Foundations of Corporate Tax in the UAE

Introduction:

Corporate tax is a direct tax imposed on the net profit of the businesses. Corporate tax was introduced under Federal Decree Law no. 47 of 2022 on Taxation of Corporations and Businesses. The law took effect for tax periods starting on or after 1 June 2023.

Who is Subject to UAE Corporate Tax?

1-UAE Companies (Resident Persons):

These are businesses that are legally formed in UAE and are subject to corporate tax including:

• LLCs

• Sole Proprietorships

• Civil Companies

• Free Zone companies (with special rules explained later)

• Public and Private joint-stock companies

2-Natural Persons/Individuals:

Individuals are subject to corporate tax if they do any business activity in UAE. For example:

• Sole proprietorship

• Freelancers

• Individuals earning business income (not employment income)

3-Non-Resident Persons:

Foreign businesses that have either a permanent establishment (PE) in UAE or UAE sourced income are subject to corporate tax.

a-Non-Residents with PE:

They are taxed only on the income related to PE. e.g. a branch or fixed place of business in UAE.

b-Non-Residents with UAE sourced income:

• Royalties

• Interest

• Dividends

• Income from properties located in UAE

c- Non-residents with nexus in UAE:

Businesses owing immovable property in UAE are subject to corporate tax.

4-Free Zone Persons:

Free zone companies are subject to corporate tax but can enjoy 0% tax on qualifying income if they meet all CT regime conditions i.e. maintaining adequate substance, audited financial statements, dealing with qualifying sources.

5-Exempt Persons (Not subject to corporate tax):

a- Non-resident individuals:

If you’re an individual and not carrying on a business in UAE through permanent establishment, then, corporate tax law does not apply to you. It means regular personal income (employment outside UAE, foreign investment, inheritance and personal savings are out of scope of CT).

b-Entities not conducting business activities in UAE:

An entity that has no business in UAE (merely holding assets or is dormant), and there is no permanent establishment in UAE may not subject to CT.

For example, a foreign company with no UAE operations, no staff, no business activity and no permanent establishment likely falls out of scope of CT.

c- Government-owned public organizations:

Some government bodies, non-profit or charitable organizations are excluded from CT depending on the legislations.

d- Pension and Social Security Funds:

UAE does not subject pension funds or social security teams to corporate tax because they are not commercial enterprises, rather, mechanism for retirement or social benefit.

Policy Objectives of UAE Corporate Tax:

The UAE introduced UAE Corporate Tax to strengthen the economy. Its policy objectives include:

1-Diversify Government Revenue:

Reduce alliance on oil and gas income.

Create a sustainable revenue resource

Align with long-term economic plans (UAE Vision 2030).

UAE Vision 2030 is the plan to reduce dependence on oil, strengthen the private sector, attract foreign investment and position the UAE as a global business and innovation hub by 2030.

Key Pillars of UAE Vision 2030:

a-Economic Diversification:

Reduce reliance on oil revenues

Grown non-oil sectors such as trade and logistics, manufacturing, tourism, financial services, technology and innovation, encourage SMEs and startups

b-Business-Friendly environment:

• Transparent Regulations

• Strong governance and compliance

• Alignment with international standards

• Fair taxation (corporate tax at 9%)

c-Private Sector & Foreign Investment:

• Increase private sector contribution to GDP

• 100% foreign ownership in many sectors

• Economic substance regulations

d-Human Capital Development:

• Skilled workforce

• Education aligned with future jobs

• Knowledge based economy

2-Maintain UAE’s competitive business environment:

• UAE has lower corporate tax rate (9%) compared to other countries.

• High exemption threshold (AED 375,000)

• Continued tax advantages for small businesses, free zone qualifying income and government and public entities

3-Promotes fairness and economic substance:

• UAE corporate tax ensures business pay tax when real economic activity occurs

• Prevents artificial profit shifting

• Treats local and foreign businesses equally

4-Support long term economic sustainability:

• Encourages responsible corporate behavior

• Strengthen investor confidence

• Support infrastructure, healthcare and public services

Business owner completing VAT registration paperwork

Framework of UAE Corporate Tax:

1-Legal basis:

UAE Corporate tax is governed by Federal Decree Law no. 47 of 2022 and supported by Cabinet Decisions, Ministerial Decisions and FTA Guides.

2-Tax Rates Structure:

For taxable income up to AED 375,000, there is 0% tax rate. The tax rate is 9% for the taxable income above AED 375,000. For large multi nationals, the corporate tax rate is 15%.

3-Tax Period:

The tax period is of 12 months and follows the financial year. The first CT period starts on or after 1 June 2023.

Small Business Relief:

SBR is a tax concession that allows UAE resident businesses to be treated as having zero taxable income for corporate tax purpose. This shows:

• No corporate tax liability for the period in which SBR is elected.

• Reduced reporting requirements

• Simpler compliance, especially for smaller businesses adapting to UAE corporate tax.

Transfer Pricing and Related Rules:

It refers to the rules that govern how transactions between related parties and connected persons are priced to ensure profits are not artificially shifted to reduce tax.

It ensures that transactions between related parties are conducted at market value, called the Arm’s Length Principle.

Related parties include entities if they share common ownership (50% or more).For example, parent company and subsidiary, sister companies, branch and head office.

Connected persons include owners of the business, directors ,Key management personnel and related family members.

Arm’s length principle means the transactions between related parties must be priced the same way as transactions between independent parties under similar circumstances.

How we Can Help

Brainstorm Accounting & Bookkeeping is FTA Approved Tax Agency & serving its clients for services related to tax including but not limited to:

• Tax Registrations

• Tax Filings

• Penalty Waiver Applications

• Tax Restructuring & Advisory

• Transfer Pricing

• Tax Residency Certificates

• Tax Accounting & Bookkeeping

• Tax Planning

• VAT Returns Filings

• Corporate Tax Returns Filings

• Tax Agent’s Services

For more details please contact info@bsaccountants.ae