On 9 December 2022, Federal Decree-Law No. 47 of 2022 was issued on the Taxation of Corporations and Businesses (the “Corporate Tax Law”). While we expect that other taxes and higher rates will follow in the future, at least for the time being, the UAE will maintain the greater part of its tax-free regime, including a 0% personal income tax, a tax exemption for UAE businesses for capital gains and dividends received from shareholdings, and a 0% tax on capital gains tax on real estate and other investments.
As of 1 June 2023, UAE businesses will be subject to Corporate Tax (the “Corporate Tax”). The Corporate Tax will become effective for business profits exceeding AED 375,000 p.a. (“Income Threshold”) in financial years starting on or after 1 June 2023, or on the 1 January 2024 for businesses with a financial year which corresponds to the calendar year. In order to support small businesses, start-ups and freelancers in the economy, a Small Business Relief initiative has been made available, which upon application would exempt small businesses with a turnover of under AED 3 million from the Corporate Tax. Also, no Corporate Tax will be levied on personal income from employment via salaries, interest from bank deposits, saving schemes and real estate investments made by individuals and originating from a business or any other form of commercial activity licensed or authorized to be conducted in the UAE.
Alongside Corporate Tax, the UAE has introduced a 15% tax requirement for large multinational companies earning profits exceeding EUR 750 million, aligning with the agreement on the Global Minimum Corporate Tax Rate. This article provides updates on the evolution of the Corporate Tax.
II. Who is subject to Corporate Tax?
A. Natural persons who are engaged in business or commercial activities or own businesses in the UAE (via commercial license or equivalent permit) will become subject to the Corporate Tax. However, income from employment will be exempt from taxation as the personal income tax remains at 0%.
B. Mainland Entities incorporated in the UAE as well as foreign legal entities with a permanent establishment in the country including Limited Liability Companies (“LLC”), Private Shareholding Companies or Public Joint Stock Companies will become subject to taxation. Capital gains and dividends received from the shareholdings of a subsidiary company remain exempt under the condition of a minimum 5% shareholding.
a. Legal entities of a foreign jurisdiction with a permanent establishment in the UAE which earn UAE sourced income or that are effectively managed and controlled in the UAE will be treated as if they were UAE incorporated entities and will be subjected to the UAE Corporate Tax.
b. Partnerships such as limited liability partnerships and partnerships limited by shares where none of the partners is subject to unlimited liability for the obligations of the partnership or its partners will be treated as a UAE company and thus be subject to Corporate Tax.
C. Tax Groups can be formed by a group of UAE resident companies if the parent company holds at least 95% of the share capital and voting rights of the subsidiaries. Tax groups will be treated as UAE companies and treated as a single taxable person. None of the group subsidiaries can be an exempt person or a Free Zone entity benefiting from the 0% Corporate Tax rate. Tax groups allow the transfer of losses if certain conditions are met. This may offer certain opportunities to reduce the group’s overall tax burden.
III. What about Free Zone entities?
Free Zone companies may also be subject to Corporate Tax, this despite the (alleged) renewable, 50-year moratoria on corporate taxes. Prerequisite is that they source (any) income from UAE mainland, which is not purely considered as ‘passive’ income (i.e. for example interest and royalties, dividends, and capital gains from owning shares in mainland UAE companies). Free Zone companies that have a mainland branch may still benefit from the 0% tax rate in the Free Zone for businesses and transactions conducted outside of the UAE or with other Free Zones, but the branch will be taxed at the regular Corporate Tax rate of 9%. However, any direct mainland sourced income of the Free Zone entity will disqualify it from the 0% tax in respect of the total income.
IV. Tax rates
The following tax rates will be applicable on the annual taxable income:
- 0% for taxable income not exceeding AED 375,000 and Free Zones conducting businesses that comply with the regulations (e.g. no mainland source of income);
- 9% for taxable income exceeding AED 375,000; and
Corporate tax will also be imposed on a Qualifying Free Zone Person at the rates of:
- 0% on Qualifying Income
- 9% on Taxable Income that is not Qualifying Income
V. Resident vs Non-Resident
Consistent with the tax regime in most countries, the Corporate Tax Law is contingent on residence and source classifications of the Taxable Person.
A natural Person is especially considered a Tax Resident, if
- his usual or primary place of residence and the center of his financial and personal interests are in the UAE, or
- he has been physically present in the State for a period of (183) one hundred and eighty-three days or more within the last (12) twelve months, or
- he has a Permanent Place of Residence or carries on an employment or Business in the UAE and he is a UAE national, holds a valid Residence Permit in the State or holds the nationality of any member state of the Gulf Cooperation Council, and has been physically present in the State for a period of (90) ninety days or more within the last (12) twelve months.
A juridical person is considered a Tax Resident, if
- it was incorporated, formed or recognized in compliance with the legislation in the UAE, excluding the branch registered by a foreign legal entity, or
- it is considered a Tax Resident in accordance with the UAE Tax Law.
A non-resident person is taxed if it has a permanent establishment within the Emirates or earn state-sourced income.
For clarity, companies and other juridical persons that are incorporated under UAE laws will automatically be considered a resident person for Corporate Tax purposes (mainland and Free Zone). If effectively managed and controlled in the UAE, foreign companies and other juridical persons may also be treated as resident persons but this would be determined by the circumstances and activity of the entity.
If a Person does not satisfy the conditions for being either a resident or a non-resident person, then they will not be a taxable Person and will not therefore be subject to Corporate Tax.
VI. Who is exempt from Corporate Tax?
At the present time, the following exemptions apply:
Federal and local governmental authorities
- Government Controlled Entities that are specified in a Cabinet Decision
- Companies engaged in the extraction and exploitation of natural resources of the UAE
Exempt subject to certain conditions and notification to the Ministry of Finance
- Extractive Businesses
- Non-extractive Natural Resource Businesses
Exempt per Cabinet Decision
- Qualifying Public Benefit Entities
- Government-owned UAE companies that carry out a sovereign or mandated activities
Exempt per application & approval by the Federal Tax Authority and subject to conditions
- Public or private pension, private social security funds and retirement pension funds
- Qualifying Investment Funds
- Wholly-owned and controlled UAE subsidiaries of government entity, a government controlled entity, a qualifying investment fund, or a public or private pension or social security fund.
Exempt per notification the Federal Tax Authority (FTA) within 20 business days
- businesses undergoing liquidation or termination
Furthermore, salaries and other earnings from an employment, earnings from real estates, dividends from bank deposits and savings accounts, income earned by non-residents from operating or leasing aircrafts or ships, and personal income from outside of the UAE will not be subjected to the UAE Corporate Tax regime.
VII. Small Business Relief package
The Small Business Relief package is an exemption from the Corporate Tax for some companies. To qualify, a company must be resident in the UAE, have revenue less than AED 3 million in the relevant tax period and previous tax periods, and be applicable for tax periods starting on or after 1 June 2023 until subsequent tax periods that end before or on 31 December 2026. The Small Business Relief must be applied for. Qualifying Free Zone Persons or Members of Multinational Enterprises Groups covered under Country-by-Country Reporting Regulation are excluded from this relief. The Small Business Relief also allows a Taxable Person to benefit from reduced compliance requirements including transfer pricing. If a Taxable Person exceeds the AED 3 million revenue threshold in any tax period, then the Small Business Relief will no longer be available.
The Corporate Tax Law aligns the UAE with global best practices as well as international standards for tax transparency and preventing harmful tax practices. Overall, with the new Corporate Tax, the UAE remains one of the most competitive in the world and the Corporate Tax Law makes several concessions in recognition of the diversity of businesses that will fall within the scope of the new Corporate Tax regime along with providing generous relief for intra-group transfers and restructurings, allowing group companies to use internally available tax losses. Additionally, transitional rules for Corporate Tax offer crucial guidance for businesses navigating the transition from the pre-implementation phase to the post-implementation phase of the Corporate Tax Law, ensuring a seamless and efficient process. In particular, more recent updates have made SMEs subject to simplifications and special rules designed to accompany the transition to the implemented Corporate Tax.