All you need to know about Corporate Tax in UAE

The United Arab Emirates (UAE) Ministry of Finance has published Federal Decree-Law No. 47 of 2022 providing the legislative framework for corporate tax on business profits in the UAE.

What is Corporate Tax?

Corporate Tax is a form of direct tax levied on the net income of corporations and other businesses.
Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions.

Who is subject to Corporate Tax?

• Broadly, Corporate Tax applies to the following “Taxable Persons”:
  Individuals who are engaged in a business or business activity in UAE through an unincorporated partnership or sole proprietorship;
• Juridical persons incorporated in the UAE;
• Juridical persons effectively managed and controlled in the UAE; and
• Foreign juridical persons that have a permanent establishment in the UAE.

What is the Corporate Tax rate?

Corporate Tax will be levied at a headline rate of 9% on Taxable Income exceeding AED 375,000. Taxable Income below this threshold will be subject to a 0% rate of Corporate Tax.
Corporate Tax will be charged on Taxable Income as follows:

What is the Withholding Tax rate?

A 0% withholding tax may apply to certain types of UAE sourced income paid to non-residents. Because of the 0% rate, in practice, no withholding tax would be due and there will be no withholding  registration and filing obligations for UAE businesses or foreign recipients of UAE sourced income.
Withholding tax does not apply to transactions between UAE resident persons.

Who are the residents and non-residents?

The corporate tax is imposed on ‘taxable persons’ which are defined as either resident persons or non-resident persons (residence for corporate tax is a concept defined in the UAE corporate tax law and is not impacted by where a person resides).

A resident person is a legal entity incorporated or established under UAE corporate law (including free zone entities). It also includes a foreign legal entity that is effectively managed and controlled in the UAE, and any individual who conducts business in the UAE.

A non-resident person on the other hand is a non-UAE resident individual that has a permanent establishment in the UAE. He/she qualifies as a non-UAE resident person when they earn state-sourced income (subject to a 0 percent withholding tax).

What about free zones?

Free zones will be within the scope of the UAE corporate tax regime and subject to the administrative and compliance obligations prescribed by the law. Qualifying Free Zone Persons (QFZPs) can benefit from a 0% corporate tax rate on “qualifying income”. The regular corporate tax rate of 9 per cent will apply to taxable income that is not qualifying income.

To qualify as a QFZP, the free zone must:

• Maintain adequate substance in the UAE;
• Derive “qualifying income” (to be specified in a Cabinet decision);
• Not have made an election to “opt-out” of the free zone corporate tax regime;
• Comply with the transfer pricing rules and documentation
• Meet any other conditions as may be prescribed by the minister

A QFZP can elect to be subject to corporate tax at the standard rate of 9%.

Foreign income

UAE resident legal entities will be subject to UAE corporate tax on their worldwide income, although income from foreign subsidiaries and foreign branches can be exempt from corporate tax. Where income earned from abroad is not exempt, income taxes paid in the foreign jurisdiction can be taken as a credit against the corporate tax payable in the UAE on the relevant income to prevent double taxation. UAE residents can elect to exempt their income from foreign permanent establishments from corporate tax (subject to meeting the relevant conditions).

Non-resident persons will only be subject to UAE corporate tax on income from their permanent establishment in the UAE on income which is sourced in the UAE (subject to a 0% withholding tax).

While asked if a foreign-headquartered company which has a branch in UAE would be taxed on foreign profits, Begum said to Gulf News that the branch would be treated as a non-resident for the purposes of the UAE corporate tax, and they would only pay tax on the income or the profits that are generated from the UAE so they would not be subject to tax on their worldwide income as a non-resident.

What are the non-taxable income streams?

There are a number of income streams that would be treated as non-taxable for corporate tax purposes, which include:

• Dividends or other profit distributions received from UAE-incorporated or resident legal entities;
• Dividends or other profit distributions received from greater than 5 per cent owned foreign legal entities where the taxpayer has held the ownership interest for at least 12 months and all of the conditions for the ‘participation exemption’ are met;
• Certain other income (e.g. capital gains, foreign exchange gains/losses and impairment gains or losses) received from greater than 5 per cent owned UAE resident or foreign legal entities where the taxpayer has held the ownership interest for at least 12 months and all the conditions for the ‘participation exemption’ are met
• Income from a foreign branch or foreign permanent establishment where an election is made to claim the ‘Foreign Permanent Establishment exemption’

What are the tax reliefs?

The corporate tax law provides a number of tax reliefs that taxpayers may benefit from subject to meeting specified conditions:

• Tax Loss Relief: This relief allows for tax losses to be offset against the taxable income of future periods, up to a maximum of 75 per cent of the taxable income and tax losses can be carried forward without limitation
• Tax Loss Transfer: UAE resident companies may be able to transfer tax losses to another taxable person where there is 75 per cent common ownership.
• Business Restructuring Relief: Gains or losses arising on business mergers, legal mergers, divisions of entities and other qualifying restructuring transactions can be excluded from Taxable Income.
• Small Business Relief: Taxpayers resident in the UAE may elect for small business relief if their revenue earned in a relevant tax period and previous tax periods does not exceed a threshold which will be specified in a ministerial decision

Qualifying groups v/s tax groups

UAE companies or non-resident companies that have a permanent establishment in the UAE will automatically be part of a qualifying group where:

• They are under at least 75 per cent common ownership
• Neither company is an exempt person or a Qualifying Free Zone Person
• Both companies use the same accounting standards and have the same financial year
• Within a qualifying group, assets and liabilities can be transferred on a no gain/no loss basis for corporate tax purposes subject to certain conditions being met

UAE group companies can apply to form a tax group and be treated as a single taxpayer. A tax group can be formed by a parent company and its subsidiaries where:

• The parent company holds (directly or indirectly) at least 95 per cent of legal and economic ownership of its subsidiaries.
• Neither the parent nor any group member is an exempt person or a Qualifying Free Zone Person.
• All group members use the same accounting standards and have the same financial year.
• Tax groups file one consolidated CT return for the entire group and tax losses are carried forward on a tax group basis.

PREREQUISITE FOR CORPORATE TAXPAYERS

• Taxpayers are required to register for corporate tax with the FTA and will be issued a corporate tax registration number (TRN)
• Taxpayers will need to prepare financial statements in accordance with accounting standards accepted in the UAE that will form the basis for their corporate tax returns.
• For certain taxpayers, their financial statements may need to be audited/certified.
• Taxpayers will need to maintain all records and documents relating to their tax return for at least seven years following the end of the relevant tax period.
• The deadline for filing the corporate tax return with the FTA and paying corporate tax is 9 months after the taxpayer’s year-end.
• Taxpayers that do not comply with the corporate tax regime will be subject to penalties. However, there will be no penalty for late registration.

How we can help you?

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