The United Arab Emirates (UAE) Federal Tax Authority (FTA) has enacted a law to implement corporate tax starting from June 1, 2023. This decision aims to promote a sustainable and diversified economy within the UAE. As per the law, taxable individuals or businesses will be subject to a 9% corporate tax rate, applicable from their first fiscal year beginning on or after June 1, 2023.
Significance of Corporate Tax in the UAE
The corporate tax in the UAE, levied on a company’s profits at a rate of 9%, plays a crucial role in the country’s economic landscape. As the UAE serves as a prominent business and commercial hub, it is imperative for businesses to comprehend the corporate tax system.
Corporate tax serves various purposes:
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- It acts as a vital source of revenue for the government, funding public services such as education, healthcare, and infrastructure.
- It ensures a level playing field among businesses by requiring all companies to pay their fair share of taxes, preventing large corporations from gaining an unfair advantage over smaller enterprises.
Eligibility for Corporate Tax Payment in the UAE
Companies with a net taxable profit exceeding 375,000 AED are subject to corporate tax. This includes UAE-based companies, entities managed and controlled within the UAE, and certain free zone entities. To support small businesses and start-ups, companies with a net profit below 375,000 AED will be subject to a 0% corporate tax rate.
Filing Corporate Taxes in the UAE
Eligible businesses in the UAE must first register under the corporate tax (CT) regime, after which they will receive a corporation tax registration number. Registered businesses are required to file their tax returns within nine months after the end of the fiscal year, as stipulated by the law.
Exemptions from Corporate Tax
Although businesses with a profit exceeding 375,000 AED are subject to corporate tax, certain types of income or businesses are exempt. These include:
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- Individuals with income from employment, real estate, share investments, or other personal income unrelated to a trade or enterprise in the UAE.
- Foreign investors who do not conduct business within the UAE.
- Free zone businesses that comply with all regulatory requirements.
- Capital gains and dividends received by UAE businesses from qualifying shareholdings, excluding eligible intragroup transactions and restructurings.
Free Zones and Tax Exemptions
The Corporate Tax Law introduces the concept of a “Qualifying Free Zone Person” (QFZP), which refers to a free zone company or branch that:
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- Maintains adequate substance within the UAE.
- Generates eligible income, as determined by a Ministerial Decision.
- Complies with transfer pricing requirements.
- Fulfills any additional requirements imposed by a ministerial decision.
A QFZP is subject to corporate tax but at a 0% rate. A QFZP can also opt to renounce this preferential treatment and pay the standard corporate tax rate.
Calculating Corporate Tax in the UAE
The corporate tax in the UAE is calculated as 9% of the net profit recorded in a company’s financial accounts. The 9% rate applies only if the taxable net profit exceeds 375,000 AED, meaning net profits up to 375,000 AED are taxed at a 0% rate.
For instance, if a company’s net profit is 575,000 AED, the corporate tax due would be 18,000 AED (575,000 – 375,000 x 9/100).
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