UAE Corporate Tax

Shortly after a landmark reform of the international tax system implemented by OECD (Organization of Economic Cooperation and Development) in December 2021, UAE announced on 31 January 2022 the introduction of corporate profits tax. The new tax regime will commence from 1 June 2023. 

This move reaffirms UAE commitment to follow international financial standards and combating illegal activities and tax evasion. 
UAE corporate tax will be one of the lowest in the world and will equal 9%. Large multinationals with revenues exceeding 750 mln EUR will be taxed differently. 

On 28 April 2022, the United Arab Emirates (UAE) Ministry of Finance (MOF) released a public consultation document on the planned introduction of corporate tax (CT) in the UAE.  

The document does not cover all the details of the planned tax regime. It mainly aims to receive valuable feedback from interested parties. Comments on the public consultation document are welcome till 19 May 2022.

Emirabiz business setup​​​​​​​ consultancy will be happy to answer your questions, assess your business and get your company ready for the upcoming corporate tax introduction. 

Meanwhile, we have prepared answers to most common questions regarding UAE corporate tax.

Who will pay UAE corporate tax

Companies or individuals operating under a commercial license or equivalent permit who meet both following criteria will be subject to UAE corporate tax:

• Taxable profits of or over 375,000 AED (102,700 USD). 
• Taxable profits are derived from activity with UAE Mainland

So under taxable profits we understand those profits which are received from UAE Mainland companies and which are over 375,000 AED. 

The business which received those profits can be either a Free Zone entity or Mainland local company.

The public consultation document says that the following entities will be exempt from corporate tax:

• Federal and emirate governments and their departments, authorities and other public institutions
• Wholly government-owned UAE companies that carry out a sovereign or mandated activity
• Companies engaged in the extraction of natural resources
• Charities and other public benefit organizations
• Public and regulated private social security and retirement pension funds 
• Investment funds (subject to some conditions)

UAE corporate tax for free zones

Companies registered in UAE free trade zones will still be able to enjoy the tax free benefits provided they meet the following conditions:

• They do not derive profits from the activity with UAE Mainland companies. 
• If they make profits from the activity with UAE Mainland, the amount is less than 375,000 AED.

Note that mainland branches of free zone entities will be taxed at the regular tax rate on mainland income. 

It is important to mention that after the new tax regime, free zone companies will need to file a tax return.

So if you have a free zone company and conduct your business out of UAE, you are not liable to 9% corporate tax. 

Also, if your company has passive income like dividend, royalty or interest from the mainland, you will not have to pay the tax. The same benefits are granted to free-zone companies in designated zones for VAT purposes that supply goods to the mainland.

The public consultation document says that free zone companies can decide to be subject to the regular corporate tax rate.

Profit tax for UAE Mainland

UAE profit tax will mostly be targeting Mainland companies who do business in the territory of the UAE and receive profits here. 

The profit tax for Mainland companies will be 9% from the profits received locally. The threshold of taxable profits starts from 375,000 AED. The profits below this figure will not be taxable.

Tax for UAE offshore companies

UAE offshore companies are represented by JAFZA offshore and RAK offshore. 

UAE offshore companies are not eligible to conduct business within the UAE, thus they are exempt from UAE corporate profit tax.

Is accounting mandatory in UAE?

All UAE companies must provide audited financial statements prepared in accordance with international financial standards. 

In addition, keeping the books in a right manner will help companies to justify the profits and place of income generation, which will help to file tax returns in an accurate way. 

All transactions have to be recorded and backed up by invoices and other supporting documents, such as contracts, bills of lading, etc.

The public consultation document also brings some more light on the taxable income calculation basics. The starting point for computing taxable income will be accounting profit/loss. 

The default tax year will be considered the Gregorian calendar year. Expenses on account of interest payments will be limited to 30 percent of EBITDA (Earnings before interest, taxes, depreciation and amortization) and only 50 percent of entertainment expenses can be deducted.

Do companies need to file tax returns?

Starting from 1 June 2023 all UAE companies will have to register with the Federal Tax Authority (FTA) and submit annual tax returns whether they pay 9% tax or not. 

Taxpayers will need to file the tax return on the FTA portal once a year and pay the taxes within nine months from the end of the tax period. Companies can ask the FTA for clarifications regarding uncertain tax positions.

Advance payments of provisional tax returns will not be required.

Can companies offset their losses?

Companies can offset prior period losses against future taxable income up to 75 percent of the taxable income. If at least 50 percent of the share capital is held by the same shareholders, tax losses can be carried forward indefinitely. If the owners are new, only 50 percent of such losses can be carried forward provided the business stays the same or similar.

Are there any income taxes in the UAE?

Being an international business hub, UAE still offers the following benefits to its companies and residents:

• Zero personal income tax. However, if individuals carry out commercial activities under a commercial license or equivalent permit, they will be subject to corporate tax.
• Zero tax from real estate generated income
• Zero tax on profits from investments
• Zero tax on capital gains
• Zero tax on dividends
• Zero withholding tax on domestic and international transfers

Will group companies pay tax separately?

No. Groups are allowed to be taxed as a single entity. 

Companies with at least 95 percent common shareholding can form corporate tax groups. Losses can be transferred between group companies if the common ownership is at least 75 percent.

What is transfer pricing in UAE?

Transfer price or transfer cost is a cost of goods or services that are being moved within a group of companies, or related companies or a multinational company.

For example, transfer pricing is used when trade happens between departments of the same company or between a company and its subsidiaries. 

Transfer prices often become a tool of lowering tax burden, reducing profits and manipulating tax obligations. 

The new law enforces that the transfer prices in UAE should be similar to the ones in this region between unrelated parties. 

Taxpayers transacting with related parties and connected persons will need to submit a disclosure form, maintain a master file and a local file. The Country-by-Country Report (CbCR) compliance requirements will still be in effect.

If you have any questions about UAE corporate tax or accounting and bookkeeping standards, contact us now to prepare your business in advance.