The UAE is a country that attracts professionals, self-employed individuals and investors due to its friendly tax policies. Nevertheless, the UAE Government announced on 31st January 2022 that companies will now be subject to the corporate tax UAE. Previously, only those corporations that belonged to some industries, such as resource extraction or any other had taxes imposed. Now, more companies operating in the country will have to pay corporate tax in UAE starting from the financial year of 1st June 2023.
In this article, we are going to explain more about the UAE corporate tax rate and how to determine if you are subject to or exempt from it. Let’s observe:
- Do you know what Corporate Tax is?
- Who has to pay and who is exempt from the Corporate Tax?
- Learn about the corporate tax rate
- Understanding the Corporate Tax on Free Zones
1. Do you know what Corporate Tax is?
The UAE corporate tax 2023 was introduced by the UAE Government on the Federal Decree-Law No. 47, most commonly known as the Corporate Tax Law.
The Corporate Tax (CT) is a direct tax on the profits of some companies and other entities. Thus, it is worth mentioning that not all corporations will be subject to it, and many will not have to pay it at all. So, if you hold a HAAD Medical license in Abu Dhabi you have to check if you are subject to or exempted.
In some jurisdictions, the Corporate Tax could be referred to as the Corporate Income Tax, or the Business Profits Tax. It can cause businesses to start considering taxable profits in the UAE.
In terms of its effective date, businesses that have a fiscal year starting on 1st June 2023, will be subject to CT from that date. And those companies that adopt a calendar year, will be subject to the CT from 1st January 2024.
1.1 See the objectives of the introduction of the Corporate Tax
Historically, the UAE is known for being a low-tax jurisdiction. Thus, that has been something that attracts foreign investors and corporations.
However, the country is trying to diversify its economy and start to rely less on fossil fuels. Therefore, this caused many companies in the country not to pay any tax at all.
So, the objectives of the CT are to enforce the UAE’s economy, accelerate its development, and meet international tax standards.
2. Who has to pay and who is exempt from the Corporate Tax?
Learning about tax regulations can be overwhelming. For this reason, it is important to understand all the terms involved in the matter.
First of all, the CT applies only to “Taxable Persons”, which are the following:
- Businesses holding a commercial license in the UAE conducting business activities
- UAE Companies
- Natural Persons who conduct business activities
- Foreign entities and individuals if they conduct business in the UAE in a regular manner
- Free Zone Companies that participate in trading activities on the Mainland
- Free Zone Person that does not comply with the requirements to be considered a Qualifying Free Zone Person
The exemptions from the Corporate Tax are the following:
- Government entities
- Businesses that participate in the extraction of natural resources
- Dividends and capital gains earned by a UAE company from its qualifying shareholdings
- Intra-group transactions qualify as long as they met the conditions
- Profits from group reorganization provided they fulfil the necessary conditions
- Individual earnings salary and employment income
- Interests earned by an individual from saving schemes or bank deposits
- Charities, public benefit organizations, and investment funds
2.1 Learning the classification of a Taxable Person
As we mentioned before, the Taxable Person is subject to this new UAE federal tax, but they are further classified into two categories, and they will be taxed as per the following:
- Resident Person: income derived from foreign and domestic sources
- Non-Resident Person: income derived from domestic sources
2.2 Tax Groups provisions in the UAE
Two or more Taxable Persons can apply to form a Tax Group, as long as they meet the conditions established in the law. For example, a parent company can form a Tax Group with its subsidiaries, but they have to comply with the following:
- Resident juridical persons
- Have the same financial year
- Prepare financial statements using the same accounting standards
Additionally, the parent company must own a minimum of 95% of the share capital of its subsidiary. Also, must hold at least 95% of the voting rights in said subsidiary and be entitled to at least 95% of the net assets and profits made by the subsidiary.
The benefit of registering as a Tax Group is filing the VAT return since it has to submit only one periodically. It is worth noting that this is different from the VAT refund for tourists and visitors in the UAE.
3. Learn about the corporate tax rate
According to the Corporate Tax Law, the rates are classified into a tier system, as the following:
- Taxable income not exceeding AED 375,000: zero (0%) percent tax rate
- Taxable income exceeding AED 375,000: nine (9%) percent tax rate
- Large multinationals that meet the criteria under the scope of Pillar 2 of the BEPS 2.0 framework: different rates as per the OECD Base Erosion and Profit Shifting Project.
4. Understanding the Corporate Tax on Free Zones
When it comes to the UAE corporate tax free zone, there is still not much information about how it will apply to businesses in this jurisdiction.
The UAE Government has to honour the tax incentives established by the regulatory standards and incentives offered to the company by the Free Zone where it is incorporated. However, it is possible that some Free Zones may change rules and may introduce the tax.
As per the conditions established currently, corporations registered in a Free Zone that do not conduct business with Mainland, should be subject to 0% Tax.
When it comes to the Free Zone Person that is a Qualifying Free Zone Peron, it can get the Corporate Tax rate of 0% as a benefit.
To be a Qualifying Free Zone Person, the Free Zone Person must comply with the following:
- Meet the Transfer pricing requirements established in the Corporate Tax Law.
- Have adequate substance in the UAE.
- Derive “qualifying income.”
- Must not make an election to be subject to Corporate Tax.
If you want to find out more information about the UAE Corporate Tax, you can visit our blog. We have useful resources about businesses such as business opportunities in the CIS or deferred tax liabilities.