What is Corporate Tax in UAE?

The corporate tax is levied on the taxable income of business establishments registered in the United Arab Emirates. The new taxation policies will come into effect from June 1, 2023, when many businesses operating in the UAE mainland will be subject to taxation based on their annual net profit.

Background of Corporate Tax UAE

Entrepreneurs and investors globally have always considered the UAE as one of the most lucrative places to set up a new business.

Both large companies and startups have favoured the UAE due to the country’s exceptionally stable political environment, strategic location, fabulous business infrastructures and, most importantly, the 0% corporate tax regime.

According to the International Monetary Fund (IMF), the UAE has the fifth-largest economy in the Middle East. The country has historically depended on its revenue from oil and natural resources, but has been gradually becoming less dependent on oil in recent years.

Is Corporate Tax the Same as VAT?

When the UAE government first announced the introduction of corporate tax, many businesses confused it with Value Added Tax (VAT). However, corporate tax and VAT are very different.

VAT is a consumption tax levied on the sale of goods and services. The customer pays it at the time of purchase. On the other hand, corporate tax is levied on businesses’ taxable income.

The companies will have to pay corporate tax on their annual net profits. Businesses collect VAT from customers when selling a product or service and then remit it to the government.

Corporate tax will be paid directly to the government and calculated by considering the net income of the company, not the total revenue or sales volume.

So, now that we know what corporate tax is in the UAE and when it is coming into operation, let’s find out further details about the taxation process.

Who Will Be Subject to Corporate Tax UAE?

According to the UAE Ministry of Finance (MOF), all business entities operating within UAE will be subject to the new tax regime from June 1, 2023, and onwards. The tax calculation of the period of businesses will differ based on how they report their financial year, as follows:

• Businesses that report financial years from July 1 will start tax calculation from July 1, 2023.
• Businesses that report financial years from January 1 will start tax calculation from January 1, 2024.

Apart from a few specific exceptions, all commercial activities that take place within UAE will have to register and file the corporate tax.

Tax Exemptions

The MOF has also announced a few exemptions for certain entities. If your business or institutional venture falls under one of those exemptions, you won’t have to file a tax report and pay the taxes. The exempt entities are:

• Any governmental or public entities that include both federal and regional offices, departments, divisions, and all other public institutions.

• Businesses that deal with the extraction or mining of natural resources in the UAE. As those businesses are already subject to Emirate-level taxation, they won’t have to file the corporate tax report separately.

• Any organisations that work for charitable and social causes. However, such businesses must register as social or charity organisations with the MOF. Those eligible must first apply to relevant authorities to obtain a formal clearance before applying for MOF registration.

• Any public or regulated private entities that deal with social benefit funds like pension or retirement planning.

• Real estate and other regulated investment funds. Similar to charitable organisations, such funds must apply to MOF and the Federal Tax Authority (FTA) to obtain a formal exemption approval.

• Any UAE companies fully owned by the UAE government and listed with a ministry-level decision to receive the tax exemption.

How Much Is the Corporate Tax UAE?

MOF, the regulatory body for the UAE corporate tax, has devised a taxation policy with three taxation tiers, which are:

• Businesses with net yearly profit up to AED 375,000: Subject to a 0% tax rate
• Businesses with net yearly profit above AED 375,000: Subject to a 9% tax rate
• Large multinational companies: Subject to a separate taxation policy Pillar Two’ of the OECD Base Erosion and Profit Shifting project. Companies with total global revenue over EUR 750 million (equivalent to AED 3.15 billion) will belong to this category.

Corporate Tax for Free Zone Businesses

The UAE has established over 60 economic free zones over the past few decades to encourage investors and businesses globally to operate in the country. Thousands of investors have opened their ventures in UAE free zones to benefit from the zero tax, 100% ownership, and liberal profit repatriation policies.

To uphold its commitment to facilitate a business-friendly environment in free zones, the UAE government has made an exception with free zone businesses regarding the corporate tax rate.

According to this exception, the UAE free zones will remain tax-free. To comply with the government policies, the free zone businesses will still have to file a complete and proper taxation report with 0% corporate tax. The free zone businesses will enjoy this 0% corporate tax benefit since they comply with all other governmental policies.

Corporate Tax for Freelancers

According to MOF, the income of individuals is not subject to corporate tax. So, you may wonder whether the authorities will treat freelancers as individuals or business entities.

The corporate tax policy states that any entity that requires a business licence in the UAE will be subject to taxation. There are three main business licence types, which are professional, commercial, and industrial licences.

The UAE and Dubai are attractive destinations for many freelancers, thanks to the easy taxation and availability of many affordable and flexible coworking spaces.

However, to practise as an independent professional or freelancer in the UAE, you will need a professional licence as a freelancer, which will automatically bring you under the tax regime.

So, as a freelancer, if your annual income goes over AED 375,000, you will have to pay the 9% corporate tax for the appropriate income amount.

Tax Exemption and Deductions for Dividends and Capital Gains

In addition to the above-listed exemptions, MOF has also announced that companies may qualify for a tax deduction and exemptions in the following two cases:

• Earnings from dividend payments.
• Capital gains from the selling of shares of a subsidiary company under their ownership.

To qualify for this benefit, the UAE company must own at least a 5% share of the subsidiary company operating abroad. The ownership requirement also varies for a few countries.

For instance, in the case of the UK, the UAE shareholder entity must own at least 10% of the UK company’s ordinary share for ten consecutive months to be eligible for a tax-deductible earning.

Tax Deduction for Companies with Foreign Branches

The UAE government will also allow the foreign company branches located in the UAE to choose one of the following options:

• If companies have a branch of office in another country, they can claim a foreign tax credit for the amount of tax paid in that country.
• Alternatively, the companies may apply for an exemption based on the profit made by their foreign branches outside the UAE.

Deductions on Financing Costs

Businesses can report their financing and interest costs as tax-deductible income. However, there’s a 30% interest expense deduction cap for businesses. The taxation authority has placed this cap to discourage businesses from relying heavily on high-risk debt financing and instead focus more on equity financing.

Without the cap, many companies might attempt to secure a high quantity of debt to avoid taxation, which eventually puts investors and stakeholders in a risky situation.

In addition to the financing costs, businesses can report their losses as future tax-deductible expenses.

The Administration of Corporate Tax UAE

The UAE Ministry of Finance (MOF) has authorised the Federal Tax Authority (FTA) to administer the taxation process and act as a regulatory compliance body. Businesses will have to file their corporate tax once every year, along with their financial report.

Most medium and large businesses in the UAE usually follow the International Financial Reporting Standards, or IFRS. The FTA, however, accepts several other ways to keep the tax filing process simple for businesses and professionals.

How to File a Corporate Tax and Financial Report

FTA, the federal corporate tax authority, requires all companies to register with them for tax filing purposes. Once the registration process comes into effect, businesses can complete the process online. Although the FTA expects all companies to participate in the registration process voluntarily, they may also enforce it.

The registration process is likely similar to how companies apply for their Tax Registration Number (TRN) with FTA. After the completion of a financial year, businesses will get nine months to complete their tax filing and financial reporting.