The United Arab Emirates (UAE) implemented a federal corporate tax regime on June 1, 2023. This marked a significant shift in the country's economic landscape, introducing a new system for corporate income taxation. While the UAE was previously known for its tax-free environment, the introduction of corporate tax in the UAE represents a significant change for businesses operating in the country.
By understanding the key features of the new regime, businesses can proactively adjust their operations and ensure compliance with the regulations. The UAE remains a strategically attractive location for businesses, offering a competitive tax rate alongside a pro-business environment and infrastructure.
The UAE corporate tax applies to most businesses operating in the UAE, with a few exceptions. Here's a breakdown of what it means for businesses
- A new tax on corporate profits: Businesses in the UAE will now be taxed on their net profits exceeding a specific threshold.
- The threshold for taxation: There's a threshold of AED 375,000 (approximately USD 102,100). Businesses with annual taxable profits below this amount are generally exempt from paying corporate tax.
- Tax rate: The UAE's standard corporate tax rate is 9%.
Why is there a corporate tax now?
The UAE government introduced a corporate tax to diversify its revenue streams and become less reliant on oil income.
What are the compliance requirements?
All businesses in the UAE, regardless of whether they expect to pay corporate tax, are required to:
- Register for corporate tax: This registration process began in June 2023.
- Maintain proper accounting records: Businesses must keep their financial records up-to-date according to specific reporting standards (like IFRS—International Financial Reporting Standards).
- File corporate tax submissions: Even if a business qualifies for an exemption, it must file submissions with the Federal Tax Authority (FTA) to verify its tax status.
In the UAE, most businesses will be subject to registering for corporate tax, even if they won’t necessarily have to pay the tax itself. Here’s a breakdown of who is subject to UAE Corporate Tax:
Resident Businesses
- UAE companies: All companies incorporated or formed under UAE laws, including mainland and free zone companies (although some free zones may offer specific exemptions).
- Natural persons: Individuals conducting business activities in the UAE, either directly or through unincorporated partnerships or sole proprietorships (subject to specific conditions outlined in Cabinet Decision No. 49 of 2023).
Non-Resident Businesses
- Foreign legal entities: These entities will be subject to corporate tax if they have a "permanent establishment" in the UAE. A permanent establishment can be a physical office, branch, or even a person acting on behalf of the company with certain levels of authority.
Who May Be Exempt?
While registration is mandatory for most businesses, some entities may be exempt from paying corporate tax:
- Businesses with low profits: Annual taxable profits below AED 375,000 (around USD 102,100) are generally exempt.
- Specific sectors: Certain industries or activities may have tax exemptions or reduced rates established by the government.
Importance of Registration
Even if you believe your business falls under an exemption category, registering for corporate tax is mandatory. This allows the Federal Tax Authority (FTA) to verify your tax status and ensures you remain compliant with regulations.
The UAE implemented corporate tax in June 2023, but not all businesses must pay it. Here's a breakdown of who qualifies for exemption from UAE Corporate Tax:
- Businesses with low profits: Annual taxable profits below AED 375,000 (around USD 102,100) are generally exempt.
- Specific sectors: Certain industries or activities may have tax exemptions or reduced rates established by the government.
Automatic Exemptions
These categories are automatically exempt from paying corporate tax and don't need to submit a formal application:
- The UAE Federal and Emirate Governments include ministries, departments, and public institutions.
- Government-Controlled Entities: Companies wholly owned and controlled by a government entity carrying out a mandated activity listed in a Cabinet Decision are exempt.
- Extractive Businesses: Businesses that extract UAE natural resources (oil, gas, etc.) or related non-extractive activities subject to Emirate-level taxation may be exempt. However, they need to meet specific conditions set by the relevant Emirate.
Exemptions Through Application
These entities need to apply to the Federal Tax Authority (FTA) for approval to be exempt:
- Qualifying Public Benefit Entities: Entities like charities, foundations, and social welfare organizations can apply for an exemption if they meet the criteria outlined in Ministerial Decision No. 115 of 2023.
- Qualifying Investment Funds: Investment funds fulfilling specific requirements set by the FTA can apply for an exemption.
Other Potential Exemptions
While not explicitly mentioned, some sectors or activities may have tax exemptions or reduced rates established by the government. It's advisable to consult the official resources or seek professional advice to determine if your business qualifies for such exemptions.
The UAE's new corporate tax landscape can feel daunting. At Bespoke Strategy Solutions, our team of seasoned tax experts is here to bridge the gap. We'll help you navigate unfamiliar territory and unlock the potential benefits of this new system.
Here's how we can empower your business
- Understanding Corporate Tax: Gain clarity on how corporate tax applies to your business operations.
- Maximizing Exemptions and Reliefs: Discover available tax exemptions and reliefs that significantly reduce your tax burden.
- Meeting Compliance Deadlines: Avoid penalties by ensuring timely and accurate tax registration and filing.
- Seamless Compliance & Efficient Processes: Our comprehensive services cover all aspects of UAE corporate tax compliance:
- Registration Assistance: Our team will guide you through the registration process with the Federal Tax Authority (FTA) from start to finish.
- Accounting Standards Support: We'll ensure your accounting records adhere to the required reporting standards (e.g., IFRS).
- Tax Return Filing: Relax – we'll prepare and file your corporate tax returns, ensuring they meet all FTA regulations.
Essential Steps for Every Business
Here's a quick reminder of the three mandatory steps for UAE businesses:
- Register for Corporate Tax: Registration began in June 2023. Ensure your business is registered.
- Maintain Compliant Accounting: Uphold the required accounting standards (e.g., IFRS) for record-keeping.
- File Corporate Tax Submissions: Even if exempt, timely filing with the FTA is crucial for verification.
Who is a Qualifying Free Zone Person(s)?
A Qualifying Free Zone Person is a Free Zone Person that meets all the conditions of the Free Zone Corporate Tax regime and hence benefits from that regime.
The conditions of the Free Zone Corporate Tax Regime require a Qualifying Free Zone Person to:
- Maintain adequate substance in a Free Zone;
- Derive Qualifying Income;
- Not have made an election to be subject to the regulator UAE Corporate Tax regime;
- Comply with arm’s length principle and transfer pricing rule and documentation requirements;
- Prepare and maintain audited financial statements;
Failure to meet any of the conditions results in a Qualifying Free Zone Person losing its qualifying status and not being able to benefit from the Free Zone Corporate Tax regime for five Tax Periods.
The Free Zone Corporate Tax regime is available only to Free Zone Persons, and this term is also used to determine what income can benefit from the regime by treating income from transactions with other Free Zone Persons as Qualifying Income.
Qualifying Income
This refers to the income a QFZP earns from activities that primarily occur within the free zone. This typically includes:
- Profits from selling goods or services within the free zone.
- Income from leasing assets located within the free zone.
- Royalties related to intellectual property used within the free zone.
Non-Qualifying Income
Income earned outside the scope of the free zone or that doesn't meet the specific definitions of Qualifying Income will be subject to the standard corporate tax rate of 9%. Examples include:
- Profits from selling goods or services to customers in the UAE mainland.
- Income from investments located outside the free zone.
- Branch profits are attributable to a permanent establishment outside the free zone.
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