A first in its history, the United Arab Emirates (UAE) will start taxing business profits with statutory rates of 0% and 9%. While this development is a notable shift from the UAE’s long-standing reputation as a tax-friendly environment, the rates are on the lower end compared to global standards, reflecting the country’s commitment to maintaining its appeal as a premier business hub.
As eligible companies will need to start registering and filing for corporate tax, this article will offer a clear guide for compliance in the UAE.
What is corporate tax?
Also referred to as corporate income tax or business profits tax, corporate tax is a direct tax levied on the net income of corporations and businesses. By adopting this taxation model, the UAE joins many countries worldwide that already have established corporate tax frameworks.
The UAE issued the Corporate Tax Law on 9 December 2022, which provided the legislative basis for the introduction and implementation of a federal corporate tax effective for financial years starting on or after 1 June 2023.
In a nutshell, unless exempted, taxable income above AED375,000 will incur a 9% statutory tax rate. Income below this threshold will not be taxed.
Who needs to register for UAE corporate tax?
Taxable persons, categorised as residents or non-residents with permanent establishment or nexus in the UAE, will need to first register and get a corporate tax registration number.
Resident persons
Resident persons include entities incorporated in the UAE, whether offshore, in free zones or on the mainland. Foreign entities effectively managed and controlled in the UAE, along with individuals conducting business in the UAE, are also considered resident persons. All are taxed on their worldwide income.
Resident taxpayers are required to register by specific deadlines determined by the month of trade licence issuance. This is irrespective of the year the licence was issued.
As an example, if the issuance date falls in March or April, the company must ensure that its tax registration application is submitted by 30 June 2024. More information is specified below:
For companies holding multiple licences, such as in the case of a group with numerous operations, the registration deadline will be based on the earliest issued licence.
Non-resident persons
Non-resident persons include companies with a permanent establishment in the UAE. Also in this category are those deriving UAE-sourced income not attributable to the permanent establishment or having a nexus in the UAE.
The taxation for non-resident persons will apply solely on the income associated with their UAE permanent establishment or nexus. The deadlines are as follows:
Moving forward, all taxable persons must submit their corporate tax registration application. Failure to do so within the designated deadlines may result in an administrative penalty of AED10,000.
Who is exempted from UAE corporate tax?
There are, however, some that are automatically exempt from corporate tax in the UAE. This includes government entities and government-controlled entities. The following may also be considered as Exempt Persons:
- Extractive businesses in the UAE
- Non-extractive natural resource businesses in the UAE
- Qualifying public benefit entities
- Qualifying investment funds
- Pension or social security funds, both public and private
- Wholly-owned and controlled UAE subsidiaries of certain exempt entities
Small businesses
For those with revenues falling below AED3 million for the latest and all previous tax periods, small business relief is available. Small business relief will be available for tax periods that end before or on 31 December 2026.
A business must meet the following conditions to be eligible for small business relief:
- It must be a resident person in the UAE
- Its revenue for the relevant tax period and previous tax periods must not exceed AED3 million
- It must not be a financial institution or a holding company
If a business meets the criteria for small business relief, it will not have to pay any corporate tax on its profits. It will also be subject to reduced compliance requirements such as simplified transfer pricing rules.
Qualifying Free Zone Persons
Where a taxable person meets the criteria of a Qualifying Free Zone Person (QFZP), they may benefit from the 0% corporate tax rate on their qualifying income. To be eligible, an entity must:
- Maintain adequate substance in the UAE
- Derive qualifying income
- Comply with the transfer pricing rules and documentation requirements
- Prepare audited financial statements in accordance with the International Financial Reporting Standards (IFRS)
- Have non-qualifying income that is not above the de-minimis threshold
Qualifying income includes two main types:
- Income from transactions with free zone persons: Income under this category stems from transactions with other free zone persons, except when generated from excluded activities
- Income from transactions with non-free zone persons (qualifying activities): Income derived from engaging in qualifying activities with entities outside the free zone can also be considered qualifying income, as long as these activities are not excluded activities
The specific activities considered as qualifying activities are as follows:
- Manufacturing and processing of goods or materials
- Holding shares and other securities
- Owning, managing, and operating ships
- Providing reinsurance services, regulated by UAE authorities
- Offering fund management services under UAE regulatory oversight
- Delivering wealth and investment management services, overseen by UAE regulators
- Providing headquarter services to related parties
- Offering treasury and financing services to related parties
- Financing and leasing aircraft such as engines and rotatable components
- Distributing goods or materials from a designated zone to resellers, including those who modify the goods for resale, provided that the distribution occurs in or from a designated free zone
- Providing logistics services
- Engaging in any activities ancillary to the abovementioned, where the ancillary activity supports the main qualifying activity without serving an independent function
On the other hand, the following excluded activities will be subject to the 9% corporate tax rate:
- Transactions with natural persons not related to certain qualifying activities
- Banking, insurance, and finance and leasing activities not included in the specified exemptions
- Ownership or exploitation of non-commercial immovable property outside free zones, or intellectual property assets
- Ancillary activities related to the abovementioned
Entities may contact their Free Zone Authority to verify their eligibility.
Filing of corporate tax
After registration, companies must prepare for their first corporate tax filing, due within nine months after the end of their relevant tax period. Any UAE corporate tax payable must also be settled within this timeframe.
With most companies operating on a fiscal year that ends on 31 December, the initial taxable period will be from 1 January 2024 to 31 December 2024. This sets the filing deadline for the first corporate tax return on 30 September 2025.
Businesses will need to maintain all relevant records and documents for seven years following the end of the tax period to which they relate. This is critical for maintaining compliance with UAE tax regulations and facilitating any future audits.
Stay compliant
To help with the transition to this new regime, Hawksford can obtain the tax registration number, prepare audited financial statements to support the determined taxable income and submit annual corporate tax returns on the company’s behalf. Our team can also conduct thorough tax research tailored to your company's needs, ensuring your corporate tax returns are prepared accurately and submitted on time.
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