Regulation of corporate tax in the UAE

The United Arab Emirates is a great place to invest as it has a really low corporate tax rate compared to other competitive countries.In the article below, we will familiarize you with the features of corporate tax in the UAE. We will start our consideration with the following points:

1. Corporate tax rate
2. Unrecorded income
3. Deductions from taxable income
4. Strings
5. Penalties
6. Conclusion

1. Corporate tax rate

Corporate tax in the United Arab Emirates is governed by Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Enterprises, hereinafter referred to as the “Law”.

Before we start considering the corporate tax, we note that in the UAE there is such a concept as “free zones”, i.e. territories that have a special legal status and create favorable conditions for business registration, and the corporate tax rate will be different due to where the activity is conducted.

The general rule regarding the determination  of the corporate tax rate on taxable income (net income)under the Act is as follows:

• 0% (zero percent) on the portion of taxable income not exceeding AED 375,000 (102,099.15 USD);
• 9% (nine percent) of taxable income in excess of AED 375,000 (102,099,156 USD).

Threshold approved by the Ministry of Finance

For legal entities registered in a free zone that meet the criteria of a “Qualifying Free Zone Person” (Qualifying Free Zone Person), there are certain peculiarities.

A person will be considered a Qualifying Free Zone Person if they meet a number of conditions:

• Maintains an adequate presence in the UAE (has expenses inherent in any company, including office rent, salaries, etc.);
• her income is classified as qualifying income;
• did not choose to be subject to corporate tax;
• adheres to transfer pricing legislation and the arm’s length principle in its transactions;
• complies with all other legal requirements.

The corporate tax rate for a Qualified Free Zone Person:

• 0% (zero percent) on Qualifying Income, which is determined as follows:
  1. income derived from transactions with a person who is a resident of a free zone;
  2. income derived from transactions with a person who is not a resident of a free zone, but only in connection with Qualifying Activities that do not include Excluded Activities*, regardless of the amount of income under the general rule above;
• Nine percent (9%) on income that does not qualify as Qualified Income under the Act (e.g., a person is located in a “free zone” but derives income from activities outside the zone).

“Excluded Activities” – financial, leasing (other than those activities listed as qualifying activities under the Ordinance), banking, owning or operating real estate, IP facilities, etc.

The list of qualifying activities shall be established by the Ministry of Finance.

2. Unrecorded income

There is also a list of income that is not taken into account in determining taxable income, these are:

• dividends and other profit distributions received from a resident legal entity;
• dividends and other profit distributions received from the shareholding of a foreign legal entity;
• any other income from an ownership interest;
• income of a foreign permanent establishment;
• income received by a non-resident person from the operation of aircraft or ships in international transportation.

3. Deductions from taxable income

It is worth mentioning that expenses incurred wholly and exclusively for the purposes of the business activities of a taxable person, which are not considered capital in nature, are deductible in the tax period in which they are incurred.

At the same time, the following income is not deductible:

• expenses that were not incurred for the purposes of the taxable person’s business;
• expenses incurred in obtaining tax-exempt income;
• losses that are not related to or do not arise from a person’s taxable activities;
• expenditures as may be determined by the Cabinet.

4. Lines

UAE corporate tax must be paid no later than 9 months after the end of the relevant tax period (12 months) and only one tax return needs to be filed during the same period.

A person whose profits are taxable must keep financial records and retain all documents and records supporting the information contained in the Tax Return for 7 years after the end of the relevant tax period. Such persons include:

• A taxable person who earns income in excess of AED 50 million (USD 13,612,850.00) during the relevant tax period;
• qualified person of the free zone.

5. Penalties

In terms of penalties, companies will be subject to penalties for non-compliance with the UAE corporate tax regime, among which the following are of particular importance:

 Cabinet Resolution 75 of 2023

* everything is calculated in dirhams

Conclusion

In the UAE, the corporate tax rate differs depending on whether the company is incorporated in or outside the “free zone” and whether its income is considered “Qualified”.

So, as a general rule, the tax rate applicable to income that does not exceed AED 375,000 (which is approximately 102,099.15 USD) is 0%. The rate applied to income that exceeds this amount is 9%.

If income is received by a Qualified Person and meets the criteria of a Qualified Person, i.e., from other legal entities registered in the free zone, or is received in connection with qualifying activities, a tax rate of 0% applies, regardless of the amount of such income.