UAE Corporate tax: Understanding who is Taxable, Exempt and Qualifying Free Zone Person

In January 2022, the United Arab Emirates (UAE) announced its intention to establish a new Corporate Tax (CT) regime. This was followed in December by the issue of Federal Decree-Law No. 47 (the Corporate Tax Law), which outlined the legislative basis for the introduction and subsequent implementation of a Federal Corporate Tax in the UAE.

The new regime comes into effect on 1 June 2023, and 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. The CT regime applies to all businesses and commercial activities in the UAE, excluding the extraction and non-extraction of natural resources, which will continue to be subject to Emirate-level corporation tax.

Tax adjusted taxable income for businesses under the new CT regime will be the accounting net profit, after adjustments for certain items, including the election of unrealised gains/losses, entertainment, interest, donations, among others. The tax rate for UAE businesses will be 9% - and will be calculated on the taxable profits, not the gross revenue of the business. Profits up to the sum of AED375,000 (approximately US$100,000) will not be taxed, in a bid to support small enterprises.

Categorisations: Taxable, Exempt or Qualifying Free Zone Person?

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.

Here, we take a look at each of these three categories and how they are affected by the introduction of the new CT regime:

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 Person shall be treated as one and the same taxable person.

Exempt Person

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.

Qualifying free zone person (QFZP)

A QFZP should meet the following conditions to benefit from the 0% CT 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).

Qualifying Free Zone Persons that meet conditions 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.

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 draws ever closer and not all details of the regime have yet been disclosed.

If you are struggling with your preparations, help is at hand: TMF Group’s local experts are already able to provide you with a solid understanding of what to expect from the introduction of the CT regime and what it will mean for the operation and administration of your business in the UAE.

We can assist with the preparation of a report to aid in assessing how your business or activities in the UAE are categorised, and help you with any necessary registrations or applications.

If you need support, talk to us.