Corporate Tax in UAE 2023 — A Complete Guide

The United Arab Emirates (UAE) had the distinctive advantage of being a low- or no-tax jurisdiction for a long time. The citizens did not pay any tax on their incomes, and very few businesses paid taxes on their profits. But the government has recently introduced the corporate tax to diversify the economy into other strategic non-oil sectors and accelerate the region’s overall economic development.

The new corporate tax regime will be effective for financial years beginning on or after June 01, 2023. This will apply to all companies, including domestic and foreign entities. Businesses are liable to pay a tax of 9% of their profits exceeding AED 375,000. The corporate tax rate is one of the lowest in the GCC region. The new law aligns the nation with international best practices in corporate governance and prevents global businesses from adopting harmful tax practices.

Let’s now explore the UAE Corporate Tax 2023 in detail and understand the concepts, features, and implications for your business.

Scope & Applicability of the UAE Corporate Tax

 Let’s check the scope and applicability of UAE corporate tax.

• All businesses that are incorporated or managed & controlled from the UAE with a net profit exceeding AED 375,000 per annum
• The tax rate is 9% on profits exceeding AED 375,000 p.a.
• To support small businesses & startups, a net profit of up to AED 375,000 in a year is exempted from tax.

Note: A global minimum corporate tax of 15% is applicable to large multinational firms as per the OECD agreement.

Exemptions from Corporate Tax in the UAE

The following business entities or their incomes are exempt from paying corporate tax in UAE.

• A government entity or a government-controlled entity
• Extractive businesses and non-extractive natural resource businesses in the UAE
• Qualifying public benefit entities that are listed in a cabinet decision
• Businesses operating in free zones shall continue to pay zero tax on qualifying income.
• Dividends and capital gains received by a UAE business from its qualified shareholding
• Foreign investors who do not conduct any business but earn their income from investments
• Eligible intra-group transactions and reorganizations that meet all necessary conditions
• Investment funds meeting the prescribed conditions
• Public/private pensions or social security funds
• An individual’s income from employment or investment in his or her personal capacity

Chargeability of Corporate Tax in the UAE

The basis of taxation depends on the classification of the business entity. The business income is taxed on both a residence and source basis as follows:

• If the business is classified as a ‘resident person’, income derived from both domestic and foreign sources shall be taxed (residence basis)
• If the business is classified as a ‘non-resident person’, income derived only from sources within the UAE shall be taxed (source basis).

Note: The basis of residency for corporate tax purposes is not determined by where a person resides or is domiciled. It depends on specific factors that are set out in the tax law.

Corporate Tax Calculation in the UAE

The UAE corporate tax has to be paid annually on a self-assessment basis by business entities. The returns have to be filed with the Federal Tax Authority for payment of taxes.

The process starts with the taxable person’s accounting income (net profit or loss before tax) according to the financial statements. Certain adjustments have to be made to arrive at the taxable income for the relevant period. This may include exempted income and expenses that are not deductible for tax purposes.

The net profit, as per the financial accounts, is tax-free up to AED 375,000. Any excess profits will be taxed at the rate of 9%. For example, if the net profit is AED 500,000, then AED 125,000 (i.e. 500,000 – 375,000) is taxed at 9%. So the tax liability of a business is AED 11,250.

Businesses that operate in the free zones are eligible for zero tax on qualifying income. A taxable income that does not meet this criterion is subject to corporate tax at 9%.

Deductible Expenses for Calculating Corporate Tax

Legitimate expenses that are incurred wholly and exclusively for business purposes are allowed as a deduction for computing net profit. But the timing of deduction may vary for different types of expenses. 

Some of the expenses that are allowed as deductions are listed below:

• The depreciation or amortization of capital assets are recognized as expenses over the economic life of such assets
• Expenses incurred for both business & personal purposes have to be clearly apportioned to determine the expenses incurred wholly & exclusively for the taxable person’s business
• Charges and fees paid to the government in connection with the setting up of a business and renewal of licenses
• Interest expenditure on servicing of debt is deductible up to 30%
• Loans given to related parties are allowed as a deduction only if they serve a legitimate business purpose
• A partial deduction of 50% is allowed as a deduction toward client entertainment expenditur

Non-Deductible Expenses for Calculating Corporate Tax

Certain expenses that are allowed as deductions as per accounting rules are not eligible for corporate tax purposes. They have to be added back to the accounting income to determine the taxable income. Some examples of expenses that are not deductible are as follows:

• Any payment made that is not in the course of the taxable person’s business
• Expenditure incurred in deriving any income that is exempt from corporate tax
• Losses not related to the taxable person’s business or not arising as a consequence of the same
• Gifts, donations, and grants made to an entity that is not a qualifying public benefit entity
• Distribution of profits by way of dividends or in any other matter
• Payment of bribes
• Fines and penalties imposed under the law

Free Zone Persons

How Can a Free Zone Person in the UAE Become a Qualifying Free Zone Person?

A free zone person that becomes a qualifying free zone person pays zero tax on their qualifying income. A qualifying free zone person is a free zone person that meets the following criteria:

• Maintains adequate substance in the UAE
• Derives eligible income (as determined by a ministerial decision)
• Complies with the transfer pricing requirements under the UAE corporate tax law
• Has not made an election to be subject to corporate tax at standard rate

The Ministry may specify other additional conditions to be fulfilled by the qualifying free zone person. If a free zone person fails to meet any of the above conditions, the entity will be subject to standard corporate tax rates from the beginning of the period when such conditions were not fulfilled.

Tax Groups

What are Tax Groups under the UAE Corporate Tax? 

Under the UAE Corporate Tax law, two or more taxable persons who fulfill certain prescribed conditions can apply to form a tax group. They can then be treated as a single taxable person and file a single tax return for the entire group.

In order to form a tax group, the parent company and its subsidiaries must be resident juridical persons. They should follow the same financial year and prepare their financial statements by adopting the same accounting standards.  The presence of reliable audit firms in UAE will also contribute to building trust and transparency in financial reporting, further enhancing the country’s reputation as a reliable and attractive investment hub.

Tax Administration

How Can Businesses File for Corporate Taxes in the UAE

The Federal Tax Authority (FTA) is responsible for the administration of corporate tax in UAE. Every taxable person (including free zone persons) has to register for corporate tax and obtain a corporate tax registration number.

The taxable persons have to file a corporate tax return for every tax period within a period of 9 months from the end of the relevant period. The same deadline is applicable for the payment of any corporate tax due in respect of the period for which a return has been filed.

The new UAE corporate tax regime shall be effective from the financial years starting on or after June 01, 2023. The corporate tax rate of 9% is amongst the lowest in the region. Small businesses and startups with annual net profits not exceeding AED 375,000 will continue to enjoy the 0% tax benefit.

A competitive tax structure that adheres to global best practices will strengthen corporate governance standards and prevent unfavorable tax practices. This will fast-track economic development and establish the UAE as one of the best business and investment destinations in the world.