Corporate Tax in UAE: An Overview

The corporate tax in the UAE will apply to businesses starting with their first financial year that ends on or after June 1, 2023.

The UAE will continue to have the world’s lowest corporate tax rate, making it easier for firms to comply with tax laws. Corporate taxation will boost the UAE’s revenue, which must remain competitive in the international business and investment environment.

Corporations will become financially more disciplined as a result, which will lead to good accounting and bookkeeping practices. Corporate tax is to protect UAE start-ups and small enterprises while upholding worldwide tax transparency standards.

What is the UAE corporate tax (CT)?

A corporate tax is a direct tax imposed on corporations and other business entities’ net income or profit.

What are businesses and persons subject to Corporate Tax (CT)?

Corporate Tax is primarily liable to “Taxable Persons” like

• Businesses operating in the UAE and other legal entities based here and handled and controlled in the UAE:
• Natural persons (individuals) who perform a business or business activity in the UAE are taxable
• Foreign legal organizations that are not residents of the UAE but have a permanent establishment in the UAE are liable for Corporate Tax.
• Regarding corporate tax, people and lawyers who work in a UAE Free Zone are also “taxable persons” and must follow the rules set out in the Corporate Tax Law.
• If a person in a free zone meets the requirements to be a qualifying free zone person, they can get a corporate tax rate of 0% on their qualifying income.
• People who do not live in the UAE but have a permanent establishment there or who work there and make money that is not related to their permanent establishment may have to pay 0% withholding tax.
• Withholding tax is a type of corporate tax that is taken out of the paycheck by the person who is paying it for the person who is receiving it.
• Tax systems around the world usually charge withholding taxes on dividends, interest, fees, and other types of income that are sent between countries.

What are businesses and persons exempt from Corporate Tax (CT)?

Some businesses and organizations are exempt from corporate tax because they significantly contribute to the UAE’s economy and culture.

The following individuals are exempt:

Exempt person

• Governmental organizations are automatically exempt.
• Companies that take natural resources will not have to pay corporate tax CT because they will still have to follow the current corporate taxation system at the emirate level.
• Dividends and capital gains from qualified shareholdings in a UAE business will not be subject to corporate tax.
• Corporate tax will not apply to qualifying intra-group transactions and reorganizations as long as the conditions are met.

Furthermore, Corporate tax (CT) will not apply to:

• An individual who makes a salary and other work-related money, whether they work for the government or for the private sector.
• Interest and other income that a person makes from saving or depositing money in a bank account.
• Income earned by a foreign investor from dividends, capital gains, interest, royalties, and other investment returns.
• People actively invest in real estate on a personal level.
• People who own gains or assets in their names can get dividends, capital gains, and other types of income.

What will be corporate tax rates?

According to the Ministry of Finance, the CT rates are as follows:

• 0% tax on incomes up to AED 375,000 taxable
• 9 percent of taxable income for amounts greater than AED 375,000

What is the scope of corporate tax?

The corporate tax is imposed on taxable income earned by a taxable person during the tax period.

Corporate tax would typically be imposed annually, with the Taxable Person calculating the Corporate Tax amount on a self-assessment basis. This means the Taxable Person calculates and pays corporate tax by submitting a Corporate Tax Return to the Federal Tax Authority.

The Taxable Person’s accounting income (i.e., net profit or loss before tax) is used to determine their taxable income based on what they say in their financial records. The Taxable Person must then make certain changes to figure out their Taxable Income for the relevant Tax Period. Accounting income, for example, may need to be adjusted for revenue free from Corporate Tax and expenditure entirely or partially non-deductible for Corporate Tax reasons.

What types of income are exempt from corporate tax?

The Corporate Tax Law does not apply to specific sources of income. Taxable persons won’t have to pay corporate tax on that income and can’t deduct any costs linked to it. People who are taxed and make protected income will still have to pay corporate tax on their taxable income.

The main reason some types of income are not subject to Corporate Tax is to keep those types of income from being taxed twice. Dividends and capital gains from both local and foreign stock holdings will not usually be subject to Corporate Tax. The person who lives in the UAE can also choose, under certain circumstances, not to include income from a foreign Permanent Establishment in their UAE Corporate Tax calculations.

What business expenses are tax deductible from corporate tax?

What kinds of costs can a business subtract from its taxes?

All legal business costs spent purely to generate Taxable Income will be tax-deductible. However, the deduction timing may differ for different types of expenses and the accounting method used. For p purchases, the cost is usually written off by taking deductions for depreciation or amortization over the useful life of the asset or benefit. 

Expenses used for personal and business reasons must be split up so that only the part directly related to the taxable person’s business is tax-deductible.

Under general accounting rules, some costs may not be fully deductible for Corporate Tax reasons. When figuring out the Taxable Income, these will need to be put back into the Accounting Income.

Classification of Expenditures	Exclusion from deduction
Bribes.Penalties and fines, (other than the amount granted as compensation for damages or contract breach).Gifts, grants, or donations are given to a group that isn’t a public benefit entity that qualifies.Dividends and other profit-related payments Under the corporation tax code, there is a corporate tax.Expenditure not incurred entirely and exclusively for the operation of the taxpayer’s business.Expanses made in the real world that result in income exempt from corporate tax.	No deductions.
Expenditure on interest	Deduction of net interest expenses over 30% of earnings before interest tax, depreciation, and amortization, which is a minimum threshold (apart from certain activities)
Client’s entertainment expenditure.	50% Fifty percent of the cost of the expenditure is partially deducted.

Some important considerations to keep in mind before submitting your taxes:

• Tax firms must know how tax laws are put into effect and what the courts have said about the matter.
• The Ministry of Finance of UAE says to follow all the rules and regulations before tax planning.
• When planning taxes, you should think about the goals of your business as well as how flexible the company will be for future changes and incorporations that will have tax benefits and effects in the future. 
• Companies should plan their taxes well before they file their taxes as if they don’t, they will likely have to pay more than the real amount they owe.
• The tax and accounting firm should give the government correct and useful information for record-keeping reasons before filing taxes.

How do firms file corporate taxes in the UAE?

Step 1: Make an account on the Emaratax portal using your email address and phone number, or use your current ID and password to log in.

Step 2: Make a taxable person or choose the right one from the list of taxable persons.

Step 3: “Register for Corporate Tax.” This is the last choice you must make to finish registering.

How corporate tax will impact UAE free zones?

Those who qualify as “Free Zone Persons” can take advantage of a favourable Corporate Tax rate of 0% on their “Qualifying Income” only.

So that they can be called a Qualifying Free Zone Person, the Free Zone Person must:

• Ensure sufficient resources are maintained in the UAE.
• Derive ‘Qualifying Income. 
• They have not chosen to be subject to Corporate Tax at the standard rates.  
• Furthermore, make sure to comply with the transfer pricing requirements outlined in the Corporate Tax Law.

The Minister can make up more rules that a Qualifying Free Zone Person needs to follow.

A Qualifying Free Zone Person will be liable to the standard rates of Corporate Tax at the start of the Tax Period in which they failed to satisfy the qualifications if they do not satisfy any of the conditions or choose to be subject to the regular Corporate Tax regime.

To Sum up the overview of corporate tax in the UAE

The Corporate Tax Law requires businesses in the UAE to maintain transfer pricing records, including the master file and local file, with certain exceptions outlined in a Ministerial Decision. The FTA must receive the TP paperwork within 30 days of receiving a request.

Once more, the corporate tax is a direct tax on the money that corporations make. If a business in the UAE makes more than

AED 375, 000 in profit, it has to pay corporate tax. The tax rule will be in effect all over the United Arab Emirates starting in June 2023.

Why Highmark tax consultants and accountants?

• Highmark, a well-known accounting and auditing company in Dubai, takes pride in giving each client personalized service.
• Highmark provides a wide range of expert services, such as accounting, auditing, assurance, VAT, business, accounting tools, and payroll. 
• Highmark tax experts are always ready to help clients with financial problems, such as meeting compliance and auditing requirements, bookkeeping, and more.
• For Corporate tax Queries call us at +971557309266 or +971524286632

Graph content

All businesses operating in the UAE will now be subject to corporate taxes.

9%

Corporate tax is applicable for income exceeding AED 375,000.

0%

0% tax on income below AED 375,000

This decision is to help startups and small businesses.

Corporate tax will start in the financial period beginning on or after June 1, 2023.

Critical elements of corporate tax in UAE

1. Foreign investors who do not conduct business in the UAE are not subject to corporate tax.
2. Corporate tax advantages may continue to be offered to businesses operating in free zones as long as they meet all standards.
3. No direct corporate tax.
4. No corporate tax is due on a few transactions and reorganizations within a group.
5. no corporate tax, On both domestic and international payments,

The dividends and capital gain a UAE business receives from its qualified shareholdings will not be subject to corporate tax.