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Corporate Tax in UAE
For many years, the United Arab Emirates (UAE) has been a preferred destination for businesses attracted by its tax-friendly environment. However, a new era began in June 2023 with the implementation of corporate tax. Corporate tax in the UAE has now become an important component of operating a business, as it significantly impacts the country’s economy.
In simple terms, corporate tax is a levy imposed on the profits earned by businesses. It is vital for companies in the UAE to understand and comply with corporate tax regulations to ensure seamless operations and prevent any legal complications. Key elements such as tax rates, taxable income, exemptions, deductions, credits, filing procedures, and penalties must be thoroughly understood by every business.
In this guide, we will provide you with comprehensive information about corporate tax in the UAE.
Corporate Tax in UAE
Corporate tax, also referred to as federal tax or company tax, is a direct tax imposed on the income or capital of corporations and similar legal entities. In 2023, the UAE introduced a federal corporate tax (CT) that applies to the net profits of most businesses operating throughout the emirates.
Corporate Tax Rates in UAE:
9%: This standard rate applies to all taxable profits exceeding AED 375,000 (approximately \$102,000 USD).
0%: A zero corporate tax rate applies to taxable income up to AED 375,000, providing relief for small businesses.
However, there are certain exceptions, such as:
Foreign banks: May be subject to a fixed 20% rate under separate emirate-level regulations.
Oil & Gas companies: Governed by specific tax agreements.
Multinational Enterprises (MNEs): Under the OECD’s Base Erosion and Profit Sharing (BEPS) 2.0 framework, those with global revenue exceeding AED 3.15 billion (around USD 860 million) may face different applicable rates.
Taxable Person
In the UAE corporate tax framework, a “taxable person” refers to any entity required to register, submit tax returns, and, if applicable, pay corporate tax. These include:
- Resident Persons: Companies incorporated in the UAE, foreign companies effectively managed from the UAE, and individuals conducting business in the UAE with an annual turnover exceeding AED 1 million.
- Non-Resident Persons: Companies that maintain a presence in the UAE (permanent establishment) or generate income from UAE sources.
UAE-Sourced Income: When a non-resident company operates a physical permanent establishment (PE) in the UAE, the profits derived from that PE are treated as UAE-sourced income. The rules for determining tax liability depend on the nature of the income and any relevant Double Taxation Agreements (DTAs).
How Corporate Tax Functions
Businesses are required to submit corporate tax returns to the government, usually on an annual basis. The tax return determines the company’s taxable income by subtracting eligible deductions and allowances from the total income. This taxable income is then multiplied by the applicable corporate tax rate to calculate the tax payable.
The implementation of corporate tax in the UAE is expected to have a significant impact on the business landscape. It is projected to attract foreign investment, strengthen the UAE’s global competitiveness, and support economic diversification.
Companies that effectively adapt to the new corporate tax system and take advantage of its opportunities will be well-positioned to succeed in the UAE’s evolving business environment.
Taxable Income
Taxable income for companies in the UAE refers to the net profit that is subject to corporate tax. The following are generally included in taxable income:
Business Profits: This is the primary component of taxable income and includes revenue from the company’s main operations after deducting related expenses.
Capital Gains: Earnings from the sale of assets such as property or investments are typically considered taxable income.
Calculating Taxable Income:
- Start with Gross Revenue: This includes all income from your business activities, such as sales, commissions, and fees.
- Deduct Allowable Expenses: Subtract ordinary and necessary expenses incurred to generate revenue, such as:
- Cost of goods sold (COGS)
- Salaries and wages
- Rent and utilities
- Marketing and advertising expenses
- Depreciation and amortization
- Interest on business loans (subject to limitations)
- Determine Profit or Loss:
- If it’s a profit, that amount is your taxable income.
- If it’s a loss, it may be carried forward to offset future profits and reduce tax liability (as per applicable rules).
Corporate Tax within Free Zones
Companies operating in designated Free Zones in the UAE with a valid Qualifying Free Zone Person (QFZP) license benefit from a 0% corporate tax rate on their Qualifying Income. This applies to income from activities carried out within the Free Zone and transactions with other Free Zone Persons.
However, QFZPs lose the 0% benefit on income derived from Excluded Activities or through a Permanent Establishment (PE) outside the Free Zone (mainland UAE or a foreign country). In such cases, the standard 9% corporate tax rate is applicable.
It is advisable to consult the relevant Free Zone authority or a corporate tax consultant in the UAE for detailed information on Free Zone benefits and qualifying activities.
Who is excluded from UAE corporate tax?
The UAE corporate tax system, implemented in 2023, grants exemptions to specific businesses and types of income. These include:
- UAE Government entities (including local government bodies, ministries, departments, and authorities).
- Extractive businesses (such as those involved in extracting natural resources like oil, gas, and minerals).
- Qualifying public benefit entities.
- Qualifying investment funds, as defined under the UAE Corporate Tax Law, are exempt from corporate tax.
- Free zone businesses are included under the corporate tax regime. However, they may continue to enjoy incentives if they meet all regulatory requirements.
Companies established in a free zone jurisdiction must still register and file corporate tax returns.
Corporate Tax for Small Businesses in UAE
The UAE provides significant relief for small businesses through a tiered tax structure and a dedicated program known as SBR – “Small Business Relief.” Profits up to AED 375,000 are subject to a 0% tax rate, which means small businesses within this range do not pay any corporate tax.
Eligibility for Small Business Relief (SBR):
Small Business Relief grants a full exemption from corporate tax for qualifying businesses. The eligibility criteria include:
- Resident taxable persons (individuals and companies), including Free Zone entities that meet the conditions.
- Business revenue must not exceed AED 3 million for the relevant tax period and all prior tax periods ending on or before December 31, 2026.
- The business must not be a financial institution or a holding company.
- A notification must be filed with the tax authorities within the tax return for the relevant period to claim SBR.
When is Small Business Relief (SBR) needed?
- If your business consistently earns profits below AED 375,000, the 0% tax rate is sufficient.
- SBR becomes beneficial if your profits vary and may occasionally exceed the AED 375,000 threshold, as it removes the need to file tax returns, provided your revenue remains within the AED 3 million limit.
Main Features of the UAE Corporate Tax System
- The standard corporate tax rate in the UAE is 9%, with a zero rate applying to taxable profits below AED 375,000.
- Taxable profits are determined in accordance with accounting standards generally accepted in the UAE (UAE GAAP) and International Financial Reporting Standards (IFRS). Certain types of income, such as dividends and capital gains, are exempt from corporate tax.
- Various deductions and credits are available, including those for direct and indirect business expenses, as well as research and development activities.
- Businesses are required to file corporate tax returns and make tax payments annually.
Any business whose financial year begins on or after June 1, 2023, will be subject to corporate tax in the same year. For example, if a company’s financial year starts on August 1, 2023, and ends on July 31, 2024, it will be liable for corporate tax from August 2023, as this marks its first financial year under the CT regime.
Conversely, if a business’s financial year starts on February 1, 2023, it will become subject to corporate tax the following year, i.e., from February 1, 2024, to January 31, 2025.
Questions About Service
Resident persons, including companies incorporated in the UAE, foreign companies managed from the UAE, and individual businesses with an annual UAE turnover exceeding AED 1 million, are subject to corporate tax. Non-resident companies with a permanent establishment in the UAE or those generating UAE-sourced income may also be liable for the tax.
Qualifying Free Zone Persons in designated Free Zones enjoy a 0% tax rate on income earned from qualifying activities and transactions with other Free Zone Persons. However, income generated outside the Free Zone (via a permanent establishment) is generally subject to the standard 9% tax rate.
Penalties and fines can be applied for failing to comply with tax regulations, including delayed filing or non-payment of taxes.
The UAE corporate tax system aligns with international accounting standards for calculating taxable income. Typically, allowable deductions include ordinary and necessary business expenses incurred to generate taxable income.
Yes, keeping accurate accounting records is essential for correctly determining taxable income. This generally includes financial statements, invoices, and receipts.
All yearly taxable profits up to AED 375,000 are taxed at a 0% rate, while any amount exceeding AED 375,000 is subject to a 9% rate.
According to the FTA’s Federal Decree Law 47, every taxable person, including Free Zone Persons, must register for Corporate Tax and obtain a Registration Number.
Qualifying income refers to any income earned by a Qualifying Free Zone Person that is subject to a 0% Corporate Tax rate. This income is determined based on qualifying business activities or transactions carried out within the Qualifying Free Zone in the UAE.
Here are some effective ways to reduce your business’s corporate tax liability:
- Take Advantage of Tax Exemptions and Incentives
- Properly Structure the Business
- Maintain Accurate Financial Records
- Hire a Registered Tax Agent in UAE
- Ensure Timely Corporate Tax Return Filing and Payments
Most importantly, seek taxation support from experts like Bright Path Accountant.
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