With the UAE flourishing economically, it’s important for business owners to understand the ins and outs of corporate taxes. Knowing about the rules on corporate tax for enterprises in the UAE is essential to ensure that you meet the necessary corporate tax law requirements and avoid any potential penalties. From taxable income rules in free zones to understanding the exemptions that apply to enterprises, this article is here to help guide you through the complexities of UAE corporate tax regulations. We’ll cover the ins and outs of UAE corporate tax as it applies to enterprises in Dubai and the UAE. Let’s get started.
It is important to understand the effects of the recent Ministry of Finance (MoF) amendments to UAE corporate taxes for enterprises and how they may affect your business. Familiarising yourself with your tax responsibilities and ensuring compliance can benefit your business in the future.
The MoF has set forth new guidelines regarding the implementation of federal corporate tax in the UAE. This tax system will be enforced starting from June 1, 2023, as part of the revised UAE Corporate Tax structure. It is the first time that this tax will be introduced in this way across the UAE. Corporate taxes will be enforced in all Emirates under the jurisdiction of the UAE Federal Tax Authority (FTA), which oversees all the corporate tax law implementation.
The UAE aims to achieve the following objectives through the introduction of corporate tax (CT):
- Establish itself as a top global centre for business and investment.
- Speed up its development and progress towards strategic goals.
- Reaffirm its pledge to comply with international standards for tax transparency and counteracting harmful tax practices.
The UAE’s CT will be applicable to all businesses, individuals and freelancers performing commercial activities using a commercial licence in the country, regardless of whether they are in a free zone or in the UAE mainland.
However, free zone businesses that adhere to all regulatory requirements and do not conduct business on the mainland will continue to benefit from CT incentives. Foreign entities and individuals will only be subject to CT if they consistently conduct trade or business in the UAE.
Businesses involved in banking operations, real estate management, construction, development, agency, and brokerage activities will also be liable for CT.
The UAE is striving to become the benchmark for international best practices in corporate tax regulations, as they lead the way in this approach.
If your enterprise follows the structures mentioned below, you need to follow the regulations related to corporate taxation. You should register for corporate tax, determine your taxable income, submit an annual tax return, and pay taxes accordingly. Additionally, you must adhere to any other rules established within the corporate tax law.
Corporate taxes are applied to the following types of business structures:
- Limited liability companies (LLCs)
- Limited liability partnerships with partners that have limited liability
- Funds that are structured as a legal entity
- Public shareholding companies
- Public joint stock companies
- Branches of non-resident companies incorporated within a free zone.
If you have a UAE commercial, professional or industrial business licence, your enterprise will fall under corporate tax rules. Similarly, if your company engages in any category of a “business activity” it will be subject to corporate tax.
Income that is exempt from UAE CT includes:
- Dividends and other profit distributions received from UAE incorporated or resident legal persons.
- Dividends and other profit distributions received from a Participating Interest in a foreign juridical person.
- Income from sources such as capital gains, foreign exchange gains or losses, and impairment gains or losses, related to a Participating Interest.
- Income from a foreign branch or permanent establishment if a “Foreign Permanent Establishment” exemption claim has been made.
- Non-resident income earned from the operation or leasing of ships and aircrafts for international transportation purposes.
If your taxable income is up to AED 375,000 (approximately USD 102,000), you won’t pay any tax. If your taxable income is above AED 375,000, you’ll pay 9% in taxes. Large multinationals that meet specific criteria based on Pillar Two of the OECD BEPS rules have different tax rates.
UAE enterprises are eligible for a variety of corporate tax exemptions. Under the new regulations, these exemptions apply to the following business activities:
- The taxation of the extraction of natural resources will remain based on the specific tax laws of each Emirate.
- Foreign investments will be subject to taxes on earnings from dividends, capital gains, interest, royalties, and other investment returns.
- Companies that operate in free zones as qualifying free zone persons (QFZP) with qualifying income are also exempt from CT.
The UAE government has implemented specific tax regulations for enterprises in free zones to encourage foreign investment, which is a considerable contributor to the economy. In free zones, to be exempt from paying UAE CT your enterprise must identify as a ‘qualifying free zone person (QFZP) with associated ‘qualifying income’. Let’s see what these two categories entail below.
In order for an enterprise to become a qualifying free zone person in the UAE, it must fulfil several requirements.
These requirements comprise satisfying the Economic Substance Regulations by possessing adequate substance, owning physical assets, accounting for operational expenses, having sufficient workforce and resources, and being able to generate profit.
The enterprise must also generate qualifying income, be controlled within the UAE, not choose to opt out of the free zone tax system and follow transfer pricing regulations while keeping precise documentation of their business operations.
If your company doesn’t meet any of these conditions or chooses not to take advantage of the free zone tax system, you will have to pay the standard corporate tax rates of 9% from the beginning of the fiscal year.
Qualifying income is income earned by individuals or companies who are eligible for free zone status. The income should be generated through business deals with companies situated outside the UAE or within the same free zone, or any other free zone within the UAE.
If you receive non-passive income from the UAE mainland, 9% tax will be applied to that portion of your income. However, any remaining income will not be taxed and will incur a 0% tax rate. Similarly, if you earn passive income from activities such as owning shares, receiving royalties, or making capital gains through investments in mainland companies, there’s no tax applicable to that income.
How are the corporate tax obligations of your enterprise affected if it is linked to a trust or family foundation?
In accordance with the UAE Corporate Tax Law definition, a Family Foundation refers to a foundation, trust, or similar entity that serves the purpose of safeguarding and controlling the assets of an individual or a family.
A Family Foundation’s main purpose is to manage funds related to savings or investments for individual beneficiaries or charitable purposes. These activities are not considered a “business” or “business activity” for UAE CT purposes, provided they are carried out by the founder, beneficiary or any other person directly involved.
So, does this mean family foundations are exempt from corporate tax in the UAE?
Family Foundations and some specific trusts are considered independent legal entities and are therefore subject to UAE CT, at face value. However, these entities can be viewed as “Unincorporated Partnerships” under UAE CT laws, wherein the primary founder and trust beneficiaries are deemed as owners of the trust assets.
As a result, this may prevent the foundation or trust’s income from being subject to corporate taxes and would qualify to be exempt.
Furthermore, Trusts established in the Dubai International Financial Centre (DIFC) or within the Abu Dhabi Global Market (ADGM) are contractual agreements between multiple individuals (such as the beneficiary, settlor, and trustee) and do not possess distinct legal identities. These trusts are considered transparent vehicles for UAE CT purposes by default.
Investment funds are often structured as limited partnerships instead of corporate entities in order to avoid tax implications for their investors. Most other countries also consider limited partnerships as transparent for tax purposes, which means that investors in the fund are taxed similarly as if they had invested directly in the underlying assets of the fund.
For UAE CT purposes, investment funds that are formed as partnerships, unit trusts, and other unincorporated vehicles would be considered financially transparent and categorised as “Unincorporated Partnerships.” Corporate investment funds, such as real estate investment trusts and partnership funds can request to be treated as “Taxable Persons” for UAE CT purposes and may be exempt from UAE CT if they meet certain requirements.
These new tax rules will come into effect from 1 June 2023. Enterprises are required to adhere to these rules for their relevant financial year. If a company’s financial year begins on 1 January and ends on 31 December, the new rules will be applicable from 1 January 2024.
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 made with the Federal Tax Authority. People who are exempt must keep records to prove that they qualify for the exemption. Enterprise owners are advised to keep tax records and documents for a period of seven years after the relevant tax period has ended.
Enterprises in the UAE that extract natural resources or engage in specific non-extractive activities will not have to pay UAE corporate tax. However, other businesses may have to pay both UAE CT and Emirate-level taxes. Remember, paying Emirate-level taxes will not reduce the amount of UAE CT payable, nor will it be credited against it.
The UAE doesn’t distinguish between nationality or residence when it comes to corporate tax. Any company that is based or operates in the UAE, regardless of the nationality or residence of its owners, will be liable for UAE corporate tax.
The ‘participation exemption regime’ in the UAE provides an exemption from corporate tax on capital gains earned from a Participating Interest. Additionally, there is also relief from corporate tax for capital gains that may arise from intra-group transfers, reorganisations, and restructuring transactions. Capital gains that are not explicitly classified as such will be considered regular income and subject to CT.
It’s easy to see why entrepreneurs and enterprise-level business owners find the UAE an appealing investment destination. Dubai and all other Emirates boast a strategic location, favourable business regulations, and diverse pool of skilled workers.
The UAE has implemented an updated corporate taxation system that makes the business environment clearer and more transparent. This change is expected to attract foreign direct investments and result in a more competitive business landscape in the coming years. Even with these recent changes in mind, there are many ways your enterprise can benefit from the advantageous tax environment in Dubai free zones provided you remain compliant with corporate tax rules.
Set your business on the fast track to success by engaging help from corporate tax consultants at Virtuzone. With decades of industry experience, our experts can take care of the hard yards, giving you more time to spend on expanding your enterprise.
We can offer personalised guidance on many aspects of business incorporation. From VAT and corporate tax consultancy services to getting the basics of establishing a business in Dubai up and running, we’re ready to assist.
Contact us today for help setting a strong foundation for the success of your business.