The Ministry of Finance in the United Arab Emirates (UAE) has recently implemented the Corporate Tax, a direct tax levied on the overall earnings of corporations and other enterprises. This new tax policy was introduced on December 9, 2022 and will come into effect for financial years beginning June 1, 2023. In various jurisdictions, the Corporate Tax is also known as the “Business Profits Tax” or the “Corporate Income Tax.”
The UAE’s Corporate Tax will maintain the distinction of having the lowest tax rate worldwide, which will alleviate the compliance burden on businesses operating within the country. This strategic implementation of the Corporate Tax is expected to enhance the UAE’s revenue and ensure its competitive edge in the global business and investment landscape. Furthermore, this measure aims to promote financial discipline in corporate practices, leading to improved record-keeping and accountability.
The decision to introduce the Corporate Tax is driven by the UAE’s commitment to meeting international tax transparency standards while safeguarding the interests of start-ups and small businesses operating within the country. By implementing this tax policy, the UAE aims to strike a balance between global tax obligations and supporting the growth of its domestic enterprises.
Corporate Tax Rates:
- No tax is imposed on the portion of the Taxable Income below AED375,000.
- A tax rate of nine percent applies to the Taxable Income that exceeds AED375,000.
- Large multinationals meeting specific criteria outlined in accordance with Pillar II of the OECD BEPS may be subject to a distinct tax rate (yet to be disclosed). The UAE’s commitment to implementing BEPS 2.0 measures, as highlighted in the Consultation Document, suggests that the tax rate will be determined based on the final rate established by the OECD. Stay informed to learn more about this anticipated tax rate for qualifying multinationals.
Corporate Tax Exemptions:
The following entities and individuals are exempt from corporate tax:
- Government entities.
- Government-controlled entities.
- Individuals engaged in extractive businesses.
- Individuals engaged in non-extractive natural resource businesses.
- Qualifying public benefit entities.
- Qualifying investment funds.
- Public pension or social security funds that are subject to regulatory oversight by the competent state authority.
- Private pension or social security funds that are subject to regulatory oversight by the competent state authority.
- Juridical persons incorporated in the State that are wholly owned and controlled by Exempt Persons, and are involved in the following:
- Undertaking part or all of the activities of the Exempt Person.
- Engaging exclusively in holding assets or investing funds for the benefit of the Exempt Person.
- Only conducting activities that are ancillary to those carried out by the Exempt Person.
- Any other persons as determined by a decision issued by the Cabinet, based on the Minister’s suggestion.
Corporate Taxable Persons:
- UAE companies and other juridical persons that are incorporated or effectively managed and controlled within the UAE.
- Natural persons (individuals) conducting a Business or Business Activity in the UAE, as specified in a forthcoming Cabinet Decision.
- Non-resident juridical persons (foreign legal entities) with a Permanent Establishment in the UAE, as explained in Section 8.
Juridical persons established in a UAE Free Zone are also considered “Taxable Persons” under Corporate Tax and must comply with the requirements outlined in the Corporate Tax Law. However, a Qualifying Free Zone Person meeting specific conditions may benefit from a Corporate Tax rate of 0 percent on their Qualifying Income.
Non-resident persons without a Permanent Establishment in the UAE or earning UAE sourced income unrelated to their Permanent Establishment may be subject to a Withholding Tax, with a rate of 0 percent.
Calculation of Taxable Income:
To determine the Taxable Income of a Tax Group, the parent company must prepare consolidated financial accounts that encompass each subsidiary within the Tax Group for the relevant Tax Period.
Transactions between the parent company and its group members, as well as transactions among group members, are eliminated for the purpose of calculating the Taxable Income of the Tax Group.
Corporate Tax Deadlines:
The Corporate Tax regime provides taxpayers with a generous timeframe of up to 21 months from the commencement of their financial year to prepare and file their tax returns, as well as make their tax payments.
For instance, businesses with a financial year beginning on June 1, 2023, and ending on May 31, 2024, have from June 1, 2024, to February 28, 2025, to file their corporate tax returns and make the corresponding payments.
In the case of a business with its first tax period starting on January 1, 2024, and ending on December 31, 2024, the return and payment would need to be completed between January 1 and September 30, 2025.
