UAE Corporate Tax - A Concise Overview

The United Arab Emirates (UAE), a fusion of tradition and innovation, offers a fertile business environment, nurtured by a tax-efficient structure designed to foster growth, stimulate investment, and encourage innovation.

Its top-notch infrastructure, ranging from high-tech ports to advanced telecommunications, is fully equipped to support businesses aiming to reach global markets. The country has been conscientiously investing in digital technologies and smart services, creating a vibrant ecosystem that supports startups and multinational corporations alike.

The nation ranks highly on ease of doing business indices, testament to its business-friendly policies and dedication to reducing bureaucratic hurdles. Its GDP, FDI influx, and overall economic health paint a promising picture of steady growth and resilience.

As we delve deeper into the nuances of the UAE's Corporate Tax Law in this article, we will further explore how this business haven has expertly woven its tax policies into its economic fabric, ensuring a progressive and sustainable future.

The UAE, aligning with global tax transparency standards, has recently unveiled a 9% federal corporate tax (CT) effective from the financial year beginning on or after 1st June 2023. This is applicable to business profits exceeding a threshold of AED 375,000, making it one of the globally competitive corporate tax rates and the lowest in the GCC.

The UAE’s Corporate Tax Law ("UAE CT") is based on international best practice and has relatively simple compliance requirements. The UAE has also taken measures to address Base Erosion and Profit Shifting (BEPS), including introducing a 5% VAT (2018), mandating Country-by-country reporting (2019), and implementing Economic Substance Regulations (2020).

In this article, we have provided an overview of the key elements of the Corporate Tax law, offering insights and interpretations, and emphasizing points that taxpayers should pay special attention to.

The Corporate Tax applies to resident person, free zone entities, and non-residents conducting business in the UAE, as well as certain non-resident entities with a permanent establishment in the UAE. In case of natural persons, the UAE CT applies provided their total turnover exceeds AED 1 million.

A resident juridical person would be liable for corporate tax on income both within and outside of the UAE, while a resident natural person would only be subject to corporate tax on income generated from business activity within the UAE.

However, a non-resident person would be subject to Corporate Tax on the income derived from -

• Permanent establishment of such non-resident person in the UAE.

• UAE sourced income that is not attributable to the permanent establishment of such non-resident person in the UAE.

• Nexus of the non-resident person in the UAE i.e., income from any immovable property in the UAE.

The Corporate Tax will be imposed at the following rates:

On Taxable Income -

• 0% if the Taxable Income does not exceed AED 375,000/-

• 9% on Taxable Income that exceeds AED 375,000/-

Free zone person (FZP) means a juridical person incorporated, established or otherwise registered in a free zone, including a branch of a non-resident person registered in a free zone. Free zone entities, if classified as Qualifying Free Zone Persons (QFZP) based on certain conditions, can be subject to 0% CT on qualifying income. Non-qualifying income is subject to the standard 9% CT rate.

Qualifying free zone person

A free zone entity in the UAE can be a "Qualifying free zone person" with 0% Corporate Tax on appropriate income, provided it maintains substantial presence in UAE, earns qualifying income, opts out of standard Corporate Tax rates, adheres to Arm's Length Principle and Transfer Pricing rules, has non-qualifying revenue within De Minimis limits, and prepares audited financial statements. Failing to meet these conditions results in classification as a regular taxable entity for five tax periods, making all income taxable at 9%.

Corporate Tax rate on qualifying free zone

• 0% on qualifying income.

• 9% on taxable income that is not qualifying income without the threshold benefit of AED 375,000.

Qualifying Income

Qualifying Income includes income (not linked to a Domestic or Foreign Permanent Establishment) from transactions with free zone persons (excluding certain activities), income from transactions with non-free zone persons related to qualifying activities that aren't excluded, and other income meeting the de minimis requirements. These requirements are met if non-qualifying revenue derived by QFZP in a tax period is lower of:

• 5% of the total revenue; or

• AED 5 million.

Non-Qualifying Revenue

Non-qualifying revenue includes:

• Revenue from excluded activities

• Revenue from non-qualifying activities in case of transaction with a non-free zone person.

Certain entities are exempt from CT, including government entities, certain businesses involved in natural resource extraction, qualifying public benefit entities, qualified investment funds, and certain pension or social security funds. The exemption also extends to a non-resident person that derives only UAE sourced income and that does not have a permanent establishment in the UAE.

Exempt entities must apply for exemption within 60 business days from the end of the qualifying tax period.

1. Transfers within a Qualifying Group

   Tax implications aren't considered when transferring assets or liabilities between two taxable person within the same qualifying group. To classify as a member of such a group, several conditions need to be met, including residency, ownership of at least 75% by either taxable person or a third party in the other, non-exemption, non-qualification as a free zone person, and matching financial year ends and accounting standards.

2. Business Re-structuring Relief

   No gain or loss is considered for tax purposes under certain business restructuring scenarios, such as asset transfer between taxable persons or on entire business transfers leading to the transferor ceasing to exist. To qualify for this relief, the market value or consideration in addition to shares or ownership interest received must not exceed the lower of:

• Net book value of Assets and Liabilities transferred.

• 10% of the nominal value of the ownership interest issued.

From financial years commencing on or after 1 June 2023, but only until 31 December 2026, Small Business relief will be extended to the following businesses and individuals whose yearly earnings do not exceed AED 3 million:

• Entities categorized as “Resident Persons.”

• Entities that are not affiliated with multinational enterprise groups.

• Entities that are not free zone entities eligible qualify for a reduced rate of tax.

• Business or individuals that had surpassed AED 3 million in revenue during a previous tax period.

The UAE CT system simplifies Taxable Income calculation, which starts with net profit (or loss) per accounting standards, typically IFRS, and then adjusts for certain items. Allowable deductions include business expenses, interest expenses exceeding AED 12 million (or 30% of EBITDA for the tax period), partially deductible entertainment expenses (up to 50%), and tax losses (up to 75% of taxable income). Also, intra-group asset transfers and business restructuring are treated neutrally. Non-deductible expenses include donations, fines or penalties, dividends, certain taxes, and expenses related to exempt income.

The following income and related expenditure shall not be considered while calculation Taxable Income:

• Dividend received from a resident juridical person.

• Dividend received from a participating interest in foreign juridical person.

• Any other income from a participating interest (subject to prescribed conditions).

• Income from a foreign permanent establishment.

• Income from operating aircraft and ships in international transportation by a non-resident person.

Resident juridical entities in the UAE can form a tax group, submitting a joint tax return and tax payment if they meet conditions such as: having at least 95% ownership by the parent company, not being an exempt person or qualifying free zone person, and sharing the same financial year and accounting standards

Taxable income for a tax group is calculated by consolidating financial results and considering income from asset and liability transfers. If a member leaves the group within two years of a transaction, transactions between group members are disregarded.

Entities subject to the Corporate Tax Law must obtain a Tax Registration Number (TRN). Different types of entities, such as public benefit entities, investment funds, pension or social security funds, and juridical entities controlled by exempt persons have specific deadlines for tax registration. De-registration applications can be made after all tax dues and penalties are cleared. This must occur within three months of halting business activities or dissolution for both natural and juridical persons.

Entities earning revenue over AED 50 million during the relevant Tax Period, and qualifying free zone persons must maintain audited financial statements according to the International Financial Reporting Standards (IFRS). If revenue is below AED 50 million, IFRS for SME can be applied. Entities with annual revenue below AED 3 million or under exceptional circumstances may maintain financial statements using the cash basis of accounting.

All amounts must be quantified in United Arab Emirates Dirham (AED) and amounts quantified in any other currency must be converted as per the exchange rate set by the Central Bank of the UAE and any other conditions by the FTA.

The filing of the Corporate Tax returns and tax payments must be settled within 9 months from the end of the relevant tax period. A parent company must file a tax return on behalf of the tax group.

A taxable person is required to maintain Corporate Tax return-related records and documents for a period of 7 years from the end of the relevant tax period. Under this, an exempt person may also be required to maintain all relevant records that enable the exempt status for a 7-year period.

Taxable persons may apply for clarifications regarding the application of the Corporate Tax law, including the conclusion of advance pricing agreements for proposed transactions.

A Taxable person may be subject to assessment and penalties under the Corporate Tax law in accordance with its procedures.

The UAE CT Law's Transfer Pricing provisions apply to related parties and connected persons, requiring transactions between them to be conducted at an Arm's Length Price. Failure to comply will result in the Federal Tax Authority (FTA) adjusting the taxable income to achieve an arm's length outcome.

TP Documentation

The documentation requirements for taxable persons, which could apply to both Mainland and Free Zone, are as follows:

• Maintain & Submit a disclosure form along with tax return, providing information on transactions with related parties & connected persons.

• If required, a master file and local file must be maintained and submitted to the FTA within 30 days upon request.

• Maintain & submit supporting information within 30 days to demonstrate the arm's length nature of transactions with related parties, if any requested by the FTA.

The Tax Period corresponds to the financial year. However, applications for a change in the start or end date of a tax period can be made by meeting certain conditions.

The UAE CT provides standard provisions pertaining to GAAR, the applicability of the provisions shall be triggered in case there is no valid commercial or other non-fiscal reason which reflects economic reality. The applicability of the provisions of GARR may also be triggered in case the transaction or arrangement is not consistent with the intention/purpose of UAE CT.

A 0% withholding tax on certain non-resident income and a credit for foreign taxes paid on income earned by a UAE taxable person can be claimed. Taxpayers may apply for CT refunds through a separate application.

The UAE CT states that in case of inconsistencies between the terms of the international agreement with the provisions of the UAE CT, the provisions of the international agreement shall prevail.

The taxable person’s opening balance shall be the closing balance of the taxable person in the preceding financial year. The opening balance, however, shall be prepared in consideration of the transfer pricing regulations mentioned under Article 34 of the UAE CT.

Harsh Patel is the Founder & Managing Partner of Water and Shark Legal FZ LLE, UAE.

Adnan Khan is the Manager at the Firm.