Corporate Tax in the UAE – What Is It and How Does It Work?

The UAE introduced a federal corporate tax system on June 1, 2023, to align with international standards and foster economic diversification. The tax applies only to qualifying income, with a 0% rate for taxable income up to AED 375,000 and a 9% rate for income exceeding this threshold. This framework ensures compliance with global norms while maintaining the UAE's competitive edge as a leading business and investment destination.

What is Corporate Tax?

Corporate tax is a direct tax imposed on the net income or profit of corporations and other entities. In the UAE, the corporate tax framework applies to businesses and commercial activities but remains competitive compared to global standards. The tax supports transparency and facilitates compliance with international requirements like the OECD’s Base Erosion and Profit Shifting (BEPS) framework.

Who is Subject to Corporate Tax in the UAE?

The UAE corporate tax applies to:

1. Entities Registered in the UAE: All businesses except those engaged in the extraction of natural resources (which remain subject to emirate-level taxation).

2. Foreign Businesses: Operating or earning income from a UAE-based permanent establishment.

3. Free Zone Companies: Those meeting specific criteria to maintain a 0% tax rate on qualifying income.

Exemptions from Corporate Tax

Certain entities and incomes are exempt, including:

• Government entities.

• Qualifying investment funds.

• Income earned from dividends and capital gains from qualifying shareholdings.

• Income from intra-group transactions under specific conditions.

Key Features of Corporate Tax in the UAE

1. Tax Rate:

   • 0%: For taxable income up to AED 375,000.

   • 9%: For taxable income above AED 375,000.

   • A different rate applies to multinationals meeting the criteria of Pillar Two of the OECD BEPS framework (Global Minimum Tax).

2. Tax Base:

   • The taxable income is based on the net accounting profit as reported in financial statements, adjusted for certain exceptions and allowances.

3. Free Zone Incentives:

   • Businesses in free zones can continue benefiting from a 0% corporate tax rate on qualifying income, provided they adhere to substance requirements and other conditions.

4. Transfer Pricing:

   • The UAE adheres to OECD-aligned transfer pricing rules, requiring related-party transactions to be conducted at arm’s length and documented appropriately.

5. Deductions:

   • Certain business expenses, such as costs directly related to generating taxable income, are deductible. However, non-deductible expenses include personal expenses and fines.

Corporate Tax Compliance

1. Registration: Businesses must register for corporate tax through the Federal Tax Authority (FTA).

2. Filing and Payment: Annual tax returns must be filed electronically, and payments are due within nine months from the end of the financial year.

3. Record-Keeping: Businesses must maintain accurate financial records for at least seven years.

FAQs

Does Corporate Tax Apply to Individuals?

No, personal income from employment, real estate, and investments (unrelated to a business) is not subject to corporate tax.

What Happens If a Business Fails to Comply?

Penalties may be imposed for non-compliance, including failure to register, file returns, or maintain proper records.

Are Dividends Taxed?

Dividends and capital gains earned from qualifying shareholdings are exempt from corporate tax.