In the ever-evolving landscape of international business, few destinations have captured the imagination quite like the United Arab Emirates (UAE). With its gleaming skyscrapers, thriving free zones, and strategic location bridging East and West, the UAE has been a magnet for entrepreneurs and corporations alike.
For years, the nation’s reputation as a tax-friendly haven remained steadfast, luring businesses to its shores. However, as we step into 2024, a notable transformation is underway. The UAE has introduced a corporate income tax, signalling a significant shift in its tax regime.
In this comprehensive guide, we’ll delve into the intricacies of business and corporate taxes in the UAE, exploring the implications of these changes and why staying informed about tax regulations is paramount for businesses operating in this dynamic landscape.
BUSINESS TAXATION IN THE UAE
Corporate Tax
What Is Corporate Tax in the UAE?
Corporate Tax in the United Arab Emirates (UAE) represents a form of direct taxation imposed on the net income of corporations and various businesses operating within the country. It can be viewed as a contribution that businesses make to support the economic growth and development of the UAE. The foundation of corporate tax in the UAE lies in the UAE Corporate Tax Law (CT Law), introduced by the Ministry of Finance. This law serves a dual purpose: preventing harmful tax practices and aligning the UAE with international standards of tax transparency. According to the CT Law, businesses are required to pay 9% of their taxable income as corporate tax to the government.
Who Does Corporate Tax Apply To?
Corporate tax in the UAE has a broad reach and applies to various entities and individuals conducting business activities within the country:
- All Businesses and Individuals
Corporate tax applies to all businesses and individuals conducting business activities under a commercial license in the UAE. This includes a wide spectrum of businesses, from small enterprises to large corporations.
- Free Zone Businesses
Free zone businesses are not exempt from corporate tax, especially if they conduct business on the UAE’s mainland or fail to comply with all regulatory requirements.
- Foreign Entities and Individuals
Foreign entities and individuals can be subject to corporate tax if they engage in ongoing or regular trade or business activities within the UAE. This is a significant consideration for international companies operating in the UAE.
- Banking Operations
The financial sector, including banking operations, is within the scope of corporate tax.
- Real Estate Activities
Businesses involved in real estate management, construction, development, agency, and brokerage activities are also subject to corporate tax regulations.
Who Is Exempt from Corporate Tax?
While corporate tax applies to a wide range of entities and individuals, certain exemptions exist in the UAE’s tax framework. Entities and individuals that are exempt from corporate tax (CT) include:
- Businesses that are engaged in the extraction of natural resources remain subject to the current Emirate-level corporate taxation. This ensures that the UAE’s vital natural resource sector continues to contribute to regional economies.
- Dividends and capital gains earned by a UAE business from its qualifying shareholdings are exempt from corporate tax.
- Qualifying intra-group transactions and reorganisations are exempt from corporate tax if they meet the necessary conditions outlined in the tax regulations.
- Individuals earning salaries and other employment income, whether from the public or private sector, are not subject to corporate tax.
- Interest and other income earned by individuals from bank deposits or saving schemes are not taxed under the corporate tax framework.
- The income of a foreign investor, earned from dividends, capital gains, interest, royalties, and other investment returns, is exempt from corporate tax.
- Individuals making personal real estate investments in their personal capacity are not subject to corporate tax.
- Dividends, capital gains, and other income earned by individuals from owning shares or securities in their personal capacity are also exempt from corporate tax.
What Are the Corporate Tax Rates?
Corporate tax rates in the UAE are structured to accommodate different income levels.
0% for Taxable Income up to AED 375,000
Businesses with annual taxable income below AED 375,000 are not liable for corporate tax. This threshold allows smaller enterprises to operate without the burden of corporate tax.
9% for Taxable Income Above AED 375,000
For businesses with annual taxable income exceeding AED 375,000, a corporate tax rate of 9% applies. This rate ensures that larger corporations contribute proportionally to the UAE’s revenue.
- VAT (Value Added Tax)
Value Added Tax (VAT) was introduced in the UAE on January 1, 2018, as the country’s first federal-level tax, managed by the Federal Tax Authority. It’s a consumption tax applied at various stages of the supply chain. VAT registration is mandatory for businesses exceeding a specified annual turnover threshold, which currently stands at AED 375,000. Registered entities must report taxable supplies, offset VAT on purchases, and file regular VAT returns to maintain compliance, all while helping to prevent double taxation and manage cash flow effectively.
- Customs Duties and Excise Tax
Customs Duties and Excise Tax play vital roles in the UAE’s taxation system.
Customs duties are levied on imported goods, determined by factors like the nature and value of the products. Businesses involved in international trade must consider these duties in their product pricing and financial planning.
On the other hand, excise tax targets specific goods known to be detrimental to health or the environment, such as tobacco products, sugary beverages, and luxury items. Companies engaged in the production, import, or sale of these goods must strictly adhere to excise tax regulations.
- Other Taxes
Municipal Taxes
Some emirates within the UAE may levy municipal taxes on specific activities or services. These taxes are typically administered at the emirate level and can vary.
Property Taxes
Property owners may be subject to property taxes, depending on the emirate and the nature of the property.
Employment-Related Taxes
While the UAE does not have personal income tax, there may be employment-related taxes and contributions, such as social security or pension contributions.
RECENT CHANGES TO TAX REGULATIONS
In 2023, the United Arab Emirates (UAE) entered a new phase in its economic journey by introducing a corporate income tax. This marks a significant shift from its previous tax-free reputation. Under the UAE Corporate Tax Law introduced by the Ministry of Finance, businesses are now required to contribute a portion of their taxable income to support the country’s economic development.
Compliance Requirements and Reporting Obligations
Businesses operating in the UAE must adhere to various compliance requirements. This includes registering for VAT if their turnover exceeds the specified threshold and maintaining accurate records of taxable supplies. Compliance also extends to customs duties and excise tax for those engaged in international trade or specific industries.
Staying on top of reporting obligations is essential. Registered businesses must file regular VAT returns, reporting their transactions accurately and promptly. Compliance with corporate income tax regulations, including record-keeping and transfer pricing rules, is equally crucial. Understanding the deadlines and requirements for these filings is vital to avoid penalties and legal consequences.
TAX INCENTIVES AND EXEMPTIONS
The United Arab Emirates (UAE) offers several tax incentives and exemptions that businesses can leverage to optimise their tax liabilities and promote economic growth.
- Foreign Tax Credit
One significant provision is the Foreign Tax Credit, which allows a credit for foreign taxes paid on a UAE taxable person’s income. However, the credit is limited to the amount of Corporate Tax (CT) due on the relevant income. It’s important to note that any unused foreign tax credit cannot be carried forward or back and will eventually be forfeited.
- Small Business Relief
The UAE CT Law provides tax relief for small businesses. A tax resident entity can elect to be treated as not having derived any taxable income if its revenue for the relevant and previous tax periods does not exceed AED 3 million during each relevant tax year.
This threshold applies starting from June 1, 2023, but only for subsequent tax periods ending before or on December 31, 2026. However, if the threshold is exceeded, the taxable person will be subject to UAE CT at the applicable rates.
It’s important to note that certain provisions of the CT Law, such as exempt income, deductions, and transfer pricing requirements, will not apply if a tax resident person applies for ‘small business relief.’ The Federal Tax Authority (FTA) may request relevant records or supporting information to verify compliance.
- Transfers within a Qualifying Group
The UAE CT Law provides tax relief on intra-group transfers of assets or liabilities between taxable persons belonging to the same qualifying group. Taxable persons are considered members of the same qualifying group if they meet specific conditions, including being at least 75% commonly owned, having the same financial year, and using the same accounting standards. A clawback period of two years exists from the initial transfer date in case of subsequent transfers outside the permitted group or if the transferor or transferee ceases to be a group member.
- Business Restructuring Relief
Similarly, the UAE CT Law offers tax relief for business restructurings such as mergers, spin-offs, and corporate restructuring transactions. These transactions involve the transfer of all or part of a business in exchange for shares or other ownership interests.
To qualify, the transfer must adhere to UAE regulations, and the involved entities must be resident persons or non-resident persons with a Permanent Establishment (PE) in the UAE. Additionally, they should have the same financial year, use the same accounting standards, and have valid commercial or economic reasons for the transfer. Like intra-group transfers, a clawback period of two years exists for subsequent transfers.
- Free Trade Zones (FTZs)
Companies and branches registered in a Free Zone are considered taxable persons under the UAE CT Law and must fulfil regular compliance obligations, including transfer pricing requirements. However, entities in a Free Zone that meet the criteria to be a Qualifying Free Zone Person (QFZP) can benefit from a 0% UAE CT rate on qualifying income. This means they pay no corporate tax on their qualifying income.
To qualify for the 0% UAE CT rate, a QFZP must meet several conditions, including being a Free Zone person, maintaining adequate substance within a Free Zone, deriving qualifying income, not electing to be subject to the standard UAE CT regime, complying with transfer pricing rules, and meeting certain other criteria set by the Ministry of Finance.
Adequate Substance
To maintain adequate substance, a QFZP must ensure that its core income-generating activities (CIGAs) are conducted within a Free Zone. This requirement is in line with the Economic Substance Regulations (ESR) established by the UAE to ensure that businesses, including those in Free Zones, meet substance-related criteria.
Additionally, it must maintain sufficient assets, a qualified workforce, and incur an appropriate amount of operating expenditures. The QFZP can also choose to outsource its CIGAs to a related party or third party in a Free Zone, provided it maintains supervision over the outsourced activity.
Qualifying Income
Qualifying income for a QFZP includes revenue derived from transactions with other Free Zone persons, except for excluded activities, as well as income from transactions with non-Free Zone persons, but only for qualifying activities that are not excluded. Any other income may also be considered qualifying if the QFZP satisfies certain criteria.
Excluded Activities
Excluded activities encompass transactions with natural persons (with some exceptions), regulated banking and finance activities, ownership or exploitation of intellectual property assets, and ownership or exploitation of immovable property (with exceptions for commercial property transactions within a Free Zone).
Qualifying Activities
Qualifying activities include manufacturing or processing of goods or materials, holding of shares and securities, ownership, management, and operation of ships, regulated reinsurance, fund management, wealth, and investment management, headquarters, treasury, and financing services to related parties, financing and leasing of aircraft, logistics, distribution of goods or materials in or from a Designated Zone, and any activities ancillary to these main qualifying activities.
The activity of distributing goods or materials must take place in or from a Designated Zone, and the goods or materials must be imported through the Designated Zone.
De Minimis Requirements
The de minimis requirements for QFZPs stipulate that non-qualifying revenue should not exceed 5% of total revenue or AED 5 million, whichever is lower. Non-qualifying revenue comprises income derived from excluded activities or activities that are not qualifying, and where the other party is a non-Free Zone person. Certain revenue, such as revenue related to immovable property or domestic or foreign PEs, is excluded from the calculation of non-qualifying revenue and total revenue.
If a Free Zone person fails to meet the qualifying conditions set out in the UAE CT Law and related decisions, they will be treated as a taxable person subject to a 9% CT rate for a minimum of five tax years.
Domestic PE
The UAE CT Law introduces the concept of a Domestic PE when a QFZP has a place of business or other presence outside the Free Zone in the UAE. Income attributable to a domestic PE is calculated as if the establishment were a separate entity
TAX PLANNING AND OPTIMIZATION
Tax optimization involves strategically minimising the tax burden to maximise after-tax income, utilising legal and legitimate methods within the framework of applicable tax laws. It’s important to distinguish tax optimization from tax evasion, which is unlawful and involves fraudulent tactics to avoid paying taxes.
- Choose the Right Company Structure
Optimal tax planning begins with selecting the appropriate legal structure for your business. The UAE offers various options, such as free zones, mainland companies, and offshore entities. Each structure has distinct tax implications, so carefully assess the tax benefits and constraints associated with each choice. Free zones, for instance, often provide 100% foreign ownership, exemptions from corporate and personal taxes, and customs duty advantages.
- Leverage Double Taxation Avoidance Agreements (DTAAs)
The UAE has signed DTAAs with multiple countries to prevent double taxation of income earned in both jurisdictions. Businesses can benefit from reduced tax rates or exemptions on specific income types by utilising these agreements. It’s essential to comprehend the provisions of applicable DTAAs for your business operations and explore the potential for tax optimization.
- Utilise Tax Incentives and Exemptions
To stimulate economic growth and attract foreign investment, the UAE offers various tax incentives and exemptions. Certain industries and sectors enjoy specific tax benefits, such as corporate tax exemptions or reduced rates. Familiarise yourself with the incentives and exemptions relevant to your business activities, and fully use them to lower your tax liability.
- Optimise Transfer Pricing
Transfer pricing pertains to the pricing of goods, services, and intangible assets transferred between related entities within a multinational group. By structuring and documenting transfer pricing policies meticulously, businesses can allocate income and expenses in a way that maximises tax efficiency. Compliance with the UAE’s transfer pricing regulations and maintaining proper documentation are crucial.
- Conduct Research and Development (R&D)
Investing in research and development activities can yield innovation and tax benefits. The UAE offers tax incentives, including deductions or credits for R&D expenditures, to companies engaged in qualifying R&D activities. By actively pursuing R&D initiatives and meeting eligibility criteria, businesses can reduce their taxable income and overall tax liability.
- Take Advantage of Free Trade Zones
The UAE’s free trade zones offer numerous advantages, including tax exemptions, customs duty benefits, and streamlined incorporation processes. Establishing operations in a free zone can result in significant tax savings, especially for companies engaged in international trade, manufacturing, or logistics. Thoroughly research to identify the most suitable free zone for your business and capitalise on available tax benefits.
If you are contemplating establishing a business in a UAE free zone to leverage favourable taxation regulations, we recommend:
- Meydan Free Zone
Situated 15 minutes from Dubai International Airport at the luxurious Meydan Hotel, it’s among the world’s largest Digital Free Zones, offering hassle-free setup, a tax-free environment, and 100% digital secure services accessible from anywhere.
- Dubai Multi Commodities Centre (DMCC)
DMCC is a prime choice for trading, commodities, and jewellery businesses, known for its excellent infrastructure and strategic location. - Sharjah Publishing City (SPC)
SPC supports the publishing, printing, and media industries, providing a conducive environment for businesses in these sectors.
- Sharjah Media City (SHJ Shams)
Tailored for media, creative, and digital businesses, SHJ Shams offers cost-effective licensing options and advanced infrastructure. - Abu Dhabi Global Market (ADGM)
ADGM, located in Abu Dhabi, caters to financial services, legal, and consulting firms with its robust regulatory framework and proximity to government entities. - Fujairah Creative City Free Zone
Positioned strategically for trading, logistics, and manufacturing businesses, Fujairah Free Zone provides access to international markets through its proximity to key waterways.
In Conclusion
The UAE’s corporate tax landscape is evolving, and businesses must adapt. With the introduction of corporate income tax and ongoing changes, staying informed and strategizing for tax optimization is crucial.
Whether you’re considering the UAE for your business or already operating here, stay informed, plan wisely, and thrive in the UAE’s vibrant business landscape.
