The United Arab Emirates (UAE) has long held a reputation for its attractive zero-tax policies, drawing businesses and workers from all corners of the world. However, in recent times, the UAE has made a noteworthy shift in its fiscal strategy.
This is because of the new introduction of the UAE corporate tax.
This decision is seen as a well-thought-out move aimed at broadening the UAE’s sources of income beyond its reliance on oil revenues, all the while ensuring its continued prominence as a major commercial hub in the region.
This article will dive into how the UAE corporate tax was introduced, what the rates are, and how it operates within the country.
So let’s start with what corporate tax is in general, and then we’ll see how UAE corporate tax is defined.
What Is Corporate Tax?
Corporate tax is a type of tax that businesses, like companies and corporations, pay on their profits.
Just like how you pay income tax on the money you earn from your job, companies pay corporate tax on the money they make from their business activities.
This tax money helps the government fund important things like schools, hospitals, and infrastructure.
It’s an essential part of how countries manage their finances, and it ensures that even big companies contribute to the well-being of the society they operate.
What Is UAE Corporate Tax & How Did It Start?
The UAE introduced a federal corporate tax (CT) on business profits, effective for financial years starting on or after June 1, 2023, or January 1, 2024, depending on your company’s fiscal year.
This marks a significant shift in the UAE’s tax policy, historically featuring a zero-tax regime for most businesses.
With this move, the UAE becomes the fourth country in the Gulf Cooperation Council (GCC) to implement a national corporate tax.
As I’ve observed from my interactions with UAE business owners through ProfitBooks, this development has created quite a buzz in the business community.
The introduction of corporate tax aligns the UAE with international tax standards and transparency requirements, helping prevent tax base erosion and profit shifting.
It also aims to enhance the country’s position as a global business hub by providing tax certainty.
Having guided numerous businesses through tax transitions in other countries, I can tell you that early preparation and understanding are key to smooth compliance.
The Scope of UAE Corporate Tax
The UAE has brought in a new national tax system that applies to all businesses and commercial activities across its seven emirates.
However, there are some exceptions:
- Resource Extraction Companies: Businesses engaged in extractive and non-extractive natural resource activities remain subject to Emirate-level taxation rather than federal corporate tax.
- Individual Income: Regular individuals earning non-business income, such as employment income, real estate investment income, and personal investment income, are generally excluded from corporate tax. This only becomes taxable if it qualifies as a business activity requiring a license.
- Free Zone Entities: Free zone companies can benefit from a 0% rate on qualifying income if they meet specific regulatory requirements and do not conduct business with the mainland UAE.
- Non-Resident Entities: Foreign entities are only subject to UAE corporate tax if they have a permanent establishment in the UAE.
- Individuals Conducting Business: Natural persons (freelancers, sole proprietors) conducting business in the UAE above certain thresholds will be subject to corporate tax.
Here’s the interesting part: Foreign banks used to follow their emirate’s bank tax rules, but now they’ll have to follow the UAE’s national tax law. How this change affects them and local banks will be explained later.
It’s a big deal because they’ll all need to adapt to these new UAE corporate tax rules.
Brief On UAE Corporate Tax Rates
The new tax rules in the UAE work like this: They have three different rates based on how much money a company makes.
- 0% tax rate on taxable income up to AED 375,000 (approximately USD 102,000). This supports small businesses and startups by essentially providing a tax-free threshold.
- 9% standard rate on taxable income exceeding AED 375,000. This is applied to the portion of profit above the threshold.
- 15% rate for qualifying multinational enterprises (MNEs) with global revenues above €750 million (approximately AED 3.15 billion), expected under the OECD’s Pillar Two rules for implementation in 2025.
To illustrate with a simple example: If your business earns AED 475,000 in taxable profit, you’d only pay tax on AED 100,000 (the amount exceeding the threshold). At 9%, your tax liability would be AED 9,000.
The starting point for calculating taxable income is your accounting net profit (or loss) as per financial statements, with adjustments for non-deductible expenses and exempt income. This is why having accurate accounting records through reliable software like ProfitBooks becomes crucial for tax compliance.
What Is UAE Corporate Tax & How Did It Start?
Understanding the new tax regime is essential for businesses operating in the UAE.
The UAE introduced a federal corporate tax (CT) on business profits, effective for financial years starting on or after June 1, 2023, or January 1, 2024, depending on your company’s fiscal year. This marks a significant shift in the UAE’s tax policy, historically featuring a zero-tax regime for most businesses.
With this move, the UAE becomes the fourth country in the Gulf Cooperation Council (GCC) to implement a national corporate tax.
As I’ve observed from my interactions with UAE business owners through ProfitBooks, this development has created quite a buzz in the business community.
The introduction of corporate tax aligns the UAE with international tax standards and transparency requirements, helping prevent tax base erosion and profit shifting.
By providing tax certainty, it also aims to enhance the country’s position as a global business hub.
Having guided numerous businesses through tax transitions in other countries, I can tell you that early preparation and understanding are key to smooth compliance.
The Scope of UAE Corporate Tax
The UAE corporate tax applies to all businesses and commercial activities across its seven emirates. However, there are several important exceptions:
- Resource Extraction Companies: Businesses engaged in extractive and non-extractive natural resource activities remain subject to Emirate-level taxation rather than federal corporate tax.
- Individual Income: Regular individuals earning non-business income, such as employment income, real estate investment income, and personal investment income, are generally excluded from corporate tax. This only becomes taxable if it qualifies as a business activity requiring a license.
- Free Zone Entities: Free zone companies can benefit from a 0% rate on qualifying income if they meet specific regulatory requirements and do not conduct business with the mainland UAE.
- Non-Resident Entities: Foreign entities are only subject to UAE corporate tax if they have a permanent establishment in the UAE.
- Individuals Conducting Business: Natural persons (freelancers, sole proprietors) conducting business in the UAE above certain thresholds will be subject to corporate tax.
I’ve noticed through my work with UAE entrepreneurs that many are still trying to determine whether their specific activities fall under the scope of this new tax.
If you’re unsure about your tax status, having proper accounting software like ProfitBooks can help you track your financials and make this determination easier.
Are There Any Exemptions?
Yes, several key exemptions exist within the UAE corporate tax framework:
- Government and Government-Controlled Entities: These organizations are exempt from corporate tax.
- Qualifying Investment Funds, Pension Funds, and Public Benefit Entities: These entities also enjoy exemption from corporate tax.
- Dividends and Capital Gains: Income from qualifying shareholdings (the specific rules are outlined in the law).
- Intra-Group Transactions: Profits from qualifying group reorganizations and certain intra-group transactions.
- Small Business Relief: Businesses with revenue below AED 3 million can claim small business relief and pay no tax until at least December 31, 2026.
- No Withholding Tax: There is no withholding tax on domestic and cross-border payments.
Through my work with ProfitBooks, I’ve observed that many businesses are reviewing their structures to maximize these exemptions.
Having proper documentation and compliance systems in place is essential to benefiting from these provisions.
Wrapping Up: Common Questions Regarding UAE Corporate Tax
As someone who regularly engages with UAE business owners through ProfitBooks, I’ve compiled the most frequently asked questions about the new corporate tax regime:
Q1. When did the UAE corporate tax regime become effective?
The UAE corporate tax applies to financial years starting on or after June 1, 2023, or January 1, 2024, depending on your company’s fiscal year.
Q2. What is the standard corporate tax rate in the UAE?
The standard rate is 9% on taxable income exceeding AED 375,000; income up to AED 375,000 is taxed at 0%.
Q3. Who is subject to corporate tax in the UAE?
UAE-incorporated companies, foreign entities managed from the UAE, individuals conducting business above certain thresholds, and non-resident entities with a UAE permanent establishment.
Q4. Are free zone companies subject to corporate tax?
Yes, but qualifying free zone companies can benefit from a 0% rate on qualifying income, provided they meet regulatory requirements and do not transact with the mainland UAE.
Q5. What income is exempt from corporate tax?
Exemptions include government entities, qualifying investment funds, pension funds, public benefit entities, and businesses in extractive industries.
Q6. How is taxable income calculated?
Taxable income is based on accounting net profit (per financial statements), adjusted for non-deductible expenses and exempt income.
Q7. What are the filing and payment deadlines?
Tax returns must be filed, and tax paid, within nine months after the end of the relevant financial year.
Q8. What are the penalties for non-compliance?
Non-compliance can result in fines and administrative sanctions by the Federal Tax Authority (FTA). More detailed guidance on penalties is expected from the FTA.
Q9. How does the UAE corporate tax regime address transfer pricing?
The regime requires related party transactions to comply with the arm’s length principle, aligned with OECD guidelines, and mandates transfer pricing documentation.
Q10. Are foreign investors taxed on dividends, interest, or capital gains?
Foreign investors’ income from dividends, interest, royalties, and capital gains is generally not subject to UAE corporate tax.
Q11. How does corporate tax interact with VAT and other taxes?
Corporate tax is separate from VAT (introduced in 2018) and other taxes. Businesses must comply with all applicable tax regimes, but file and pay them separately.
In the world of compliance, having good tax accounting software is essential for businesses. You need to choose software that will make the transition to the new VAT rules smooth, simplify your VAT accounting, and streamline the process of filing returns.
ProfitBooks is exactly the right tool for this. The best part? It’s a FREE-to-use accounting software with customer support that answers within the same business day!
Get your FREE account now!
Also Read:
VAT In the UAE: A Comprehensive Guide
UAE VAT Return Filing – Comprehensive Guide
