Corporate tax law in the UAE is a newly enacted set of legislation that sets a framework for companies to follow when operating in the country.
If you’re a veteran of the UAE corporate world, you may have already done your research and set yourself up for what’s to come, either by being resolved to undertake the filing process yourself or enlisting the services of tax auditors in the UAE.
However, if you’re still grappling with the intricacies of the UAE corporate tax law and want to learn what its implementation will mean for you and your business, this Q&A guide should help.
What is corporate tax?
Corporate tax is a direct type of tax that companies and similar organizations have to pay. It’s levied against the net income or profits they make from their business activities.
In other jurisdictions, corporate tax might also be known as “business profits tax” or “corporate income tax.”
When did corporate tax become applicable in the UAE?
His Highness Sheikh Mohamed bin Zayed Al Nahyan, President of the United Arab Emirates, instituted Federal Decree-Law No. 47 of 2022, also known as the “Corporate Tax Law,” on October 3, 2022.
It establishes the legal framework for the initiation and application of the federal corporate tax in the UAE, and it comes into effect for the fiscal years that start on or after June 1, 2023.
What is the purpose of corporate tax in the UAE?
The implementation of corporate tax in the UAE was intended to accomplish three main objectives:
- Solidify the UAE’s position as a leading international center for business and investment.
- Speed up its growth and transformation to reach its strategic goals.
- Reassert its promise to uphold global tax transparency standards and prevent harmful tax practices.
Who will be affected by corporate tax in the UAE?
According to the UAE Federal Tax Authority, corporate tax will apply to the following “taxable persons”:
- All companies and persons engaged in business activities with a UAE commercial license
- Foreign organizations and individuals, but only if they regularly conduct trade or business within the UAE
- Banking operations
- Enterprises involved in construction, real estate management, development, brokerage and agency activities
Businesses within free zones are also subject to corporate tax as “taxable persons” and must follow the rules outlined in the corporate tax law.
However, if a free zone entity meets the criteria to be classified as a qualifying free zone person, they can enjoy a 0% corporate tax rate on their qualifying earnings.
What is the rate of corporate tax in the UAE?
The UAE Ministry of Finance has set out a standard corporate tax rate of 9% on taxable income of more than AED 375,000. But if your business revenue is on the lower end of this threshold, then 0% corporate tax is applied.
Additionally, companies that meet the criteria for Qualifying Free Zone Person mentioned earlier can also expect 0% corporate tax. The conditions for receiving this benefit are that you:
- Sustain sufficient business presence in the UAE.
- Generate qualifying income.
- Not have chosen to be taxed at the standard corporate tax rate.
- Meet the transfer pricing conditions specified in the corporate tax law.
Which companies are exempt from paying corporate tax?
There are some businesses and types of income that are exempt from corporate tax in the UAE. These include:
- Companies involved in natural resource extraction are not subject to corporate tax as they will continue to be taxed at the current emirate level.
- Private or public pension and social security funds so long as they’re approved by the Federal Tax Authority.
- Dividends and capital gains made by a UAE business from its eligible shareholdings.
- Eligible transactions within the same group and reorganizations, as long as they meet the required conditions.
What types of business expenses are deductible?
In essence, all expenses incurred by a business solely for generating taxable income will be permitted as deductions. However, what constitutes a deductible expense under the UAE Ministry of Finance’s corporate tax law may sometimes differ from traditional accounting standards.
In these scenarios, these expenses must be added back to the income statements to calculate the total taxable income accurately. These are some of the common expenses that may only earn partial deductions:
- Client entertainment expenses. (50% of amount)
- Interest expenditure (up to 30% of the amount of earnings before the deduction of depreciation, amortization and interest tax)
What is the process for filing corporate tax?
All taxable persons must register for corporate tax and receive a corporate tax registration number. These taxable persons should submit a corporate tax return for each tax period within nine months after that period ends.
For instance, if your business’s financial year starts on June 1, 2023, and ends on May 31, 2024, you must submit your tax return no later than February 2025.
Are there any penalties for non-compliance?
The penalty type and amount of money that non-compliant taxable persons will pay may vary, depending on the severity of their violation — all under The UAE’s Ministry of Finance’s Cabinet Decision No. 75 of 2023.
For example, if a person running a business or having a tax duty under the tax procedures law or the corporate tax law doesn’t keep the necessary records and information, they’ll be subject to the following penalties:
- AED 10,000 for each violation
- AED 20,000 for each repeated violation within 24 months from the last offense
This is just one example of the numerous penalties that are enforced in the UAE for non-compliance with corporate tax laws.
What’s next for your business?
Remaining compliant with UAE corporate tax law is vital for any business that wants to stay in good standing. So, whether you plan on outsourcing the responsibility to an expert or taking an in-house approach, you need to make sure that you’re up to date on the latest corporate tax regulations.
Visit the Ministry of Finance and Federal Tax Authority websites for more details and instructions on the UAE corporate tax system.
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