Checklist The United Arab Emirates (UAE) has long been known as a global business hub, offering favorable tax conditions, world-class infrastructure, and a thriving economy. One of the key advantages for businesses in the UAE has traditionally been the absence of corporate tax in most sectors. However, this dynamic is changing, with the UAE corporate tax law undergoing significant reforms.

In this blog, we’ll explore the UAE corporate tax system, the key features of the new tax regime, and what businesses need to know to stay compliant while taking full advantage of the UAE’s tax incentives.

What is UAE Corporate Tax?

Corporate tax is a tax levied on the profits of companies operating in a given country. In the UAE, corporate tax has historically been non-existent in most sectors, which has made the country an attractive destination for both local and international businesses. However, in 2022, the UAE announced its plans to introduce a federal corporate tax on business profits, marking a significant shift in its tax policy.

The UAE Corporate Tax Law, which came into effect on June 1, 2023, applies to businesses that meet specific criteria. The new tax system aligns with international tax standards and is designed to create a more sustainable revenue stream for the country, while still keeping the UAE competitive in the global business landscape.

Key Features of the UAE Corporate Tax Law

1. Tax Rate of 9%

One of the most notable aspects of the UAE Corporate Tax Law is the 9% tax rate on taxable income exceeding AED 375,000 (approximately $102,000). This rate places the UAE in line with many global jurisdictions that have introduced corporate tax systems to help fund their public services while remaining business-friendly.

• Income up to AED 375,000: The UAE will not charge corporate tax on businesses whose profits are below AED 375,000. This exemption encourages small and medium-sized enterprises (SMEs) and startups, providing them with an extended runway to grow without the pressure of corporate taxes.
• Income above AED 375,000: Any taxable income exceeding AED 375,000 will be taxed at a flat 9% rate. This tax is relatively low compared to other global business hubs, making the UAE still an attractive destination for businesses seeking to minimize tax liabilities.

1. Exemption for Qualifying Free Zone Entities

The UAE has a range of free zones that offer various incentives to attract businesses. Under the new corporate tax regime, free zone entities can continue to enjoy corporate tax exemptions if they meet specific requirements, such as:

• Active Business Operations: Companies must conduct genuine business activity within the free zone.
• No Business with the Mainland: To qualify for exemptions, companies should not derive income from business activities outside the free zone.

If these conditions are met, free zone companies can still benefit from a zero percent tax rate on qualifying income. However, if a free zone business generates income from the mainland UAE, it may be subject to the standard 9% tax rate.

1. Global Minimum Tax and International Agreements

The UAE is a member of the OECD (Organization for Economic Cooperation and Development) and is committed to international tax transparency. As part of its compliance with global tax rules, the UAE has implemented a global minimum tax rate to align with the OECD’s Base Erosion and Profit Shifting (BEPS) framework.

The BEPS initiative aims to ensure that multinational companies pay a minimum level of tax on profits in jurisdictions where they operate. The UAE has agreed to adopt this framework and will adhere to the 15% minimum tax rate set by the OECD for large multinational groups.

1. No Tax on Capital Gains and Dividends

Another benefit of the UAE’s corporate tax regime is the exemption from tax on capital gains and dividends. This is a key feature for investors, particularly those who invest in UAE-based businesses or engage in mergers and acquisitions. Capital gains, including profits from the sale of shares in companies, and dividends received by UAE businesses are not subject to corporate tax.

This makes the UAE a particularly attractive destination for foreign direct investment (FDI) and for businesses looking to grow through acquisitions or expand their shareholder base.

1. Tax Grouping and Transfer Pricing Rules

To simplify tax administration and improve business efficiency, the UAE allows companies to form tax groups. This means that businesses with related entities or subsidiaries can file a single consolidated tax return, which could lead to tax efficiencies, particularly for large multinational companies with operations in the UAE.

Furthermore, the UAE has introduced transfer pricing rules to ensure that transactions between related entities, such as subsidiaries and parent companies, are conducted at arm’s length prices — prices that would be agreed upon between unrelated parties. This aligns the UAE tax system with international best practices and minimizes the risk of profit shifting to low-tax jurisdictions.

1. Compliance and Reporting Requirements

Businesses that are subject to the new corporate tax laws will need to adhere to specific compliance and reporting requirements. These include:

• Annual Tax Returns: Companies must file an annual tax return to report their income, tax deductions, and liabilities. The UAE’s tax authority, Federal Tax Authority (FTA), will oversee the implementation and enforcement of the corporate tax laws.
• Audited Financial Statements: Large businesses and those with significant operations may be required to submit audited financial statements along with their tax returns to ensure compliance and accurate reporting.

The government has also developed an online portal through which businesses can file tax returns, make payments, and manage other tax-related obligations.

Who Will Be Affected by UAE Corporate Tax?

The UAE corporate tax applies to all businesses operating in the country, including:

• UAE Mainland Companies: Any business that operates in the mainland, including both UAE-owned companies and foreign-owned companies, is subject to the corporate tax regime.
• Free Zone Companies: As mentioned earlier, free zone companies may still benefit from tax exemptions if they meet specific conditions.
• Multinational Corporations: Multinational companies operating in the UAE will be required to comply with the corporate tax rules and may be subject to additional reporting requirements for their international operations.
• Individuals Operating as Sole Proprietors: Self-employed individuals and sole proprietors who are generating business income may also be subject to the corporate tax, depending on the structure of their business.

It’s important for businesses to review their operations and income sources to ensure they are compliant with the new tax rules and to optimize their tax position.

How Can Businesses Prepare for Corporate Tax in the UAE?

As businesses adapt to the new corporate tax laws, they should take proactive steps to ensure smooth compliance and efficient tax management. Here are some recommendations:

1. Consult with a Tax Advisor: Work with a tax professional or accountant who is familiar with UAE corporate tax laws to ensure your business is compliant with all regulations and to optimize your tax strategy.
2. Review Your Business Structure: Analyze your business structure and determine whether registering in a free zone or setting up a mainland entity is more advantageous for your tax planning.
3. Keep Detailed Financial Records: Ensure your financial records are accurate and up-to-date. This will make it easier to file tax returns, meet reporting requirements, and avoid penalties.
4. Explore Tax Incentives: Investigate potential tax exemptions, credits, or incentives that your business may qualify for under the UAE’s corporate tax regime.

Conclusion

The introduction of corporate tax in the UAE represents a significant shift in the country’s business environment. While the 9% tax rate is competitive, businesses must now navigate the new regulations to ensure compliance. By embracing proper tax planning, utilizing available exemptions, and staying informed about changes in the tax landscape, businesses can continue to thrive in the UAE’s dynamic market.

The UAE remains one of the most business-friendly environments globally, and the corporate tax system is designed to be simple, efficient, and attractive to both local and international businesses. By staying ahead of the curve, businesses can leverage the advantages of the UAE’s tax regime to support their growth and success.