UAE corporate tax: key questions answered

In December 2022, Federal Decree-Law No 47 (the Corporate Tax Law) was issued, outlining the legislative basis for the introduction and subsequent implementation of a federal corporate tax in the UAE.

The new regime marks a first step in aligning with the OECD’s vision for a global minimum tax rate, while positioning the UAE as an attractive location for businesses to expand into or establish headquarters.

Here we answer some key questions about the regime: when it is set to come into force, what the rates will be, who will be subject to the tax, and other important details.

When will the UAE corporate tax regime become effective?

The regime will become effective for financial years starting on or after 1 June 2023.

By way of an example, a business with a financial starting on 1 July 2023 and ending on 30 June 2024 will be subject to the new regime from 1 July 2023, as its financial year commences after 1 June 2023.

In contrast, a business whose financial year aligns with the calendar year will become subject to the corporate tax regime on 1 January 2024.

What will the corporate tax rates be?

The corporate tax rates for taxable income will be as follows:

• 0% for income up to AED375,000
• 9% for income above AED375,000
• A different rate will soon be implemented for large multinationals that meet specific criteria set by the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project. A ‘large’ multinational corporation is defined as one that has consolidated global revenues of more than €750m (c. AED3.15bn).

How do you determine the taxable income that will be subject to UAE corporate tax?

The taxable income subject to UAE corporate tax will be the accounting net profit of a business, as reported in financial statements prepared in accordance with internationally accepted accounting standards, after adjustments for certain items specified under the UAE Corporate Tax Law (unrealised gains/losses, entertainment, interest, donations, and other items specified in the Law).

Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from UAE corporate tax, as will qualifying intra-group transactions and reorganisations that meet certain conditions.

Will any income be exempt from UAE corporate tax?

Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from UAE corporate tax.

Qualifying intra-group transfers will not be subject to UAE corporate tax provided the necessary conditions are met.

Who will be subject to the UAE corporate tax?

UAE corporate tax will apply to UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE. This includes natural persons (individuals) who conduct business or business activities in the UAE, as specified in a Cabinet decision to be issued in due course, and non-resident juridical persons (foreign legal entities) that have a permanent establishment in the UAE

How do you determine whether an individual has a business that will be within the scope of UAE corporate tax?

To determine this, reference will be made to whether they have, or are required to obtain, a business licence or permit to carry out commercial, industrial and/or professional activities in the UAE.

Under the new regime, businesses will be categorised as ‘Taxable’, ‘Exempt’ or ‘Qualifying Free Zone Persons’ (QFZP) and must assess if they fall under these categories and register accordingly. Certain exempt entities must still apply and receive approval.

What is a ‘taxable person’?

A taxable person shall be either a resident or non-resident person:

Resident person:

• A resident person is a juridical person incorporated/established/recognised in the state, including a free zone person, or of a foreign jurisdiction that is effectively managed and controlled in the state
• A natural person who conducts a business or business activity in the state.

Non-resident person:

• A non-resident person that either has a permanent establishment in the state, derives state-sourced income or has a nexus in the state as per Cabinet Decision.

A branch in the state of a resident person shall be treated as one and the same taxable person.

Which business entities be categorised as ‘exempt’ from UAE corporate tax?

Certain exemptions are made automatically, via cabinet decision or upon application, as follows:

Automatically exempt:

• Government entities and government-controlled entities to be specified in a cabinet decision (yet to be published)
• Exempt upon notification to the UAE Ministry of Finance – extractive and non-extractive natural resource businesses
• Exempt, if listed in a cabinet decision (yet to be published) – Qualifying Public Benefit entities.

Exempt, if applied to and approved by the Federal Tax Authority:

• Public or private pension and social security funds
• Qualifying investment funds
• Wholly owned and controlled UAE subsidiaries of exempt persons.

Will a free zone business be subject to UAE corporate tax?

Free zone (FZ) entities will be subject to UAE corporate tax, but will continue to have corporate tax incentives as long as they comply with all applicable regulatory requirements.

What are the tax rates for free zone entities?

Free zone entities that meet conditions to benefit from the free zone corporate tax regime - qualifying free zone persons (QFZPs) – will have to pay tax at the following rates:

• 0% on qualifying income
• 9% on taxable income that does not meet the qualifying income definition.

What are the conditions of qualifying income for QFZPs?

A QFZP should meet the following conditions to benefit from the 0% corporate tax rate:

• Maintain adequate substance in the UAE
• Derives qualifying income (as to be specified in a cabinet decision yet to be made)
• Has not elected to be subject to 9% CT
• Complies with transfer pricing provisions (as applicable).

Will foreign corporate tax paid on UAE taxable income be recognised under the UAE corporate tax regime?

Foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against the UAE corporate tax liability. The UAE corporate tax regime will allow a business to use losses incurred from the effective date of the regime to offset taxable income in subsequent financial periods.

Will transfer pricing rules be applicable to UAE businesses?

UAE will also have transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved. Businesses will be required to apply the internationally recognized ‘arm's length’ principle to transactions and arrangements between related parties and connected persons.

If relevant, businesses will also need to submit a disclosure containing information regarding their transactions with related parties and connected persons and maintain a master and local file (with format and content consistent with the requirements prescribed under OECD BEPS Action 13) where the arm's length value of their related party transactions exceeds a certain threshold in the relevant tax period.

What are the penalties for failing to comply with the corporate tax regime?

The UAE cabinet decision on penalties for late submission of corporate tax information is yet to be published. They are expected to include significant fines and may include the risk of imprisonment for non-compliance.

TMF Group: We make UAE corporate tax simple

Preparing for, and complying with, the new federal corporate tax regime will prove challenging for many businesses with activities in the UAE. June is drawing closer, and you’ll need to be prepared – despite certain details of the regime remaining yet to be disclosed.

At TMF Group, we make UAE corporate tax simple for our clients. Our global presence and experts on the ground in 120 offices across 85 jurisdictions around the world, including Abu Dhabi and Dubai, have the knowledge and experience to help businesses of all sizes navigate and implement the new corporate tax regime.

Our accounting and tax experts in the UAE can support you with:

• auditing in preparation for the for start of the corporate tax regime
• registering your company in the corporate tax portal
• supporting with provision of calculations
• coordinating the filing of returns
• building awareness and regular updates on new developments.

If you need support, talk to us.