Introduction to Corporate Tax in the UAE.

The United Arab Emirates (UAE) introduced a federal corporate tax (CT) on business profits starting from June 1, 2023. This marks a significant shift from the UAE’s traditional status as a tax-free business hub. The introduction of corporate tax aligns the UAE with global tax standards, enhances its financial transparency, and helps combat tax evasion. CT will be applied across all the emirates.

Corporate tax is a form of direct tax levied on the net income or profit of corporations and other entities from their business. Corporate tax is governed by Federal Decree-Law No.60 of 2023 (PDF, 187 KB) Amending Certain Provisions of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.

Businesses will become subject to UAE Corporate Tax from the beginning of their first financial year that starts on or after 1 June 2023.

Any company that adopts a fiscal year starting on 1 June 2023 and ending 31 May 2024 will be subject to CT starting 1 June 2023. The first tax return filing is likely to be due towards the end of 2024.

Any company that adopts a calendar year starting 1 January 2023 and ending 31 December 2023 will be subject to CT starting 1 January 2024 and filing is likely to be due towards mid-2025.

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- John V. Doe

Key Features of UAE Corporate Tax

1. Effective Date: June 1, 2023
2. Corporate Tax Rate:
   • 0% – On taxable income up to AED 375,000 (to support small businesses and startups)
   • 9% – On taxable income exceeding AED 375,000
   • a different tax rate– For large multinational corporations meeting the OECD’s Pillar Two criteria (i.e., consolidated global revenue exceeding €750 million)

   Corporate Tax Calculation Example

   Example:

   A mainland business earns AED 1,000,000 in net profit:

   Taxable Income	Tax Rate	Tax Payable
   First AED 375,000	0%	AED 0
   Remaining AED 625,000	9%	AED 56,250
   Total Tax Payable		AED 56,250

3. Scope of Corporate Tax:
   • Applies to all businesses and commercial activities conducted within the UAE, except for:
   • Extraction of natural resources (taxed at the emirate level)
   • Certain qualifying free zone businesses (subject to specific conditions). free zone businesses (The UAE CT regime will continue to honour the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business set up in the UAE’s mainland.)
   • Foreign entities and individuals only if they conduct a trade or business in the UAE in an ongoing or regular manner
   • Banking operations. Foreign Banking sector, which has been operating under the Emirate level Bank tax decree will now be subject to the UAE Federal Tax Law
   • Businesses engaged in real estate management, construction, development, agency and brokerage activities.
4. Exemptions:
   • Government entities and government-controlled companies
   • Businesses engaged in the extraction of natural resources are exempt from CT as these businesses will remain subject to the current Emirate level corporate taxation. Income from oil, gas, and natural resource extraction is taxed at the emirate level instead.
   • Charities and public benefit organizations (if registered)
   • Pension and social security funds
   • Investment funds (meeting regulatory requirements). Funds regulated under UAE law, including Real Estate Investment Trusts (REITs) and qualified investment funds.
   • Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from CT. Additionally, CT will not apply to:
     • an individual earnings salary and other employment income, whether received from the public or the private sector; as long as the income generating activity does not require a commercial license.
     • interest and other income earned by an individual from bank deposits or saving schemes
     • a foreign investor’s income earned from dividends, capital gains, interest, royalties and other investment returns
     • investment in real estate by individuals in their personal capacity
     • dividends, capital gains and other income earned by individuals from owning shares or other securities in their personal capacity.
5. Foreign Tax Credits:
   • Taxes paid in other jurisdictions can be credited against UAE corporate tax liabilities

Why Corporate Tax Was Introduced

• To diversify government revenue beyond oil and natural resources
• To align with global tax policies and avoid harmful tax practices
• To establish a more sustainable and competitive business environment

Impact on Free Zones

• Businesses in designated free zones may continue to benefit from a 0% corporate tax rate if they:
  • Maintain adequate substance in the UAE
  • Derive income from transactions with businesses outside the UAE or within the same free zone
  • Comply with transfer pricing rules and other requirements

Transfer Pricing Rules

• The UAE corporate tax law includes transfer pricing regulations based on the OECD guidelines
• Businesses must maintain proper documentation and disclose related-party transactions.
• Transaction thresholds: Snapshot of the the applicability and reporting requirements for transactions with “related parties” and “connected persons” are as follows:

  Particulars	Thresholds - Aggregate value of transactions	Transactions to be disclosed
  Related Parties	AED 40 million	Exceeding AED 4 million per category Category means transactions pertaining to Goods, Services, Intellectual property, Interest, Assets, Liabilities and Others
  Connected Persons	Payment or benefit to at least one connected person exceeding AED 500,000	Payment or benefit provided

Who Needs to Register for UAE Corporate Tax?

• All businesses, including those in free zones (even if they benefit from a 0% rate), must register for corporate tax.
• Filing of tax returns is mandatory, even for businesses eligible for exemptions

Entities Required to Register:

1. Mainland companies
2. Free zone companies (even if eligible for a 0% tax rate)
3. Foreign companies with a permanent establishment (PE) in the UAE
4. Partnerships and joint ventures conducting business in the UAE
5. Individuals conducting business activity that meets the tax threshold

Corporate Tax Registration Timeline

• Businesses that began operations before June 1, 2023 must register by the deadlines set by the Federal Tax Authority (FTA).
• Newly established businesses must register within three months of incorporation.

Corporate Tax Return Filing Requirements

1. Annual Filing:
   • All taxable businesses must file a corporate tax return once per financial year.
   • Filing is due 9 months after the end of the financial year.
   • Example: If the financial year ends on December 31, 2024, the tax return is due by September 30, 2025.
2. Supporting Documents:
   • Audited financial statements (if applicable)
   • Transfer pricing documentation (if applicable)
   • Disclosure of related-party transactions
3. Payment:
   • The corporate tax liability is due at the time of filing.

Key Takeaways

• Register for corporate tax, even if exempt
• File annual returns within 9 months of the financial year-end.
• Comply with transfer pricing and related-party disclosure rules.
• Free zone businesses can maintain a 0% rate if they meet the conditions.