The United Arab Emirates (UAE) is a fusion of traditional and innovation. It offers a fertile business environment to foster growth, investment and development. The UAE has a reputation as a tax-free jurisdiction, which attracts many foreign investors. However, on June 1st 2023, the UAE implemented a Corporate Tax system, which has become an important topic of discussion in the business world.
The UAE implemented its Corporate Tax system on June 1st, 2023, the beginning of the new financial year. The introduction of Corporate Tax aligns with other developed countries across the globe, but its rate is still exceptionally lower, with most countries having a rate of around 20%. The UAE also hopes that the Corporate Tax will disincentivise foreign businesses from using the country as a base to avoid taxes in their home countries. The introduction of Corporate Tax in the UAE has been viewed as a positive step towards economic diversification, as it creates a new source of revenue for the government. Historically, the majority of the government's revenue has come from the fossil fuel extraction industries. However, with the potential for less revenue from these industries in the future, it makes sense for the government to tax revenue from more businesses. This will enable further investment in infrastructure, education, and healthcare.
What is the Corporation Tax rate?
The UAE Corporate Tax rate is set at 9% and applies to businesses with profits exceeding a threshold of AED 375,000 (approximately $102,000). Businesses with profits below this threshold will continue to pay 0% tax. For businesses whose tax year began in January 2023, revenue generated before January 1st, 2024, is not subject to tax.
Who can be taxed?
Legal entities with notable legal personalities, such as LLCs, PSCs, PJSCs, and LLPs, will be levied with taxes. Additionally, any foreign legal entity that earns income in the UAE and is a tax resident will also be charged. Free zones, however, can enjoy 0% corporate taxes as long as they comply with all regulatory requirements, including registering and filing a corporate tax return.
What about free zones?
Some free zone entities will be able to claim a rate of 0% corporate tax depending on the following conditions and meeting the criteria of a qualifying free zone person.
Qualifying free zone person
A free zone entity in the UAE can be considered a "Qualifying Free Zone Person" eligible for 0% corporate tax on qualifying income, provided that it meets the following conditions:
- maintains a substantial presence in the UAE
- earns qualifying income
- opts out of standard Corporate Tax rates
- adheres to the Arm's Length Principle and Transfer Pricing rules
- has non-qualifying revenue within De Minimis limits
- prepares audited financial statements.
If these conditions are not met, the entity will be classified as a regular taxable entity for five tax periods, and all income will be subject to a tax rate of 9%.
Corporate Tax rate on qualifying free zone
- 0% on qualifying income.
- 9% on taxable income that is not qualifying income without the threshold benefit of AED 375,000.
Qualifying Income
Qualifying Income includes income from transactions with free zone persons (excluding certain activities) and non-free zone persons related to qualifying activities that aren't excluded, as well as other income meeting de minimis requirements. To meet these requirements, QFZP must have non-qualifying revenue lower than:
- 5% of the total revenue; or
- AED 5 million.
Non-Qualifying Revenue
Non-qualifying revenue includes:
- Revenue from excluded activities
- Revenue from non-qualifying activities in case of transaction with a non-free zone person.
Who is exempt from UAE Corporate Tax?
Entities that are exempt from CT include government entities, businesses involved in natural resource extraction, qualifying public benefit entities, qualified investment funds, and certain pension or social security funds. The exemption also applies to non-resident individuals who only earn income sourced in the UAE and do not have a permanent establishment in the UAE.
Exempt entities must apply for exemption within 60 business days from the end of the qualifying tax period.
How will the tax be calculated?
The 9% corporate tax will only be levied if the taxable net profit exceeds 375,000 AED. In other words, net profits up to 375,000 AED are taxed at 0%. The company's financial statements will be used to determine income. It is now vital businesses in the UAE have accurate data in their financial statements.
When do I have to pay the Corporation Tax?
The filing of the Corporate Tax returns and tax payments must be settled within 9 months from the end of the relevant tax period (financial year).
How can Nephos Global help?
Entities that are subject to the Corporate Tax Law are required to obtain a Tax Registration Number (TRN). Different types of entities, including public benefit entities, investment funds, pension or social security funds, and juridical entities controlled by exempt persons, have specific deadlines for tax registration.
Entities that earn revenue exceeding AED 50 million during the relevant Tax Period, as well as qualifying free zone persons, are required to maintain audited financial statements in compliance with the International Financial Reporting Standards (IFRS). For entities with revenue below AED 50 million, IFRS for SME may be applied. Entities with annual revenue below AED 3 million or under exceptional circumstances may maintain financial statements using the cash basis of accounting.
Nephos Global are experts in preparing accounts under IFRS and corporate tax returns. We can help ensure that compliance with these requirements are met and that you avoid any potential penalties or legal issues.