What Is Corporate Tax Uae
What is Corporate Tax?
Corporate Tax in the UAE, also referred to as Corporate Income Tax or Business Profits Tax, is a direct tax levied on the net income or profits of businesses and corporations. Introduced by the UAE Ministry of Finance, this tax reform aims to support small and medium enterprises with a nominal tax rate of 9% on corporate profits exceeding AED 375,000. Profits below this threshold are exempt from tax.
Compliance with corporate tax regulations is mandatory for all eligible taxable entities in the UAE. This includes preparing for corporate registration, filing annual tax returns, and maintaining accurate accounting records as required by law. The introduction of Corporate Tax aligns with the UAE’s strategic objectives of promoting growth and transformation. By utilizing its vast network of double tax treaties, the UAE is building a competitive tax framework that adheres to international standards. This move strengthens the UAE’s status as a leading business and investment hub. The UAE Corporate Tax Code incorporates global best practices, ensuring clarity and ease of understanding for businesses.
What is the Corporate Tax Rate in the UAE?
In the UAE, the Corporate Tax rate is set at 9% for taxable income exceeding AED 375,000. Any taxable income below this threshold is subject to a 0% Corporate Tax rate. The application of Corporate Tax is as follows:
| Taxable Person | Applicable Rate |
|---|---|
| Natural persons and juridical persons | 9% for taxable income exceeding AED 375,000 |
| Qualifying Free Zone persons | 0% on qualifying income, 9% on non-qualifying income |
Applicability of Corporate Tax in the UAE
Corporate Tax applies to:
- All businesses and individuals with a commercial license in the UAE.
- Free zone businesses, with continued Corporate Tax incentives for compliant businesses operating in the UAE mainland.
- Foreign entities and individuals conducting regular business activities in the UAE.
- Banking operations.
- Businesses involved in real estate management, construction, development, agency, and brokerage activities.
Who is Subject to UAE Corporate Tax?
The following “Taxable Persons” are subject to Corporate Tax in the UAE:
- UAE corporations and legal entities incorporated or effectively managed and controlled in the UAE.
- Natural persons engaged in business or commercial activities within the UAE.
- Non-resident legal entities with a permanent presence in the UAE.
- Legal entities established in UAE Free Zones are also considered “Taxable Persons.”
What Defines a “Business” or “Business Activity” under Corporate Tax?
Under the UAE Corporate Tax Law, the definitions of “Business” and “Business Activity” are crucial for determining the tax obligations of individuals and entities. These terms help identify those who qualify as Taxable Persons subject to UAE Corporate Tax.
The term “Business” refers to any economic activity undertaken by an individual or entity, whether it is continuous or short-term. Importantly, it reflects an intention to generate profit and requires a structured, organized approach to the activity.
It is also important to note that the classification of a Business or Business Activity for UAE Corporate Tax purposes does not depend on its profitability.
Who Qualifies as a Resident Person for UAE Corporate Tax Purposes?
Under the UAE Corporate Tax Law, Resident Persons include companies incorporated within the UAE, such as Limited Liability Companies, Private Joint Stock Companies, Public Joint Stock Companies, and other juridical entities operating in the UAE. These entities are automatically classified as “Resident” Persons for UAE Corporate Tax purposes due to their incorporation within the country. Additionally, natural persons engaged in business or business activities in the UAE are also considered Resident Persons under UAE Corporate Tax regulations.
Foreign companies can also attain Resident Person status if they are “effectively managed and controlled” from within the UAE. Determining effective management and control involves evaluating factors such as where the company’s board of directors makes significant strategic decisions.
Who is Considered a Non-Resident Person for UAE Corporate Tax Purposes?
A juridical entity is classified as a Non-Resident Person if it is incorporated in a foreign country and its effective management and control occur outside the UAE. Natural persons are designated as Non-Resident Persons for UAE Corporate Tax purposes if they do not engage in taxable business activities within the UAE.
How Are Non-Resident Persons Subject to UAE Corporate Tax?
Non-Resident Persons are only subject to UAE Corporate Tax under specific circumstances, including:
- Income attributed to their Permanent Establishment within the UAE.
- Income related to a nexus in the UAE, as outlined in Cabinet Decision No. 56 of 2023.
- Income derived from sources within the UAE, subject to a 0% Withholding Tax.
How is Taxable Income determined for UAE Corporate Tax?
Taxable Income for a given Tax Period is calculated as the accounting net profit or loss of the Business, with adjustments made for specific items specified in the Corporate Tax Law and relevant implementing decisions. The accounting net profit or loss corresponds to the amount reported in financial statements prepared in accordance with International Financial Reporting Standards (IFRS). Adjustments to the accounting net profit or loss are required for various items, including:
- Unrealized gains and losses (subject to the realization of principal election).
- Exempt Income, such as qualifying dividends and capital gains.
- Gains or losses arising from transfers within a Qualifying Group.
- Gains or losses associated with qualifying business restructuring transactions.
- Non-deductible deductions for Corporate Tax purposes.
- Transactions involving Related Parties and Connected Persons.
- Transfer of Tax Losses within a group, contingent upon meeting relevant conditions.
- Incentives or tax reliefs.
What is a Tax Period under Corporate Tax in the UAE?
Corporate Tax in the UAE is levied on an annual basis, and understanding the concept of the “Tax Period” is essential. The Tax Period refers to the financial year used to prepare financial statements. Typically, it aligns with the Gregorian calendar year, from January 1 to December 31. However, businesses have the flexibility to choose a different 12-month period for their financial statements, in which case the Tax Period will correspond to their selected financial year.
Are Natural Persons Subject to UAE Corporate Tax?
Natural persons are subject to UAE Corporate Tax if they generate an annual turnover exceeding AED 1 million from a “Business” or “Business Activity” within the UAE, as outlined by the Corporate Tax Law and Cabinet Decision No. 49 of 2023.
Are UAE Holding Companies Subject to UAE Corporate Tax?
UAE holding companies are subject to UAE Corporate Tax. However, certain exemptions apply: dividends received from domestic shareholdings may be conditionally exempt, and dividends and capital gains from both domestic and foreign shareholdings can be exempted if they meet the conditions of the Participation Exemption.
What is a Juridical Person under Corporate Tax?
A “juridical person” refers to an entity that is established or officially recognized under the laws and regulations of the UAE or foreign jurisdictions. These entities possess a legal personality distinct from their founders, owners, and directors.
Examples of juridical persons in the UAE include:
- Limited Liability Companies (LLCs)
- Foundations
- Onshore trusts
- Public or private joint stock companies
- Other entities with a separate legal identity as per UAE mainland legislation or Free Zone regulations.
Branches of UAE or foreign juridical entities operating within the UAE are considered extensions of their “parent” or “head office” and are not regarded as separate juridical persons.
Who is Exempt from UAE Corporate Tax?
Certain entities and individuals are automatically exempt from UAE Corporate Tax, while others may apply for exemption. The exemptions include:
Automatically Exempted Persons:
- The UAE Federal and Emirate Governments, including their departments, authorities, and public institutions.
- Companies wholly owned and controlled by a Government Entity engaged in a Mandated Activity.
- Businesses involved in the extraction of UAE Natural Resources or related non-extractive activities subject to Emirate-level taxation (subject to specific conditions).
- Qualifying Public Benefit Entities listed in Cabinet Decision No. 37 of 2023 or any subsequent relevant decisions.
Exempted Upon Application:
- Qualifying Investment Funds that meet prescribed conditions.
- Public or private pension or social security funds that meet conditions outlined in Ministerial Decision No. 115 of 2023.
- UAE juridical entities wholly owned and controlled by certain exempted entities, conducting activities specified in Article 4(h) of the Corporate Tax Law.
Will Small Businesses Receive UAE Corporate Tax Relief?
Small businesses with revenues of AED 3 million or below for the relevant Tax Period and previous Tax Periods can opt for the “Small Business Relief” for Tax Periods ending on or before December 31, 2026. By electing Small Business Relief, the Taxable Person will be treated as having no Taxable Income for the respective Tax Period, enabling them to benefit from simplified compliance obligations. To claim this relief, the election must be made in the Taxable Person’s Corporate Tax Return for the relevant Tax Period.
What is “Small Business Relief” under Corporate Tax in UAE?
Small Business Relief offers certain businesses an exemption from calculating and paying Corporate Tax, as well as from complying with regular Corporate Tax reporting requirements. To qualify, a Taxable Person must meet the following criteria:
- Revenue of AED 3 million or below for the relevant Tax Period ending on or before December 31, 2026, and previous Tax Periods.
If a Taxable Person’s revenue exceeds AED 3 million in any Tax Period, they will no longer be eligible for Small Business Relief for that period and any subsequent periods.
Who Qualifies as a Multinational Enterprise Group?
A Multinational Enterprise Group consists of companies operating across various countries, with a consolidated group revenue exceeding AED 3.15 billion. Members of such groups are not eligible for Small Business Relief under UAE Corporate Tax.
Who is a Free Zone Person?
A Free Zone Person refers to a legal entity incorporated or established under the regulations of a Free Zone. It also includes branches of mainland UAE or foreign legal entities that are registered in a Free Zone. Foreign companies that relocate their place of incorporation to a UAE Free Zone are also considered Free Zone Persons. The Free Zone Corporate Tax regime is specifically applicable to these entities, determining which income can benefit from the regime by classifying income from transactions with other Free Zone Persons as Qualifying Income.
Who is a Qualifying Free Zone Person?
A Qualifying Free Zone Person is a Free Zone entity that meets the criteria of the Free Zone Corporate Tax regime, enabling it to benefit from preferential tax treatment. These criteria include:
- Maintaining sufficient substance within the Free Zone.
- Deriving Qualifying Income.
- Not opting for the regular UAE Corporate Tax regime.
- Adhering to arm’s length pricing principles.
- Keeping audited financial statements.
Failure to meet these conditions results in the loss of Qualifying Free Zone Person status for five Tax Periods.
How Are Qualifying Free Zone Persons Taxed Under the UAE Corporate Tax Regime?
Qualifying Free Zone Persons are subject to a 0% Corporate Tax rate on taxable income generated from Qualifying Activities and transactions with other Free Zone Persons, except for income derived from Excluded Activities. When a Qualifying Free Zone Person operates outside a Free Zone through a Permanent Establishment in mainland UAE or abroad, the profits attributed to that Permanent Establishment will be taxed at the standard 9% Corporate Tax rate.
To prevent double taxation of foreign Permanent Establishment profits, the UAE provides relief through its extensive network of double tax treaties and provisions within the UAE Corporate Tax Law. Certain income from immovable property located in a Free Zone is also subject to the 9% Corporate Tax rate.
Can a Foreign Company Benefit from the Free Zone Corporate Tax Regime?
Yes, a foreign company can register a branch in a Free Zone and benefit from the Free Zone Corporate Tax regime on Qualifying Income generated by that Free Zone branch. The Free Zone Corporate Tax regime does not impose any ownership restrictions or requirements, allowing both wholly and partially foreign-owned Free Zone companies to benefit from this regime.
Are Family Foundations Subject to UAE Corporate Tax?
Family Foundations, along with certain trusts, are independent juridical entities with separate legal personalities and are typically subject to UAE Corporate Tax. However, some types of Family Foundations can elect to be treated as transparent “Unincorporated Partnerships” for tax purposes. This election allows the founder/settlor and the beneficiaries to be treated as the owners of the foundation’s assets, generally exempting the foundation’s income from UAE Corporate Tax.
Other types of trusts, such as those established in the DIFC (Dubai International Financial Centre) or ADGM (Abu Dhabi Global Market), do not have separate legal personalities and are regarded as transparent entities for UAE Corporate Tax purposes.
Are Investment Funds Subject to UAE Corporate Tax?
Investment funds, often structured as limited partnerships or other unincorporated vehicles, are designed to maintain tax neutrality for investors. This structure allows most countries to treat limited partnerships as transparent entities for tax purposes, meaning that investors are taxed as though they directly hold the fund’s underlying assets. In the UAE, investment funds structured as partnerships, unit trusts, or unincorporated vehicles are generally treated as fiscally transparent “Unincorporated Partnerships” for Corporate Tax purposes.
However, investment funds structured as corporate entities, such as Real Estate Investment Trusts (REITs), or partnership funds that elect to be treated as “Taxable Persons” under UAE Corporate Tax, may apply for an exemption from UAE Corporate Tax, provided they meet the specific requirements.
What Standards Must Be Used for Preparing Financial Statements?
For UAE Corporate Tax purposes, financial statements of UAE entities and businesses must comply with International Financial Reporting Standards (IFRS). If a business’s revenue does not exceed AED 50,000,000, it may use IFRS for SMEs as an acceptable alternative. Additionally, businesses with revenue under AED 3,000,000 can opt for the Cash Basis of Accounting.
What Expenses Are Deductible for Calculating Taxable Income?
Generally, business expenses incurred to generate Taxable Income are deductible, subject to specific exceptions and restrictions outlined in the Corporate Tax Law. The timing of deductions depends on the nature of the expenses and the accounting method used. Expenses related to capital assets are typically recognized through depreciation or amortization over the asset’s economic life.
For expenses with dual purposes, such as those incurred for both personal and business reasons, only the portion that is “wholly and exclusively” for business purposes is deductible.
What Are Transfer Pricing Rules?
Transfer pricing rules ensure that transactions between Related Parties are conducted at arm’s length, as though they were between independent entities. This is designed to prevent the manipulation of Taxable Income and maintain fairness in the application of Corporate Tax.
Can Prior-Year Tax Losses Reduce Taxable Income in the UAE Corporate Tax Regime?
Yes, Tax Losses can offset Taxable Income in future periods under specific conditions. Taxable Persons can carry forward Tax Losses and offset them against Taxable Income in future periods, but only up to 75% of the Taxable Income in each of those periods. Unused Tax Losses can be carried forward indefinitely. For example, if a Taxable Person has Taxable Income of AED 100,000 and carries forward Tax Losses of AED 125,000, they can offset AED 75,000 of those losses, reducing Taxable Income to AED 25,000. The remaining losses of AED 50,000 will continue to be available for offset in subsequent periods.
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Frequently Asked Questions
What is Federal Corporate Tax in UAE?
Corporate Tax, also known as Corporate Income Tax or Business Profits Tax, is a direct tax imposed on the net income or profit of corporations and businesses.
Corporate Tax in UAE applies to which Persons?
UAE Corporate Tax applies to legal entities incorporated in the UAE, foreign entities effectively managed and controlled in the UAE, and foreign entities operating through a Permanent Establishment or having a taxable presence in the UAE.
Are Natural Persons Subject to UAE Corporate Tax?
Natural persons are subject to Corporate Tax if they engage in business activities in the UAE, either directly or through an unincorporated partnership or sole proprietorship.
What are the Corporate Tax Rates in UAE?
The UAE Corporate Tax rates are as follows:
| Taxable Person | Applicable Rate |
|---|---|
| Natural persons and juridical persons | 9% for Taxable Income exceeding AED 375,000. |
| Qualifying Free Zone Persons | 0% on Qualifying Income and 9% on non-Qualifying Income. |
Who are Exempted Persons under UAE Corporate Tax?
The following entities are exempt from UAE Corporate Tax:
- UAE Federal and Emirate Governments, along with their departments, authorities, and public institutions.
- Certain government-owned companies conducting mandated activities.
- Businesses involved in the extraction of UAE Natural Resources or related non-extractive activities (subject to Emirate-level taxation).
- Qualifying Public Benefit Entities as listed in relevant decisions.
Who can Apply for Exemption under Corporate Tax in UAE?
Certain entities may apply for exemption from UAE Corporate Tax upon approval, including:
- Qualifying Investment Funds that meet prescribed conditions.
- Public or private pension or social security funds that meet conditions specified in Ministerial Decision No. 115 of 2023.
- UAE juridical entities wholly owned and controlled by exempted entities, engaging in activities specified in Article 4(h) of the Corporate Tax Law.
Who can get Small Businesses Relief under UAE Corporate Tax?
Who should Register for Corporate Tax in UAE?
All Taxable Persons, including Free Zone Persons, are required to register for UAE Corporate Tax and obtain a Corporate Tax Registration Number. This registration ensures that businesses comply with the applicable Corporate Tax laws and regulations. Failure to register may lead to penalties and legal consequences.
What are the Required Documents for Corporate Tax Registration?
The following documents are required for Corporate Tax registration in the UAE:
- Proof of Address: Documentation verifying the physical address of the business.
- Company Details: This includes the company’s legal structure, ownership details, and registration information.
- Audited Financial Statements: These must reflect the accounting period used for financial reporting. Any changes in the accounting period must be disclosed to the tax authority before filing tax returns.
Proper documentation ensures a smooth registration process and compliance with UAE Corporate Tax requirements.