Understanding Corporate Tax in the UAE

Planning to set up a company in the UAE? Or do you already have a company in the country? In either case, you would benefit by understanding UAE’s new corporate tax regime. Corporate Tax (CT) was introduced to establish the country’s commitment to global standards of transparent tax practices. Now, businesses have to pay this tax in the UAE besides the existing VAT, excise tax, and service fees. This blog looks at the recent CT law in the UAE, changes in the tax landscape, and Commenda’s simple, one-stop platform to handle all your tax obligations.

How Do I Register for Corporate Tax in the UAE?

You can register for corporate tax in the UAE under the new regime with 3 simple steps.

Steps to Register for Corporate Tax

1. Register on the Emaratax portal with your email ID and phone number.
2. Choose the class of taxable persons you belong to and submit the required documents. The documents to be submitted are as follows:
   1. Natural persons: Trade license, Emirates ID/ passport
   2. Juridical persons: Trade license, Emirates ID/ passport, proof of authorization
3. Select option ‘Register for Corporate Tax’. You need not pay any fees for registration.

This process should take approximately 30 minutes. The Federal Tax Authority reviews and accepts the application within 20 business days.

The UAE corporate tax regime, which came into effect on June 1, 2023, applies to the fiscal year starting on that date and to all subsequent years.

• For businesses with a July–June fiscal year, tax will be applied from the fiscal year starting from July 1, 2023.
• For businesses with a January–December fiscal year, tax will be applied from the fiscal year starting from January 1, 2024.

Scope of the CT

UAE corporate tax applies to both residents and non-residents.

Residents

• Corporations incorporated in the UAE.
• Corporations effectively managed and controlled in the UAE, even if not incorporated there.
• Natural persons engaged in business activities through sole proprietorship in the UAE.

A cabinet decision on CT applicable for natural persons will be issued in due course.

Non-Residents

• Corporations not incorporated in the UAE and not effectively managed and controlled there.
• Natural persons not engaged in taxable business activities in the UAE.

Non-residents are liable to pay corporate tax on the income derived from a permanent establishment in the UAE or generated within the country.

Rates

A tier-system for corporate tax with different rates based on taxable income is introduced.

• 0% for taxable income up to $102,097 (375,000 AED)
• 9% for taxable income above $102,097 (375,000 AED)

(Note: Conversions are based on the at press time exchange rate: 1 AED = $0.27)

The Ministry of Finance is yet to specify a different tax rate for large MNCs under the OECD Base Erosion and Profit Shifting Project.

Exempt Income

The income sources exempt from corporate tax are:

• Individual’s salary and other employment income
• Interest and other income earned by individuals
• Income earned from dividends, capital gains, royalties, and other investment by a foreign investor
• Investment in real estate at personal capacity

Free Trade Zones

There is a free zone-specific corporate tax regime applicable to juridical persons incorporated in the UAE free zones.

Qualifying Income

Income earned from qualifying activities exclusively performed in a free zone, like manufacturing, processing goods, etc, are subject to a 0% tax rate.

Income from Excluded Activities

Non-qualifying income is the income from transactions involving intangible assets, immovable property, and financial services. They do not qualify for a 0% tax rate.

• If the non-qualifying income does not exceed 5% of total revenue or AED 5 million (whichever is lower), a 0% tax rate is applicable.
• If this income exceeds the threshold, it is subject to the regular UAE corporate tax rate of 9% for at least 5 years.

Transfer Pricing Rules

The transfer pricing rules under the new tax regime requires:

• Arm’s length transactions between related parties, as though they are independent parties. Transaction value can be calculated using comparable uncontrolled price, resale price, cost-plus, transactional net margin, or transactional profit split methods.
• Market value as reference for all transactions between related parties or connected persons.

All UAE businesses must comply with the transfer pricing rules for transactions between related parties or connected persons, both domestic and cross border. Transfer pricing  involves valuation of transactions and maintaining detailed documentation. 

Commenda has experienced professionals to assist you with transfer pricing, and we are just a call away.

Losses

A tax loss arises when taxable income falls short of the deductions made by the business. 

Offset Against Future Taxable Income

Tax losses can be carried forward to future periods, where they can be offset against taxable income (up to 75%) in future periods.

Accommodates Change in Ownership

Tax losses can be carried forward when there is a change in ownership. That is, when:

• The same individuals own at least 50% of the entity with losses, or
• There is no major change in business activities with a more than 50% change in ownership.

Tax Losses for Group Companies

Tax losses from a UAE company can be offset against taxable income of another UAE group company when there is at least 75% common ownership. However, tax loss transfers from exempt or 0% corporate tax-free zone companies are not allowed.

Tax Groups

The Federal Tax Authority (FTA) in the UAE introduced a provision to form tax groups, to aid in tax consolidation within the group, reduce administrative costs, and simplify the tax filing process.

A parent company and its subsidiary can apply to the FTA for forming a tax group. They become a single taxable person under the corporate tax law and their tax liability will be jointly determined post-FTA approval. Tax losses within group companies can be offset to determine tax liability and no individual company has to file for corporate tax.

Foreign Tax Credits

Foreign tax credits under the UAE corporate tax regime are offered to taxable persons to avoid double taxation on income from foreign sources.

These credits are available when:

• Foreign tax imposed is payable to government,
• Payment of foreign tax is mandatory and legally enforceable in the foreign jurisdiction, and
• Foreign tax is levied on net income.

Foreign tax credits are limited to the tax rate levied on the income by the foreign country.

Initial observations

The introduction of the new corporate tax regime changes the business landscape in the UAE. 

Shift towards Free Zones

The corporate tax rate in the UAE is still one of the lowest in the world, only after Turkmenistan and Barbados. This makes the UAE an attractive choice for new businesses. Additionally, the 0% tax rate in UAE free zones can attract business from the mainland. 

How can Commenda help?

If you choose to set up your business in the UAE free zones, Commenda’s incorporation service can help you incorporate online with local expertise, track incorporation progress, and find partners and services to run your new entity.

Increased Compliance Costs for UAE SMEs

The small and medium enterprises contribute to 63.5% of the UAE’s GDP. With the new CT regime, SMEs will now have to manage a wide range of tax obligations: corporate tax, excise duty, and VAT. This increases their administrative costs to track due dates and ensure timely compliance.

How can Commenda help?

If you need any assistance to adopt and comply with the new CT regime, book a free consultation with Commenda today!

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