What is Corporate Tax for Business in UAE: Step by Step guide

UAE recently passed a federal decree-law setting the corporation tax rate at 9 percent for businesses with taxable income over AED370,000. The new law took effect for fiscal years beginning on June 1, 2023, as announced in December 2022. The “Corporate Tax Law” is Federal Decree-Law No. 47 of 2022 on Taxation of Corporations and Businesses. Beginning with their first fiscal year that begins on or after 1 June 2023, businesses will be liable to UAE Corporate Tax (“Corporate Tax”).

What is Corporate Tax for Business in UAE

For financial years beginning on or after 1 June 2023, the Corporate Tax Law serves as the legal foundation for the adoption and execution of a Federal Corporate Tax (“Corporate Tax”) in the UAE.

The implementation of Corporate Tax UAE is meant to hasten the UAE’s development and transition while also assisting it in achieving its strategic goals. The UAE will solidify its position as a top jurisdiction for business and investment thanks to the certainty of a competitive corporate tax structure that complies with international standards and its wide network of double tax treaties. 

The UAE Corporate Tax regime draws from best practices globally and incorporates concepts that are widely recognized and accepted due to the UAE’s status as a hub for global commerce and finance. This guarantees that the UAE Corporate Tax regime will be transparent in its ramifications and easy to understand.

What is Corporate Tax?

The net income of corporations and other businesses is subject to corporate tax, a type of direct tax. In certain other jurisdictions, the term “corporate tax” is also used to refer to “corporate income tax” or “business profits tax.” 

Who is subject to Corporate Tax?

According to a Cabinet Decision to be issued in due course, natural persons (individuals) who conduct a Business or Business Activity in the UAE, UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE, and non-resident juridical persons (foreign legal entities) that have a Permanent Establishment in the UAE are all considered “Taxable Persons” for the purposes of the Corporate Tax.

Legal entities established in a UAE Free Zone are also considered “Taxable Persons” for purposes of corporate tax and are therefore subject to the regulations outlined in the corporate tax law. However, a Qualifying Free Zone Person who satisfies the requirements can gain advantages. Withholding Tax (at a rate of 0%) may apply to non-residents who do not have a permanent establishment in the UAE or who receive income from the UAE that is unrelated to their permanent establishment.

A type of corporate tax known as withholding tax is taken out at the source by the payer on behalf of the income recipient. The payment of dividends, interest, royalties, and other types of income across international borders is frequently subject to withholding taxes, which are present in many tax systems.

Who is exempt from Corporate Tax?

Given their significance and contribution to the social fabric and economy of the UAE, several types of companies or organizations are exempt from corporate tax.

These are referred to as Exempt Persons and consist of: Government Entities, Government Controlled Entities that are listed in a Cabinet Decision, Extractive Businesses, and Non-Extractive Natural Resource Businesses may all be exempt from being subject to Corporate Tax in addition to being exempt from any registration, filing, and other compliance requirements imposed by the Corporate Tax Law, unless they engage in activities that are subject to the charge of Corporate Tax.

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How is a Taxable Person subject to Corporate Tax?

The Corporate Tax Law levies income on a residency and source basis, similar to the tax systems in most other nations. The classification of the Taxable Person determines the applicable basis of taxation. Income from both domestic and international sources is taxed on a “Resident Person” basis (i.e. based on residence).

Only income obtained from sources located within the United Arab Emirates will be taxed on a “Non-Resident Person” basis.  For corporate tax purposes, residence is defined by a number of particular elements that are outlined in the Corporate Tax Law rather than by a person’s place of residence or domicile. 

A person will not be a taxable person and thus not be liable for corporate tax if they do not meet the requirements to be either a resident or a non-resident.

Resident Persons, Non-Resident Persons, and Permanent Establishment

Who is resident

For the purposes of corporate tax, all businesses and other juridical entities that are incorporated, otherwise created, or recognized under UAE law are immediately regarded as resident people. This includes legal entities established in the UAE in accordance with applicable Free Zone laws or mainland legislation, as well as legal entities established under a particular statute (such as a special decree). 

When efficiently managed and controlled in the UAE, foreign corporations and other juridical entities may also be recognized as resident people for corporate tax reasons. 

This will be decided based on the particulars of the firm and its operations, with the location of key management and business decisions being a deciding factor. Only insofar as such income is earned from a Business or Business Activity performed by the natural person in the UAE would it be subject to Corporate Tax as a “Resident Person” on revenue from both domestic and foreign sources. A natural person’s other income would not fall under the purview of corporate tax.

Who is a Non-Resident Person?

Non-resident persons are legal individuals who are neither residents nor have a permanent establishment in the UAE, nor do they get income from the state. On Taxable Income attributable to their Permanent Establishment (as is described in Section 8), Non-Resident Persons shall be subject to Corporate Tax. Certain non-residents’ income from the UAE that is not traceable to a permanent establishment there will be subject to 0% withholding tax.

What is a Permanent Establishment? 

A crucial premise of international tax law that is applied in corporation tax systems all over the world is the idea of a permanent establishment. In order to evaluate whether and when a foreign person has established sufficient presence in the UAE to justify the business earnings of that foreign person being subject to Corporate Tax, the Permanent Establishment concept is central to the UAE Corporate Tax Law.

The OECD Model Tax Convention on Income and Capital’s Article 5 definition, as well as the UAE’s stance under the Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, served as the foundation for the definition of Permanent Establishment in the Corporate Tax Law. 

This enables international individuals to determine whether they have a Permanent Establishment in the UAE or not by using the pertinent Commentary of Article 5 of the OECD Model Tax Convention. The terms of any bilateral tax agreements between the UAE and the nation where the non-resident person resides should be taken into account in this assessment.  

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Taxable Income and Tax calculation

What is Corporate Tax imposed on?

A taxable person must pay corporate tax on any taxable income they receive during a tax period.  Corporate Tax would typically be levied once a year, with the Taxable Person determining their own burden through self-assessment.

This indicates that the Taxable Person files a Corporate Tax Return with the Federal Tax Authority in order to calculate and pay the Corporate tax UAE. The accounting income (i.e., net profit or loss before tax) of the Taxable Person as reported in their financial accounts serves as the basis for computing Taxable Income.

To determine their Taxable Income for the applicable Tax Period, the Taxable Person will then need to make a few modifications. For instance, it could be necessary to make adjustments to accounting income for revenue that is exempt from corporate tax and for expenses that are entirely or partially non-deductible for corporate tax reasons. 

What income is exempt?

Additionally, the Corporate Tax Law exempts some forms of revenue from the Corporate Tax. As a result, a Taxable Person will not be charged Corporate Tax on such revenue and cannot deduct any expenses that are connected to it.

Taxable individuals who receive exempt income continue to be liable for paying corporate tax on their taxable income. The fundamental goal of exempting some income from corporate tax is to avoid taxing some forms of income twice.

Particularly, corporate tax will typically not be applied to dividends and capital gains derived from local and overseas shareholdings. In addition, for the purposes of UAE Corporate Tax, a Resident Person may choose, under certain circumstances, to exclude income from a foreign Permanent Establishment.

What expenses are deductible?

The timing of the deduction may vary depending on the type of expense and the chosen accounting system, but in general, any legitimate business expenses made entirely and exclusively for the purpose of generating Taxable Income will be deductible.

For capital assets, expenses are typically recorded through depreciation or amortization deductions throughout the course of the asset’s or benefit’s economic life.  

Dual-purpose expenses, such as those incurred for both personal and company needs, must be allocated, with the appropriate portion being recognized as deductible if it was incurred completely and solely for the taxable person’s business. For corporate tax purposes, some expenses that are deductible under normal accounting principles might not be entirely deductible. 

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What is the Corporate Tax rate?

If your taxable income is more than AED 375,000, corporate tax will be charged at a headline rate of 9%. A 0% corporate tax rate will apply to Taxable Income below this cap.

What is the Withholding Tax rate?

Some types of income from the UAE paid to non-residents may be subject to a 0% withholding tax. Due to the 0% rate, in effect, neither UAE enterprises nor international beneficiaries of income from the UAE would be required to register or file any withholding tax-related documents.  Transactions between UAE residents are exempt from withholding tax. 

When can a Free Zone Person be a Qualifying Free Zone Person?

For “Qualifying Income” only, a Free Zone Person who qualifies for the benefit may receive a special Corporate Tax UAE rate of 0%. The following requirements must be met by a free zone person in order to qualify as one: maintain sufficient substance in the UAE; obtain ‘Qualifying Income’; not have made an election to be subject to Corporate Tax at the regular rates; and comply with the transfer pricing rules under the Corporate Tax Law.

A Qualifying Free Zone Person may be required to comply with extra requirements set forth by the Minister. The standard rates will apply if a Qualifying Free Zone Person fails to comply with any of the requirements or elects to be subject to the regular Corporate Tax regime.

What are Tax Groups, and when can they be formed?

If two or more Taxable Persons meet the requirements (see below), they may apply to form a “Tax Group” and receive the same treatment as one Taxable Person for the purposes of Corporate Tax. 

The main firm and all of its subsidiaries must be resident juridical entities, share the same financial year, and compile their financial statements in accordance with the same accounting rules in order to constitute a Tax Group. 

In order to create a Tax Group, the parent firm must additionally: possess at least 95% of the subsidiary’s share capital, at least 95% of the voting rights within the subsidiary, and at least 95% of the profits and net assets of the subsidiary. Ownership, entitlement, and rights may be held directly or indirectly through subsidiaries, but a tax must be paid.

How to Calculate the Taxable Income of a Tax Group?

The parent firm must prepare consolidated financial accounts for each subsidiary that is a member of the Tax Group for the applicable Tax Period in order to determine the Taxable Income of a Tax Group. For the purpose of figuring out the Taxable Income of the Tax Group, transactions between each group member and the parent firm as well as between the group members would be deleted.  

Registering, filing, and paying Corporate Tax

It will be necessary for all Taxable Persons to register for Corporate Tax and get a Corporate Tax Registration Number, including Free Zone Persons. Some Exempt Persons may also be asked by the Federal Tax Authority to register for Corporate Tax.

For each Tax Period, Taxable Persons must submit a Corporate Tax return within nine months after the conclusion of the applicable period. The payment of any Corporate Tax owed in relation to the Tax Period for which a return is submitted would typically have to be made by the same deadline. The registration, filing, and payment dates applicable to Taxable Persons with a Tax Period (Financial Year) ending on May 31 or December 31 (respectively) are illustrated here. 

How to Prepare for Corporate Tax?

Read the Corporate Tax UAE Law and the supplementary materials on the websites of the Federal Tax Authority and the Ministry of Finance. Determine if your company will be liable to corporate tax and, if so, from what date, using the information at your disposal.

Recognize the requirements for your company under the Corporate Tax Law, such as:

a. Whether and when your company needs to register for Corporate Tax;

b. What is the accounting or tax period for your company;

c. When your company would need to file a Corporate Tax return;

d. What elections or applications your company may or should make for Corporate Tax purposes; and

e. What financial data and records your company will need to keep for Corporate Tax purposes. 

What is Business activity

According to the definitions of “Business” and “Business Activity” in the Corporate Tax Law, it is determined whether a person is a taxable person when their actions result in a UAE CT obligation. Any ongoing or transient economic activity is referred to as a “business” and can be carried out by anyone. It is implied that a business is operated with the goal of making a profit and that the activity is organized and follows some sort of system.

A business or commercial activity, however, does not lose its identity for UAE CT purposes just because it is not profitable. A person is deemed to be a taxable person if their actions result in a UAE CT obligation in accordance with the definitions of “Business” and “Business Activity” in the Corporate Tax Law.

A “business” is any continuing or sporadic economic activity that is conducted by any individual. It is implied that a business is run with the intention of turning a profit and that the operation is planned out and adheres to a set of rules. However, just because a firm or commercial activity isn’t lucrative doesn’t mean it loses its identity for UAE CT purposes. 

Are international companies’ UAE branches subject to UAE CT?

The UAE CT payable on the income of the foreign branch or permanent establishment may be reduced by the corporate tax (or similar tax) paid on the pertinent income in the foreign jurisdiction in cases where no election is made or the foreign branch or permanent establishment’s income is not eligible for an exemption from CT. 

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The information provided herein is for the general information of the user and is provided in good faith. We make no representation or provide warranty of any kind, express or implied, regarding the adequacy, suitability, validity, or completeness of the information. Our advice in regard to UAE corporate tax and value added tax is based on our understanding of the relevant laws and the regulations issued. We cannot be held responsible for new regulations and/or interpretation of existing regulations by the FTA that is not consistent with our advice. Under no circumstance shall we have any liability to any user of this information or to third parties for any loss or damage of any kind incurred as a result of the use or reliance of this information.

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