UAE Corporate Tax

UAE Corporate Tax – Everything You Need to Know

As of June 2023, the UAE has implemented a federal corporate tax (CT) system.

The standard corporate tax rate is 9%. Certain businesses are eligible for a 0% tax rate, while those subject to the global minimum corporate tax rate agreement must pay a rate of 15%.

Free zone businesses may be exempt from federal corporate tax if they are considered Qualifying Free Zone Persons (QFZP) and they generate Qualifying Income from specific Qualifying Activities as defined by the UAE Corporate Tax (UAE CT) Law.

The UAE Federal Tax Authority (FTA) oversees the collection of federal corporate taxes and performs audits. All businesses in the UAE, including exempt, free zone and zero-rate businesses must register for federal corporate taxes.

Some emirates, such as Dubai and Abu Dhabi, impose a flat 20% corporate tax on the income derived by foreign banks operating within their jurisdictions.

Here below we provide a useful summary of all the important provisions of the UAE Corporate Tax (UAE CT) law.

 UAE Corporate Tax Registration

On 22^nd February 2024, the UAE Federal Tax Authority (FTA) issued Decision No. 3 of 2024, outlining the timelines for taxable persons to register for corporate tax (CT) and obtain a Tax Registration Number in accordance with Article 51 of the UAE Corporate Tax Law.

The key highlights are summarized below:

UAE Corporate Tax Registration Timeline for Resident Juridical Persons

For juridical persons that are residents and established before 1st March 2024, the deadlines for submitting tax registration applications are as follows:

If a person does not have a license by the effective date, they must submit an application within three months of 1^st March 2024.

Note: The earliest issued license will be used for determining the registration timeline.

For juridical persons incorporated or recognized on or after 1^st March 2024:

• They must register within three months of incorporation, establishment, or recognition.
• Foreign entities managed in the UAE must register within three months after the end of their financial year.

 UAE Corporate Tax Registration Timeline for Non-Resident Juridical Persons

The deadlines for non-resident juridical persons are as follows:

UAE Corporate Tax Registration Timeline for Natural Persons

Natural persons conducting business activities in the UAE and exceeding AED 1 million must register by:

UAE Corporate Tax Penalties for Late Registration

The updated Cabinet Decision No. 75 imposes a penalty of AED 10,000 for each taxable person failing to submit their tax registration application within the specified timelines.

UAE Corporate Tax Return

The UAE Corporate Tax (UAE CT) return is generally due within 9 months following the end of the tax period. No provisional or advance UAE Corporate Tax (UAE CT) filings will be required. The tax period is specified for each registered person on the issued Corporate Tax Registration Certificate.

Important Note:

Some entities that registered for UAE Corporate Tax (UAE CT) prior to the latest clarification (CTP003) had received Tax Registration Certificates indicating a first tax Period from 1^st January 2024 to 31^st December 2024.  Now, based on the clarification, registered entities incorporated in June 2023 should re-download their Corporate Tax Registration Certificate and submit their first Corporate Tax (CT) return as follows:

• A First Tax Period from June 1, 2023, to December 31, 2023;
• A submission deadline for the Corporate Tax (CT) return for this period of September 30, 2024 (instead of September 30, 2025).

As a result, these entities must ensure they file their first Corporate Tax (CT) return by the new deadline of 30^th September 2024.

Taxable Income

In the UAE, income under 375,000 AED is subject to a zero tax rate.  As for free zone individuals, an assessment of transactions must be carried out to determine where invoicing is done and what the activities that generate income relate to.   A further analysis on Qualifying Free Zone Persons (QFZP) is mentioned below.  Furthermore details on claiming the small business relief, eligibility and main provisions are also provided below.

Taxable individuals

Resident legal entities, whether registered in the UAE or not but managed and controlled from the UAE, are subject to taxation on their global income. Natural persons who conduct business activity in the UAE above 1 million AED.

A permanent establishment (PE) in the UAE of a foreign legal entity is taxed on the income attributed to the PE.

Non-resident persons with UAE sourced income and with a nexus in the UAE (income from

Exempt Income

In order to prevent double taxation, the UAE CT regime excludes dividends and other earnings received by a taxable individual from a UAE tax resident entity (such as local dividends) or from non-UAE tax resident individuals, as long as they meet the participation exemption:

• the ownership interest is at least 5%;
• a 12-month uninterrupted holding period (or the intention to hold for 12 months) is in place;
• the participation is subject to tax in its country or territory of residence at a rate that is not lower than 9%;
• not more than 50% of the assets directly or indirectly owned by the participation consist of an ownership interest or entitlements that would not qualify for the participation exemption if these assets were held directly by the taxable person;

There is an election to claim an exemption for foreign PE/branch income and associated expenditure provided that the foreign PE/branch is subject to tax in the foreign jurisdiction of at least 9% or more.

Income derived by a non-resident person from the operation of ships or aircraft in international transportation.

Small Business Relief

The UAE Corporate Tax Law provides tax relief for small businesses. A tax resident person may elect to be treated as not having derived any taxable income where the revenue for the relevant and previous tax periods does not exceed AED 3 million during each relevant tax year. If such a threshold is exceeded, then the taxable person will be subject to UAE Corporate Tax at the relevant rates as provided under the Corporate Tax Law. The abovementioned revenue threshold will be applicable starting on or after 1 June 2023. However, it will only apply to subsequent tax periods that end before or on 31 December 2026. If a tax resident person applies for ’small business relief‘, certain provisions of the UAE Corporate Tax Law will not apply, such as exempt income, reliefs, deductions, tax loss relief, and transfer pricing compliance requirements, as specified in the relevant chapters of the UAE Corporate Tax Law.

The Small Business relief will not be available to the below two categories of Taxable persons:

• When the entity is part of an Multinational Enterprise Group (MNE);
• For QFZps;

Fiscally Transparent Structures

An unincorporated partnership is not considered a taxable person. Each partner is individually viewed as a taxable person based on their distributive share. Partners in such a partnership can request the FTA to treat the partnership as a taxable entity, with some exceptions.

Foreign partnerships will be regarded as unincorporated partnerships where they are not taxed under the foreign jurisdiction’s laws, and each partner is taxed individually on their distributive share of the partnership’s income when it is received or accrued.

Family foundations/trusts can also apply to be treated as an unincorporated partnership upon meeting certain criteria (established for benefit of individuals or for a public benefit, do not conduct business etc.)

UAE Corporate Tax Deductions

Non-deductible expenses

1. Non-business expenses;
2. Donation to non-approved charities;
3. Fines and penalties;
4. Bribes or illicit payments;
5. Dividends/profit distributions;
6. Withdrawals;
7. UAE and foreign Corporate Tax;
8. Recoverable input VAT;
9. 50% cap on entertainment expenditure;

The UAE Corporate Tax (UAE CT) Law provides that net interest expense (NIE) up to 30% of tax adjusted earnings before interest taxes depreciation and amortization (EBITDA) will be deductible. However, this should not apply if the NIE for the relevant tax period does not exceed the threshold of AED 12 million. If this threshold is exceeded, the taxable person may deduct the higher of the threshold or 30% of EBITDA. This does not apply for banks, insurance companies and business carried on by natural persons.

The UAE Corporate Tax (UAE CT) Law allows a business to offset tax losses against taxable income in future periods, capped at 75% of the taxable income for that period. Remaining losses can be carried forward indefinitely. Tax relief cannot be claimed for losses incurred before the UAE Corporate Tax regime’s start date, before becoming a taxable entity under the Corporate Tax Law, or from exempt income sources. Shareholder majority must remain unchanged to carry forward losses, or new owners must continue the same business.

Transfer Pricing

Taxpayers must keep transfer pricing documentation, including a Master File and a Local File, in case:

• in the relevant tax period, if the taxable person is a member of a multinational enterprise (MNE) group with a total consolidated group revenue of at least AED 3.15 billion;
• the taxable person has revenues of at least AED 200 million or more in a relevant tax period.

Moreover, taxable individuals (in both the mainland and free zone) might need to comply with the transfer pricing documentation requirements below:

• The FTA might request a taxable individual to submit a disclosure form alongside the tax filing. This form should detail the transactions and agreements involving related parties and affiliated individuals;
• Additionally, the FTA might necessitate that any taxable individual provides documentation supporting the arm’s-length principle of transactions and agreements with related parties and affiliated individuals within a 30-day period.

Qualifying Free Zone Persons

Individuals in free zones are seen as taxable entities according to the UAE CT Law and must adhere to standard compliance duties, which involve meeting transfer pricing criteria. If a free zone establishment fulfills the criteria to be classified as a Qualifying Free Zone Person (QFZP), it may qualify for a 0% UAE CT rate on its eligible earnings. Any income of a QFZP that does not fall under qualifying income will be subject to a 9% CT rate.

To qualify for the 0% UAE CT rate, a QFZP must satisfy all the following conditions.

The person must:

• be a free zone individual, i.e. a juridical person incorporated, established, or otherwise registered in a free zone, including branches;
• maintain adequate substance in the UAE in a free zone;
• derive qualifying income (explained below);
• not have made an election to be subject to the standard UAE CT regime;
• comply with all transfer pricing rules and documentation requirements;
• not exceed the de minimis requirements of non-qualifying revenue;
• prepare audited financial statements.

Qualifying income for a qualifying free zone person (QFZP) for the purposes of corporate tax includes the below categories of income, provided that the income is not attributable to a domestic permanent establishment (PE) or a foreign permanent establishment (PE) or to the ownership or exploitation of immovable property:

• Income derived from transactions with other free zone persons, apart from income from excluded activities;
• Income derived from transactions with a non-free zone person, however only in respect of qualifying activities that are not excluded activities;
• Income derived from the ownership or exploitation of Qualifying Intellectual Property;
• Any other income provided the qualifying free zone person satisfies the de minimis requirements under Ministerial Decision No. 139 of 2023.

Qualifying Activities

Excluded Activities

• All transactions with natural persons, apart from transactions relating to the following eligible activities:
  • The ownership, management and operation of ships;
  • Fund management services subject to regulatory supervision by the competent UAE authority;
  • Asset management and investment services subject to regulatory supervision by the competent authority of the UAE;
  • Financing and leasing of aircraft, including engines and rotating parts.
• Banking activities subject to regulatory supervision by the competent authority of the UAE
• Insurance activities subject to the supervision of the competent authority of the UAE, except for reinsurance services subject to the supervision of the competent authority of the UAE
• Financing and leasing activities subject to regulatory supervision by the competent authority of the State, other than treasury and related party financing services and the financing and leasing of aircraft, including engines and rotating parts
• Owning or operating real estate other than commercial real estate located in a free zone, provided that the transaction relating to such commercial real estate is carried out with other persons in the free zone
• The ownership or operation of intellectual property
• Any activity ancillary to the above (an activity is considered ancillary if it has no independent function but is necessary for the exercise of the main activity).

De minimis Requirement

A Qualifying Free Zone Person (QFZP) must meet the following two conditions, in addition to those set out above:

1. Its non-qualifying income must not exceed 5% of its total income during the tax period or AED 5 million whichever is less;
2. It prepares audited financial statements in accordance with Ministerial Decision No. 82 of 2023.

A Qualifying Free Zone Person (QFZP) that does not meet the above conditions and the conditions as set out in the CIT Act Article 18 Clause 1 during a Tax period, shall cease to be considered as a Qualifying Free Zone Person (QFZP) from the beginning of the relevant Tax Period and for the next four (4) Tax periods.

Non-qualifying Revenue is Revenue derived in a Tax Period from any of the following:

• Excluded activities;
• Activities that are not Qualifying Activities where the other party to the transaction is a Non-Free Zone Person.

Total Revenue is all revenue derived by a Qualifying Free Zone Person (QFZP) in a Tax period.

Furthermore the following revenue shall not be included in the calculation of non-qualifying revenue and total revenue:

• Revenue attributable to immovable property located in a free zone derived from the following transactions:
  • Transactions with non-free zone persons in respect of commercial property;
  • Transactions with any person in respect of immovable property that is not commercial property.
• Revenue attributable to a Domestic Permanent Establishment (PE) or a Foreign Permanent Establishment (PE) of the qualifying free zone person.

Domestic Permanent Establishment (PE)

Domestic Permanent Establishment (PE) or Foreign Permanent Establishment (PE) of a Qualifying Free Zone Person (QFZP) must be treated as if it were an independent and separate entity.
The income that is attributable to a domestic permanent establishment or a foreign permanent establishment shall be considered taxable income and taxed in accordance with the provisions of corporate tax law.

Furthermore, the income attributable to immovable property located in a free zone that is derived from the below transactions shall be considered taxable income and is taxed at 9%:

• Transactions with non-free zone persons in respect of commercial property;
• Transactions with any person in respect of immovable property that is not commercial property.