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Corporate tax in the UAE

In January 2022, the Ministry of Finance (Ministry) of the United Arab Emirates (UAE) announced its intention to introduce a federal corporate tax (Tax, Corporate Tax, CT) on corporate net income and in October 2022 Federal Decree-Law No. 47 on Corporate and Business Taxation in the UAE (the Law) was issued as we have previously reported on here and here.

Since the issuance of the Law, the Ministry, the Federal Tax Authority (the Authority) and the Cabinet have issued an article-by-article commentary on the Law, about 30 by-laws and a FAQ with more than 20 sections and 200 questions and answers about Corporate Tax in the UAE.

In addition to general information the abovementioned documents cover the gaps that previously occurred in the legislation, including: income [1, 2] and persons [1, 2, 3] subject to taxation or exempt  [1, 2, 3, 4] from taxation, persons who are not subject to registration[1], residence [1, 2, 3], procedure for adjustment of taxable income [1], deductions [1], amendment of tax period [1], deregistration [1]; accounting and financial statements [1]; free zones (FZ); benefits [1, 2] and conditions  of exemption from taxation, restrictions and limits; in terms of qualified persons [1, 2], qualified activities[1][1], its types, exceptions, qualified income [1], etc.; transfer pricing (TP) [1][2]; tax and qualified groups [1][3].

What to do now?

In order to pay the Tax, all taxable persons are obliged to register (regardless of the level of income and status of the company, existence of registration for VAT purposes, etc.). At the same time, the Authority may request tax exempt persons to register (the list of persons is set forth in the decisions).

It is also necessary, using the published decisions, commentary and FAQ: (1) determine whether your business will be subject to the Tax, and if so, from what date and at what rate; (2) understand the requirements for your business under the Act, including what is the reporting/tax period for your business, by what date your business must file a declaration, etc.; (3) assess how the Tax may affect your business’s obligations and liabilities under contracts with customers and suppliers; (4) specify what financial information and records must be maintained for purposes of the Tax.

What income is subject to the Tax?

As we have mentioned, the basic rate of CT is 9%, but now it is specified in the decisions that such a tax rate is charged only on income which exceeds 375,000 AED. Income below this amount is taxed at 0%[4]. This applies to entities incorporated in the UAE or effectively managed and controlled in the UAE[5] and to foreign entities having a permanent establishment in the UAE. Individuals will only be taxed under certain circumstances (if doing business directly or through an unincorporated partnership or sole proprietorship).

How free zones are taxed?[6]

The tax rate for persons registered in a free zone (FZ) depends both on whether their income exceeds AED 375,000 and on whether the persons meet the definition of Qualifying Free Zone Person (QFZP), whether the income and activities are qualifying (0%) or not (9%)[7]. Also, the 0% CT rate applies only if such persons’ income is not derived from an excluded activity[8] or does not exceed a certain threshold (de minimis).

In other words, the CT regime applies not only to the mainland, but also to the FZ (free zone), and companies and branches of the FZ can enjoy the reduced rate of 0% CT on income from relevant activities and transactions only if they meet certain conditions.

An FZ person who meets the conditions of the FZ CT regime and, therefore, benefits from the regime is called a qualified FZ person[9]. Failure to meet any of the conditions (e.g. receipt of qualifying income by CP[10] or adequate substance[11]) results in the person losing his qualifying status and cannot benefit from the CT FZ tax regime for a period of five (5) tax periods, starting from the beginning of the Tax Period in which any of the conditions are no longer met.

It should also be kept in mind that income from qualifying activities will only benefit from the FZ CT regime if the income is received from a legal entity. This is due to the fact that transactions with individuals are considered an excluded activity.

Do financial statements have to be prepared?[12]

Taxpayers are expected to prepare and maintain financial statements for the purposes of calculating their taxable income, and should maintain all documents and records that support the information in the CT return or in any other filing made with the Authority. Exempt persons are required to maintain all records to support their exempt status. For UAE CT purposes, the financial statements of UAE entities and other businesses should be prepared in accordance with accounting standards accepted in the UAE (usually IFRS).

A Qualifying Free Zone Person must prepare and maintain financial statements that are audited by an independent audit firm.

It is important to note that since the issuance of the law, the UAE Ministry of Finance has done a lot of work. The aforesaid shows, among other things, that the UAE has not only declared, but is resolutely on the way to fundamentally transforming its tax regulation and eliminating the practices and image of a non-tax jurisdiction (it once used to be) for persons engaged in economic activities around the world.

An overview of taxation regimes for specific businesses, including those providing services, owning real estate, international trade, use of intellectual property, etc., will be covered in our next publication.

[1] E.g.: see questions 112-169 of section “P” of FAQ;

[2] E.g.: see questions 95-102 of section “M” of FAQ;

[3] E.g.: see questions 187-184 of section “R” and “S” of FAQ;

[4] In addition to a 0% CT rate for taxable income up to and including AED 375,000, small businesses with revenue below a certain threshold can claim ‘small business relief’ and be treated as having no taxable income during the relevant Tax Period and may be subject to simplified compliance obligations. To claim small business relief, an election must be made to the FTA;

[5] All facts and circumstances must be considered in determining where a company is effectively managed and controlled, but a relevant indicator may include the place where the strategic decisions affecting the business are made;

[6] E.g.: see questions of section “P” of FAQ;

[7] For more information, see the example of calculating CT obligations in question 27 of Section “B” and section “O” of FAQ;

[8] The Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities specifies the following Excluded Activities: (1) Transaction with natural persons, except in relation to: Ownership, management and operation of ships; Fund management services*; Wealth and investment management services*; Financing and leasing of aircraft; (2) Regulated banking activities; (3) Regulated insurance activities, other than reinsurance services; (4) Regulated finance and leasing activities, other than intra-group treasury and financing activities and aircraft finance and leasing activities; (5) Ownership or exploitation of Immovable Property, other than Commercial Property located in a Free Zone; (6) Ownership or exploitation of intellectual property assets; (7) Any ancillary activities. *subject to regulatory oversight of the competent authority in the UAE

[9] The conditions for obtaining the status of an QFZP and receiving the benefits of the Free Zone Corporate Tax regime are the same, regardless of the FZ in which the QFZP person is established or registered;

[10] Qualifying Income is the income that can benefit from the 0% Corporate Tax rate under the Free Zone Corporate Tax regime. Qualifying Income includes income derived from transactions with other Free Zone Persons as well as domestic and foreign sourced income from any of the ‘Qualifying Activities’ specified in Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities. Qualifying Income does not include income derived from performing any of the ‘Excluded Activities’ that are also specified in the above mentioned Ministerial Decision. Qualifying Activities are activities that can benefit from the Free Zone Corporate Tax regime regardless of whether the income is derived from transactions with another Free Zone Person, a Person in the mainland UAE, or from a foreign Person. The Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities specifies the following Qualifying Activities: (1) Manufacturing of goods or materials; (2) Processing of goods or materials; (3) Holding of shares and other securities; (4) Ownership, management and operation of ships; (5) Reinsurance services*; (6) Fund management services*; (7) Wealth and investment management services*; (8) Headquarter services to Related Parties; (9) Treasury and financing services to Related Parties; (10) Financing and leasing of aircraft, including engines and rotables; (11) Distribution of goods or materials in or from a Designated Zone; (12) Logistics services; *subject to appropriate regulatory oversight of the competent authority in the UAE; (13) Any ancillary activities. Except for shipping, wealth and asset management, and aircraft finance and leasing activities, income from Qualifying Activities would only benefit from the Free Zone Corporate Tax regime where the income is derived from a juridical person. This is because transactions with natural persons are considered an Excluded Activity;

[11] A Qualifying Free Zone Person must have and be able to demonstrate adequate substance in a Free Zone relative to the nature and level of its activities and the Qualifying Income it earns. This means that the Qualifying Free Zone Person must have adequate staff and assets and incur adequate operating expenditure in the relevant Free Zone or in any other Free Zone for the purposes of undertaking its core income-generating activities. For more information, see, for example, questions 137 – 140 of the Ministry’s “P” section of the FAQ;

[12] E.g.: see questions 185 – 192 of section “T” of FAQ;