One of the top places to do business is the United Arab Emirates (UAE) because of its new corporate tax regime. The relaxed tax policies made it a prime place for entrepreneurs, but how the corporate tax system works is important to get maximum advantage of these advantages.
In this article, we’ll discuss everything you need to know about who has to pay corporate tax in UAE, what entities are exempt from the corporate tax, which individuals are not subjected to, and more. Let’s dive in!
What is the Corporate Tax in UAE?
UAE Corporate tax, corporate income tax, or business profits tax is a form of direct tax levied on the net income or profit of corporations operating in the UAE. The Ministry of Finance introduced this tax on 31 January 2022.
The business subject to the UAE’s new corporate tax is implemented on 1 June 2023 or 1 January 2024, depending on the business’s financial year. According to the rules set by the FTA, if you are a business in the UAE and eligible for corporate tax, then you have to pay a percentage of your profit as tax.
UAE standard corporate tax for taxable income over AED 375,000* is 9% for the previous and relevant tax period.
Who is Subject to Corporate Tax in the UAE?
Now, let’s come to the point of who has to pay corporate tax in UAE.
A ‘Taxable Person’ is a person who comes under corporate tax in the UAE. The following are the entities which are subject to corporate tax:
1. UAE Companies and Other Legal Entities:This covers those incorporated or effectively managed and controlled from within the UAE.
2. Individuals Conducting Business Activities: These are the natural persons involved in business or business activities in the UAE.
3. Foreign Entities With a Permanent Establishment:Legal entities that are non-residents of the UAE have a permanent establishment there.
Under UAE Corporate Tax Law, entities in free zones are also ‘Taxable Persons’ and, therefore, obliged to comply with regulations. However, a zero percent corporate tax rate in the UAE is applied to qualifying net income for those who meet the requirements to be a Qualifying Free Zone Person.
Moreover, persons not resident in the UAE who have no permanent establishment or do not have a UAE-sourced income may be subject to a 0% withholding tax. Many tax systems collect this tax at source, meaning the payer collects it on behalf of the income recipient and applies it to cross-border payments, generally dividends, interest, royalties, and other types of income.
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Which Businesses or Incomes are Exempt from Corporate Tax?
If businesses exceed the profit threshold of 375,000 AED*, they must pay corporation tax. However, some types of business or income enjoy tax incentives and are exempt from corporate tax.
- Exempt Persons
Government entities and entities controlled by the government are exempt from corporate tax. The following may also be considered as exempt persons:
- The businesses in UAE extractive
- Natural resource businesses in the UAE that don’t extract.
- Public benefit entities qualifying
- Qualifying investment funds
- Public and private pension or social security funds
- Certain exempt entities wholly owned and controlled UAE subsidiaries
- Small Businesses
Small business relief is available for those businesses with revenues below AED 3 million* for the latest and all previous tax periods. Tax periods that end before or on 31 December 2026 will be eligible for small business relief.
A business must meet the following conditions to be eligible for small business relief:
- It has to be a UAE resident person.
- Such a person should not have a revenue exceeding AED 3 million* in the relevant and previous tax periods.
- It can not be a holding company or a financial institution.
- Qualifying Free Zone Persons
A taxable person meeting the Qualifying Free Zone Person (QFZP) definition can benefit from the 0% corporate tax rate on their qualifying income.
To be eligible, an entity must:
- Control to ensure adequate substance in a free zone in the UAE
- Derive qualifying income
- Take to the letter of the rules in the transfer pricing section (and its application) and the required documentation.
- To prepare audited financial statements by the International Financial Reporting Standards (IFRS)
- Earn income not above the de-minimis threshold of qualifying income
Final Words
If you have owned businesses in the UAE, it is crucial to understand who has to pay corporate tax in UAE. The federal corporate tax applies to UAE and foreign companies that have established a permanent establishment in the UAE and individuals conducting business there. Small businesses and certain free zone entities may qualify for tax exemptions or reduced rates. Moreover, tax benefits are associated with qualifying businesses participating in qualifying activities or meeting certain criteria to be classified as a small business or a free zone.
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FAQs
What is the Corporate Tax Rate in the UAE?
A standard corporate tax rate of 9% applies to taxable income of more than AED 375,000* (approximately USD 102,000). Income below this level is not taxed. If you are classified as a Qualifying Free Zone person, your business in UAE free zones can enjoy a 0% tax rate for the qualifying income.
How is Corporate Tax Calculated in UAE?
The UAE corporate tax rate is based on 9% of the net profits displayed in the company’s financial statements. However, if the taxable net profit exceeds 375,000 AED*, you will not have to pay the 9 % corporate tax. In short, no tax is levied on net earnings up to 3,75,000 AED*.
How do Businesses Register for Corporate Taxes in the UAE?
UAE corporate tax registration requires businesses to prepare transfer pricing reporting (drafted master file and draft local file) according to the Corporate Tax Law, conditioned to certain restrictions stipulated in a Ministerial Decision. The FTA must receive TP paperwork within 30 days of a request. In addition, taxpayers must file a TP disclosure and the Corporate tax return.
