Taxation is a form of mandatory payment or levy collected by the government or those authorized by the government, from taxpayers to cover the costs of public expenditures. UAE, as a means of reducing its dependency on oil backed revenue while continuing to provide world class public services has decided to implement corporate taxes which are applicable since 1-Jun-2023 or 1-Jan-2024 depending on the financial year of the business.
There are two types of taxes which are Direct taxes which are paid directly to the government such as corporate tax and Income tax and Indirect taxes which are collected by businesses from their customers such as Excise tax, Value Added Tax (VAT) and Sales Tax.
Corporate Tax
When does this apply?
According to the UAE Federal Decree-Law No. 47 of 2022 on taxation of corporations and businesses (the “Corporate Tax Law”), businesses will become subject to UAE Corporate Tax from the beginning of their first financial year that starts on or after 1 June 2023.
Who does this Corporate Tax apply to?
UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE; Natural persons (individuals) who conduct a Business or Business Activity in the UAE under a commercial license issued from a licensing agency. Non-resident juridical persons (foreign legal entities) that have a Permanent Establishment in the UAE (which is explained in detail later). Juridical persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons” and will need to comply with the requirements set out in the Corporate Tax Law. However, a Free Zone Person that meets the conditions to be considered a Qualifying Free Zone Person can benefit from a Corporate Tax rate of 0% on their Qualifying Income (explained in detail later). Non-resident persons that do not have a Permanent Establishment in the UAE or that earn UAE sourced income that is not related to their Permanent Establishment may be subject to Withholding Tax (at the rate of 0%). Withholding tax is a form of Corporate Tax collected at source by the payer on behalf of the recipient of the income. Withholding taxes exist in many tax systems and typically apply to the cross-border payment of dividends, interest, royalties and other types of income.Are you exempt from Corporate Tax?
| Exempt (100%) | Government entities Government controlled entities (specified in cabinet decision) |
| Exempt if informed the Ministry of Finance | Extractive business Non-Extractive Natural resource business |
| Exempt if listed in Cabinet decisions | Qualifying public benefit entities |
| Exempt if applied and approved by the FTA | Public or private pension and social security funds |
How is a Taxable Person subject to Corporate Tax?
The Corporate Tax Law taxes income on the basis of both your residence and your income. The basis depends on the classification of the Taxable Person.
- A “Resident Person” is taxed on income derived from both domestic and foreign sources (i.e., a residence basis).
- A “Non-Resident Person” is taxed only on income derived from sources within UAE (i.e., a source basis).
Residence for Corporate Tax purposes is not determined by where a person resides or domiciled but by specific factors set out in the Corporate Tax Law. If a Person does not satisfy the conditions for being either a Resident or a Non-Resident person then they will not be a Taxable Person and will not therefore be subject to Corporate Tax.
What is the Difference between a Resident person and a Non-Resident person?
| Resident Person | Non-Resident Person |
|---|---|
| Companies and other juridical persons that are incorporated or otherwise formed or recognised under the laws of the UAE (includes juridical persons under either mainland legislation or Free Zone regulations) | Juridical persons who are not Resident Persons and have an established Permanent Establishment or derive a State sourced income |
| Foreign companies and other juridical persons may also be treated as Resident Persons where they are effectively managed and controlled* in the UAE. | Non-Resident Persons will be subject to Corporate Tax on Taxable Income that is attributable to their Permanent Establishment |
| Certain UAE sourced income of a Non-Resident Person that is not attributable to a Permanent Establishment in the UAE will be subject to Withholding Tax at the rate of 0% |
What is a Permanent Establishment?
The main purpose of the Permanent Establishment concept in the UAE Corporate Tax Law is to determine if and when a foreign person has established sufficient presence in the UAE to warrant the business profits of that foreign person to be subject to Corporate Tax. A non-resident person would generally be considered to have a Permanent Establishment in the UAE where: It has a fixed or permanent place in the UAE through which the business of the non-resident person, or any part of it, is conducted Where a person has and habitually exercises an authority to conduct a business or business activity in the UAE on behalf of a non-resident person (this means either the person concludes contracts in the name of the non-resident person or the person negotiates contracts that are concluded by the non-resident person without the need for modification by the non-resident person), or The non-resident person has any other form of nexus in the UAE.What is Corporate Tax imposed on?
Corporate Tax is imposed on Taxable Income earned by a Taxable Person in a Tax Period. Corporate Tax would generally be imposed annually, with the Corporate Tax liability calculated by the Taxable Person on a self-assessment basis. This means that the calculation and payment of Corporate Tax is done through the filing of a Corporate Tax Return with the Federal Tax Authority by the Taxable Person. The starting point for calculating Taxable Income is the Taxable Person’s accounting income (i.e. net profit or loss before tax) as per their financial statements. The Taxable Person will then need to make certain adjustments to determine their Taxable Income for the relevant Tax Period. For example, adjustments to accounting income may need to be made for income that is exempt from Corporate Tax and for expenditure that is wholly or partially non-deductible for Corporate Tax purposes.What income are exempt?
The main purpose of certain income being exempt from Corporate Tax is to prevent double taxation on certain types of income. Specifically, dividends and capital gains earned from domestic and foreign shareholdings will generally be exempt from Corporate Tax. Furthermore, a Resident Person can elect, subject to certain conditions, to not take into account income from a foreign Permanent Establishment for UAE Corporate Tax purposes.What expenses are deductible and if so to how much extend can they be deducted?
Technically all legitimate business expenses incurred wholly and exclusively for the purposes of deriving Taxable Income will be deductible, although the timing of the deduction may vary for different types of expenses and the accounting method applied. For capital assets, expenditure would generally be recognised by way of depreciation or amortisation deductions over the economic life of the asset or benefit. Expenditure that has a dual purpose, such as expenses incurred for both personal and business purposes, will need to be apportioned with the relevant portion of the expenditure treated as deductible if incurred wholly and exclusively for the purpose of the taxable person’s business. Certain expenses which are deductible under general accounting rules may not be fully deductible for Corporate Tax purposes. These will need to be added back to the Accounting Income for the purposes of determining the Taxable Income. Examples of expenditure that is or may not be deductible (partially or in full) include:
|
NO DEDUCTION |
| Client entertainment expenditure | Partial deduction of 50% of the amount of the expenditure |
| Interest expenditure | Deduction of net interest expenditure exceeding a certain de minimis threshold up to 30% of the amount of earnings before the deduction of interest, tax, depreciation and amortisation (except for certain activities) |
What is the Corporate Tax Rate and Slab?
Corporate Tax will be levied at a headline rate of 9% on Taxable Income exceeding AED 375,000. Taxable Income below this threshold will be subject to a 0% rate of Corporate Tax. Corporate Tax will be charged on the TAXABLE INCOME as follows: –| Resident Taxable Persons | Rate |
| Taxable income till AED 375,000 | 0% |
| Taxable income > AED375,000 | 9% |
| Qualifying Free zone person | |
| Tax on Qualifying income | 0% |
| Tax on income that are not “Qualifying income”* | 9% |
Does the UAE have any Withholding Taxes?
A 0% withholding tax may apply to certain types of UAE sourced income paid to non-residents. Because of 0% rate, in practice, no withholding tax would be due and there will be no withholding tax related registration and filing obligations for UAE businesses or foreign recipients of UAE sourced income. However, this will not be applicable to Resident persons.When can a Free Zone Person be a Qualifying Free Zone Person?
In order to be considered a Qualifying Free Zone Person, the Free Zone Person must:
- maintain adequate substance in the UAE;
- derive ‘Qualifying Income’;
- not have made an election to be subject to Corporate Tax at the standard rates; and
- comply with the transfer pricing requirements under the Corporate Tax Law.
In addition, the minister of finance could prescribe additional conditions other than the ones mentioned above.
If a Qualifying Free Zone Person fails to meet any of the conditions, or makes an election to be subject to the regular Corporate Tax regime, they will be subject to the standard rates of Corporate Tax from the beginning of the Tax Period where they failed to meet the conditions.
What are Tax Groups, and who can form Tax Groups?
Two or more Taxable Persons who meet below conditions can apply to form a “Tax Group” and be treated as a single Taxable Person for Corporate Tax purposes. To form a Tax Group, both the parent company and its subsidiaries must be resident juridical persons, have the same Financial Year and prepare their financial statements using the same accounting standards. In addition to this the parent company must: –- own at least 95% of the share capital of the subsidiary;
- hold at least 95% of the voting rights in the subsidiary; and
- is entitled to at least 95% of the subsidiary’s profits and net assets.
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