The UAE has introduced the "Corporate Tax Law" (Federal Decree-Law No. 47 of 2022), setting the stage for the implementation of Federal Corporate Tax effective from June 1, 2023, for financial years commencing on or after that date. This move aims to bolster the UAE's strategic objectives and foster its development by establishing a competitive Corporate Tax system in alignment with international standards. Drawing inspiration from global best practices, the UAE's Corporate Tax regime is built on internationally recognized principles, ensuring transparency and clear understanding of its implications.
Corporate Tax: Definition and Scope
Corporate Tax, also referred to as "Corporate Income Tax" or "Business Profits Tax" in other jurisdictions, is a direct tax levied on the net income of corporations and other businesses.
The scope of Corporate Tax encompasses the following entities, collectively known as "Taxable Persons":
- UAE-based companies and other legal entities incorporated or effectively managed and controlled within the UAE.
- Individuals engaged in business or business activities in the UAE, as defined by an upcoming Cabinet Decision.
- Non-resident legal entities (foreign corporations) having a Permanent Establishment in the UAE, as elaborated in Section 8.
Taxation of Juridical Persons in Free Zones
Juridical persons established in a UAE Free Zone are categorized as "Taxable Persons" and are required to comply with the provisions outlined in the Corporate Tax Law. However, Free Zone entities meeting the criteria to be designated as "Qualifying Free Zone Persons" are eligible for a favorable Corporate Tax rate of 0% on their Qualifying Income, subject to conditions detailed in [Section 14].
Withholding Tax for Non-Residents
Non-resident individuals without a Permanent Establishment in the UAE or earning UAE-sourced income unrelated to their Permanent Establishment may be subject to a 0% Withholding Tax rate.
Corporate Tax Rate
The Corporate Tax rate is set at 9% for Taxable Income exceeding AED 375,000. Taxable Income below this threshold is subject to a 0% Corporate Tax rate.
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Resident and Non-Resident Classification
- Resident Person:
A "Resident Person" includes companies, juridical entities formed under UAE laws, and foreign entities effectively managed and controlled within the UAE. This classification encompasses income from both domestic and foreign sources related to business activities conducted in the UAE.
- Non-Resident Person:
A "Non-Resident Person" refers to juridical entities that do not meet the criteria for residency. This category includes entities with a Permanent Establishment (PE) in the UAE or deriving State Sourced Income.
- Permanent Establishment (PE):
A critical concept in international tax law, PE determines substantial presence for foreign entities in the UAE, triggering Corporate Tax liability. The definition aligns with Article 5 of the OECD Model Tax Convention and the UAE's stance under the Multilateral Instrument. Foreign entities can refer to relevant OECD Commentary and bilateral tax agreements to assess the existence of a PE.
Exemptions from Corporate Tax
Exemptions from Corporate Tax apply to the following categories of individuals and entities:
- Government Entities and Controlled Entities: Government-related entities, including both government entities and government-controlled entities, are exempt.
- Extractive and Non-Extractive Natural Resource Businesses: Extractive businesses and non-extractive natural resource businesses meeting specific conditions outlined in the Corporate Tax Law are eligible for exemption.
- Non-Resident Individuals: Non-resident individuals earning only UAE-sourced income and lacking a Permanent Establishment in the country are also exempt from UAE Corporate Tax registration.
Corporate Tax and Taxable Income
Corporate Tax is applicable to the Taxable Income earned by a Taxable Person within a specified Tax Period. Generally imposed on an annual basis, the Taxable Person is responsible for calculating their Corporate Tax liability through a self-assessment approach. This involves preparing and submitting a Corporate Tax Return to the Federal Tax Authority.
Qualifying for the 0% Corporate Tax Rate as a Free Zone Person
A Free Zone Person can avail of a special 0% Corporate Tax rate, but solely on their "Qualifying Income." To qualify as a "Qualifying Free Zone Person," the following criteria must be met:
- The Free Zone Person must have a significant presence in the UAE.
- They must generate what is termed "Qualifying Income."
- They should not have elected to be taxed at regular rates.
- They need to adhere to transfer pricing rules stipulated in the Corporate Tax Law.
Income Exemptions under Corporate Income Tax (CIT)
The Ministry of Finance (MOF) has identified specific income categories that will be exempt from the CIT system:
- Natural Resource Extraction: Income derived from natural resource extraction will be exempted.
- Dividends and Capital Gains: UAE businesses' dividends and capital gains from qualifying shareholdings will be exempt. These shareholdings pertain to ownership interests in UAE or foreign companies meeting defined conditions.
- Qualifying Intra-Group Transactions: Certain intra-group transactions and reorganizations meeting specified conditions will qualify for exemption.
- Foreign Entities and Individuals: Income of foreign entities and individuals not consistently engaged in UAE trade or business will be exempt.
- Foreign Investors' Returns: Income obtained by foreign investors from dividends, capital gains, interest, royalties, and other investment returns will be exempt.
Corporate Tax Registration, Filing, and Payment
Every Taxable Person, including Free Zone Persons, must register for Corporate Tax and obtain a Corporate Tax Registration Number. In certain cases, Exempt Persons may also be required to register.
Taxable Persons are required to submit a Corporate Tax return for each Tax Period within 9 months of the period's conclusion. Typically, this same deadline applies for fulfilling any necessary Corporate Tax payments pertaining to the specific Tax Period for which the return is filed.
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Impact of Corporate Tax in the UAE
- Long-Term Economic Stability: By creating more ways to make money and growing industries other than oil, the UAE is setting up a strong base for keeping its economy steady over time. A stable economy makes it a good place for investors to find long-lasting and profitable chances to invest their money.
- Infrastructure Development: With a new revenue source, the UAE can allocate more resources to vital infrastructure projects. This includes expanding transportation networks, enhancing water and electricity supply systems, and improving telecommunications infrastructure. Such initiatives stimulate growth in various sectors and attract foreign investment.
- Economic Growth: Investing in infrastructure projects fosters growth in non-oil sectors, creating fresh demand and opportunities for foreign investors. This economic diversification strengthens the nation's resilience to oil price fluctuations and economic uncertainties.
- Support for SMEs: Corporate tax revenues contribute to funding initiatives aimed at nurturing small and medium-sized enterprises (SMEs). These efforts can include providing financial assistance, mentorship, and access to resources, fostering a vibrant entrepreneurial ecosystem.
- Enhanced FDI Environment: The introduction of corporate tax underscores the UAE's commitment to developing a robust and sustainable economy. This commitment, coupled with a competitive tax regime, enhances the UAE's attractiveness as a destination for foreign direct investment (FDI).
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Mostafa is a seasoned Tax Consultant with over 5 years years of experience gained in diverse taxations matters. He has vast expertise in settling tax disputes with the Federal Tax Authority and handling of tax procedures in compliance with tax laws. He is adept in investigating underlying tax intricacies and offering expert tax advisory. He is also well-versed in conducting tax analysis’s and negotiations with the Tax Regulators, upon tax preparation and filing. Mostafa specializes in the areas of Tax law, Auditing, Accounting and Banking law.