Starting from June 1, 2023, the federal tax on corporations and business profits will be implemented for financial years. In a bid to accelerate the country’s development and transformation, the UAE announced a nine percent corporate tax on companies with a profit of Dh375,000 and above, making tax registration mandatory. This places the UAE’s corporate tax rate among the lowest in the world.
Corporate tax, also known as corporate income tax or business profit tax, is a direct tax levied on the net income of corporations and other businesses. The tax rate stands at nine percent for taxable income exceeding Dh375,000. This rate is considered low compared to other countries, where corporate tax rates can reach up to 30 percent.
The introduction of corporate tax aims to facilitate the country’s development and transformation. By establishing a competitive corporate tax regime that adheres to international standards, alongside the UAE’s extensive network of double tax treaties, the UAE solidifies its position as a leading jurisdiction for business and investment.
The tax applies to various entities known as “Taxable Persons.” These include UAE companies, juridical persons incorporated or effectively managed and controlled in the UAE, natural persons conducting business activities in the UAE, and non-resident juridical persons with a permanent establishment in the UAE.
Certain entities are exempted from corporate tax based on the Ministry of Finance’s directive. This includes government and government-controlled entities, extractive businesses, non-extractive natural resources businesses, quality public benefit entities, public or private pension and social security funds, qualifying investment funds, wholly-owned and controlled UAE subsidiaries of government-controlled entities, qualifying investment funds, public and private pension or social security funds, businesses undergoing liquidation or termination, and personal income earned from employment, investments, and real estate without licensing requirements. Salary, perks, allowances, bonuses, residential rental income on real estate, and investment income from bonds, shares, and other securities are not taxable. However, certain conditions must be met to qualify for these exemptions. Freelancers’ income up to Dh1 million is also exempted.
Legitimate business expenses incurred solely to derive taxable income are deductible from corporate tax. The timing of these deductions may vary depending on the type of expenses and accounting methods applied. For capital assets, depreciation or amortization deductions are typically recognized over the economic life of the asset or benefit.
Certain types of UAE-sourced income paid to non-residents may be subject to a zero percent withholding tax. This means no withholding tax would be due, and there are no associated registration and filing obligations for UAE businesses or foreign recipients of UAE-sourced income.
Tax groups can be formed by two or more taxable persons who meet specific conditions. In a tax group, these entities are treated as a single taxable person for corporate tax purposes. To form a tax group, the parent company and its subsidiaries must be resident juridical persons with the same financial year and prepare their financial statements using the same accounting standards.
To calculate the taxable income of a tax group, the parent company must prepare consolidated financial accounts that include each subsidiary within the tax group for the relevant tax period. Transactions between the parent company and each group member, as well as transactions between group members, are eliminated to determine the taxable income of the tax group.
All taxable persons, including those in free zones, are required to register for corporate tax and obtain a registration number. Taxable persons must file a tax return for each tax period within nine months from the end of the relevant period. The same deadline generally applies for the payment of any corporate tax due in respect of the tax period for which a return is filed.
