropriately if it serves both personal and business functions.
Only the business-related segment of the expenditure is considered solely for the benefit of the entity’s taxable operations. The business expenses that will be deducted are:
- Donations to any charity that is listed in Cabinet Decision No. 37 of 2023.
- Financing and interest costs can be reported as tax-deductible income, but this only applies to businesses with a Net Interest Expenditure above AED 12 million. These businesses can deduct interest expenditure up to the greater of 30% of their adjusted earnings before depreciation, amortisation, tax, and interest (EBITDA) or AED 12 million. The taxation authority has placed this cap to discourage businesses from relying heavily on high-risk debt financing.
- Any payment of a royalty made to a foreign group company, as long as the payment was necessary and made at arm's length (neither party influencing the other).
- Irrecoverable input Value Added Tax.
- Remuneration may be deductible, but the amount that can be deducted varies. For instance, when remuneration is paid to an owner or director (or someone who is related to the director or the owner), the remuneration should reflect the market rate for the services performed. If the remuneration exceeds the market rate, it will not be deductible. Additionally, when a corporation remits a management fee to its parent company or another affiliated entity, the transfer pricing regulations will be considered to guarantee the fee aligns with market rates. Payments exceeding these market rates will not be eligible for deduction.
- Businesses can report their losses as future tax-deductible expenses, depending on the accounting method used. If the taxable entity has chosen to record profits and deficits based on a realisation basis, then revaluation profits and deficits recorded in the financial statements will be taxable under Corporate Tax for the applicable tax duration. If the taxable entity has chosen to account for profits and deficits using the realisation method, then any value changes in the asset or liability beyond its initial cost will not be considered for Corporate Tax calculations.
- Costs associated with entertaining employees are generally tax-deductible for corporate tax reasons, as long as they are spent on business-related activities. However, only 50% of the expenditure will be deductible.
- Doubtful debts can be deducted as expenses, consistent with the guidelines set by the International Financial Reporting Standards (IFRS).
- Government, business set up and license renewal fees and charges can also be deducted as business expenses.
Additional Tax Exemptions
In addition to the above-listed exemptions, MOF has also announced that companies may qualify for tax income exemptions in the following cases:
- Earnings from dividend payments or other profit distributions received from UAE-incorporated or resident juridical persons as per Article 22 of the Corporate Tax Law.
- Earnings from dividend payments or other profit distribution received from a Participating interest in a foreign juridical person.
- Capital gains from the selling of shares of a subsidiary company under their ownership.
- Foreign exchange gains/losses or capital gains earned from a domestic or foreign participating interest.
- Earnings made by non-residents from the operation or leasing of ships or aircrafts in international transportation.
- Earnings made by a Permanent Establishment or foreign branch where an election has been made to claim the 'Foreign Permanent Establishment' exemption
To qualify for deductions from earnings from dividend payments, the UAE company must own at least a 5% share of the subsidiary company operating abroad. The ownership requirement also varies for a few countries.
For instance, in the case of the UK, the UAE shareholder entity must own at least 10% of the UK company’s ordinary share for ten consecutive months to be eligible for a tax-deductible earning.
Tax Deduction for Companies with Foreign Branches
The UAE government will also allow the foreign company branches located in the UAE to choose one of the following options:
- If a company has a branch or office in another country, it can claim a foreign tax credit for the tax paid in that country. The maximum limit for a foreign tax credit is the lower of the foreign tax paid and the UAE Corporate Tax due on the corresponding revenue. Any surplus foreign tax credits cannot be transferred to a previous or subsequent tax period.
- Alternatively, the companies may apply for an exemption based on the profit made by their foreign branches outside the UAE.
The Administration of Corporate Tax UAE
The UAE Ministry of Finance (MOF) has given authorization to the Federal Tax Authority (FTA) to regulate the taxation process and ensure compliance. As per the regulations, businesses are required to file their corporate tax along with their financial report annually.
Most medium and large businesses in the UAE adhere to the International Financial Reporting Standards (IFRS) for financial reporting. However, the FTA accepts various other ways to simplify the tax filing process for businesses and professionals.
How to File a Corporate Tax and Financial Report
As previously discussed, all companies are required to register with the Federal Corporate Tax Authority for tax filing purposes. After the end of each financial year, businesses are given a period of nine months to complete their tax filing and financial reporting.
Below are some sample timelines for registration, submission, and payment due dates for entities whose tax period (financial year) ends on either May 31st or December 31st.
Probable Implications of Corporate Tax UAE
The introduction of corporate tax will help the UAE economy become more diversified and sustainable in the long term. It will also make the country more attractive to foreign investors.
It should be noted that the UAE is not the first country in the Middle East and Gulf region to introduce corporate tax. Several countries have it already with the following rates:
- Saudi Arabia: 20%
- Oman: 15%
- Qatar: 10%
- Bahrain: 46% for a few specific sectors related to natural resource extraction, 0% for others
- Kuwait: 15%
Now, let’s take a look at the corporate tax rates of some other economic regions.
- Montenegro: 9%
- Gibraltar: 12.5%
- Ireland: 12.5%
- Liechtenstein: 12.5%
- Hong Kong: 7.5-16.5%
- Singapore: 17%
- San Marino: 17%
The UAE’s tax rate of 9% is still lower than many of the competing regional and global economies.
Wrap Up: Corporate Tax UAE
To keep your UAE business compliant with tax policy changes, it’s essential to stay updated with the latest announcements from the UAE government. You can also seek Professional Help From Our Tax Advisors to ensure your business is structured most efficiently to handle the corporate tax payable.
Gulf Gateway CSP has a team of vetted professionals who can help your business register with all relevant tax authorities and ease your business management. Get in touch with Gulf Gateway CSP today!
Frequently asked
Questions
Corporate tax is a direct tax imposed on corporations and other entities net income or profit from their business activities.
The UAE corporate tax will become applicable either on June 1, 2023, or January 1, 2024, depending on the financial year followed by the business.
Corporate tax will apply to all businesses and individuals conducting business activities under a commercial license in the UAE, free zone businesses that do not operate in the UAE mainland and foreign entities conducting trade or business in the UAE. The following business activities will also be subject to corporate tax: banking operations, real estate management, construction, development, agency and brokerage.
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