Corporate Tax Advisory

The Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (hereinafter referred to as the “Corporate Tax Law”) was issued by His Highness Sheikh Mohamed bin Zayed Al Nahyan, President of the United Arab Emirates (“UAE President”), on 3 October 2022.
The Corporate Tax Law provides the legislative basis for the introduction and implementation of a Federal Corporate Tax (“Corporate Tax”) in the UAE and is effective for financial years starting on or after 1 June 2023.  
The introduction of Corporate Tax is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation. The certainty of a competitive Corporate Tax regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties, will cement the UAE’s position as a leading jurisdiction for business and investment. 
Given the position of the UAE as an international business hub and global financial centre, the UAE Corporate Tax regime builds from best practices globally and incorporates principles that are internationally known and accepted. This ensures that the UAE Corporate Tax regime will be readily understood and is clear in its implications

What is Corporate Tax?

Corporate Tax is a form of direct tax levied on the net income of corporations and other businesses. 
Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions.

Who is subject to Corporate Tax?

Broadly, Corporate Tax applies to the following “Taxable Persons”:
●UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE;
●Natural persons (individuals) who conduct a Business or Business Activity in the UAE as specified in a Cabinet Decision to be issued in due course; and
●Non-resident juridical persons (foreign legal entities) that have a Permanent Establishment in the UAE (which is explained under Section 8).
Juridical persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons” and will need to comply with the requirements set out in the Corporate Tax Law. However, a Free Zone Person that meets the conditions to be considered a Qualifying Free Zone Person can benefit from a Corporate Tax rate of 0% on their Qualifying Income (the conditions are included in Section 14).
Non-resident persons that do not have a Permanent Establishment in the UAE or that earn UAE sourced income that is not related to their Permanent Establishment may be subject to Withholding Tax (at the rate of 0%). Withholding tax is a form of Corporate Tax collected at source by the payer on behalf of the recipient of the income. Withholding taxes exist in many tax systems and typically apply to the cross-border payment of dividends, interest, royalties and other types of income.

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Frequently Asked Questions

At Right Ratios, we bring years of expertise and a deep understanding of the UAE’s financial landscape

The UAE is a member of the OECD BEPS Inclusive Framework and is committed to addressing the challenges faced by tax jurisdictions internationally. As such, the introduction of a CT regime helps to provide the UAE with a framework to adopt the Pillar Two rules.

Until such time as the Pillar Two rules are adopted by the UAE, multinationals will be subject to CT under the regular UAE CT regime.

Further information will be released in due course on the implementation of the Pillar Two rules in the UAE.

Self-employed persons would only be subject to UAE CT if their activity is a taxable business or business activity as per the Cabinet Decision that will be issued in due course. Even if the self-employed person is considered to be undertaking a taxable business or business activity, no CT would be payable on the first AED 375,000 of net income / profit earned from the activity, and further relief (small business relief) may be available to the self-employed person and other individual entrepreneurs.

The Corporate Tax Law makes a distinction between unincorporated and incorporated partnerships.

“Unincorporated Partnerships” (as defined in the Corporate Tax Law) are essentially a contractual relationship between two or more persons, as opposed to being a distinct juridical person separate from their partners / members. Unincorporated partnerships are treated as ‘transparent’ for UAE CT purposes. This means that an unincorporated partnership is not subject to UAE CT in its own right. Instead, each partner is subject to UAE CT on their share of the income from the business conducted through the partnership.

Incorporated partnerships include limited liability partnerships, partnerships limited by shares and other types of partnerships where none of the partners have unlimited liability for the partnership’s obligations or other partners’ actions. Such partnerships are subject to CT in the same manner as a corporate entity (see Section D ‘Juridical persons’).

UAE holding companies would be subject to UAE CT (at a 9% CT rate or the 0% Free Zone CT rate), depending on whether the holding company is established in a Free Zone or in the mainland UAE, but dividends and capital gains earned from domestic and foreign shareholdings would generally be exempt from CT, subject to certain conditions.

For certain types of business activities, natural persons can form a sole proprietorship or civil company. For CT purposes, these entities will be treated as the natural person or persons owning them.

The following persons are exempt from UAE CT, either automatically or by way of application:
The UAE Federal and Emirate Governments and their departments, authorities and other public institutions;
Wholly Government-owned companies that carry out a mandated activity, and that are listed in a Cabinet Decision;
Businesses engaged in the extraction of UAE natural resources and related non-extractive activities that are subject to Emirate-level taxation after meeting certain conditions;
Public Benefit Entities that are listed in a Cabinet Decision;
Investment Funds that meet the prescribed conditions;
Public or private pension or social security funds that meet certain conditions; and
UAE juridical persons that are wholly-owned and controlled by certain exempted entities after meeting certain conditions.

UAE incorporated companies such as LLCs, PSCs, PJSCs, and other UAE juridical persons will be subject to CT as resident persons.

An entity that is incorporated in the UAE will automatically be considered a ‘resident’ person for UAE CT purposes. Equally, an individual who is engaged in a business or business activity in the UAE will also be considered a resident person for UAE CT purposes.

A foreign company may be treated as a resident person for UAE CT purposes if it is effectively “managed and controlled” in the UAE. All facts and circumstances must be considered in determining where a company is effectively managed and controlled, but a relevant indicator may include the place where the strategic decisions affecting the business are made.

In addition to a 0% CT rate for taxable income up to and including AED 375,000, small businesses with revenue below a certain threshold can claim ‘small business relief’ and be treated as having no taxable income during the relevant Tax Period and may be subject to simplified compliance obligations. To claim small business relief, an election must be made to the FTA.

Businesses engaged in the extraction of the UAE’s natural resources and in certain non-extractive activities that are subject to Emirate level taxation will be outside the scope of UAE CT, subject to meeting certain conditions.

Other businesses may be subject to both CT and Emirate level taxation. Emirate level taxes paid will not be able to be credited against or otherwise reduce the amount of CT payable.

In-force International agreements (including international agreements for the avoidance of double taxation) to which the UAE is a party should be considered under the UAE CT regime. In case of a conflict between the Corporate Tax Law and an international agreement with respect to the right to tax a certain item of income, the relevant international agreement may limit the application of UAE CT.

The CT liability will be calculated as follows:

● Taxable income of AED 375,000 (amount to be confirmed in a Cabinet Decision) subject to CT at 0%: AED 375,000 x 0% = AED 0
● Taxable income exceeding AED 375,000 (amount to be confirmed in a Cabinet Decision) subject to CT at 9%: (AED 1,000,000 – AED 375,000) = AED 625,000 x 9% = AED 56,250

The UAE CT liability for the Tax Period will be AED 0 + AED 56,250 = AED 56,250

The final amount of UAE CT payable can be reduced by available tax credits (see below under ‘Tax Credits’ section).

In order to be considered a Qualifying Free Zone Person, the Free Zone Person must:

maintain adequate substance in the UAE;
derive ‘Qualifying Income’;
not have made an election to be subject to Corporate Tax at the standard rates; and
comply with the transfer pricing requirements under the Corporate Tax Law.
The Minister may prescribe additional conditions that a Qualifying Free Zone Person must meet.

If a Qualifying Free Zone Person fails to meet any of the conditions, or makes an election to be subject to the regular Corporate Tax regime, they will be subject to the standard rates of Corporate Tax from the beginning of the Tax Period where they failed to meet the conditions.

Two or more Taxable Persons who meet certain conditions (see below) can apply to form a “Tax Group” and be treated as a single Taxable Person for Corporate Tax purposes.

To form a Tax Group, both the parent company and its subsidiaries must be resident juridical persons, have the same Financial Year and prepare their financial statements using the same accounting standards.

Additionally, to form a Tax Group, the parent company must:

own at least 95% of the share capital of the subsidiary;
hold at least 95% of the voting rights in the subsidiary; and
is entitled to at least 95% of the subsidiary’s profits and net assets.
The ownership, rights and entitlement can be held either directly or indirectly through subsidiaries, but a Tax Group cannot include an Exempt Person or Qualifying Free Zone Person.

All Taxable Persons (including Free Zone Persons) will be required to register for Corporate Tax and obtain a Corporate Tax Registration Number. The Federal Tax Authority may also request certain Exempt Persons to register for Corporate Tax.

Taxable Persons are required to file a Corporate Tax return for each Tax Period within 9 months from the end of the relevant period. The same deadline would generally apply for the payment of any Corporate Tax due in respect of the Tax Period for which a return is filed.

A 0% withholding tax may apply to certain types of UAE sourced income paid to non-residents. Because of the 0% rate, in practice, no withholding tax would be due and there will be no withholding tax related registration and filing obligations for UAE businesses or foreign recipients of UAE sourced income.

Withholding tax does not apply to transactions between UAE resident persons.