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UAE Corporate Tax Guide

On 31 January 2022, the UAE government announced that it would implement corporate tax at a rate of 9% on all profits above AED 375,000 generated by businesses in the UAE beginning 1 June 2023. Businesses with tax years beginning in January will not have to start paying tax on their revenues generated before 1 January 2024.

Under the Federal-Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Corporate Tax Law), the UAE has released the criteria required to be eligible for corporate tax and exemptions. The UAE is also currently working on framework on how to tax larger multinational businesses at a slightly higher rate.

Both residents and non-residents are eligible to be taxed by the new tax regime, however, non-residents will only be taxed if they are considered to have a Permanent Establishment (PE) in the UAE.

Permanent Establishment is a principle of international tax law used in corporate tax regimes worldwide. The UAE has adopted the definition of a PE from Article 5 of the OECD Model Tax Convention on Income and Capital, and its position under the Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. This is used to determine if and when a foreign entity has established sufficient presence in the UAE to warrant the business profits of the foreign entity to be subject to corporate tax.

Charities, public benefit organizations, qualifying investment funds, wholly-owned government entities, dividends and capital gains, and pension or social security funds are exempt from corporate tax. Businesses operating in the extraction of natural resources are exempt from corporate tax, however, they are subject to taxation from the respective Emirate they operate in. Furthermore, businesses registered in Free Trade Zone are also exempt from corporate tax if they do not conduct business in the mainland and comply with regulations, but all Free Trade Zones must file and annual corporate tax return, and the regulations are subject to change.

The accounting income as reported in the stand-alone financial statements will be the basis to determine a business’s taxable income which is subject to adjustments:

  • Unrealized gains and losses;
  • Income and associated expenses derived by an exempt person with respect to their exempt activity;
  • Dividend income and other profit distributions from a resident;
  • Dividend income and capital gains under the participation exemption;
  • Income from a PE not located in the UAE that has been subject to a corporate tax at a rate of at least 9%;
  • Income derived by a non-resident from the operation or leasing of aircrafts and ships for the use of international transportation;
  • Gains and losses from reorganization or intragroup transfer of assets/liabilities;
  • Net interest expenditure will be capped at 30% earnings before interest, taxes, depreciation, and amortization (EBITDA)
  • Client entertainment expenses will be deductible by up to 50%.

With respect to interest deduction limits, the Corporate Tax Law indicates that the amount of deductible expenses can be carried forward for up to 10 years.

Businesses are also permitted to carry forward taxable losses indefinitely under the new law. They are allowed to offset up to 75% of the taxable income of future tax periods, losses incurred before the effective date (1 June 2023) of the Corporate Tax Law are not eligible for corporate tax relief.

A parent entity may form a tax group; however, they must have ownership of at least 95% of the subsidiary, and they must not be an exempt person(s). if a parent company has at least 75% ownership of a subsidiary, tax losses may be transferred between the entities even without being part of a tax group.

There is no (0%) withholding tax for payments made to non-residents who earn incomes sourced from the UAE.

A business who is eligible for corporate tax is required to register and obtain a Tax Registration Number (TRN) from the Federal Tax Authority (FTA) of the UAE. The businesses must also file a tax return, this also includes Free Zone Companies that are exempt from corporate tax; a parent company only needs to file one tax return for their tax group. The outstanding tax must be paid within 9 months from the end of the financial year.

The FTA may require businesses to submit financial statements and request for them to maintain audited or certified financial statements.

All companies are now mandated to comply with the OECD Transfer Pricing Rules and documentation requirements, this means that intercompany transactions need to be undertaken at ‘arm’s length’ and generally should be supported by the appropriate documentation.

Small businesses with revenues below AED 3 million will not have to pay corporate tax as per Article 21 of the Corporate Tax Law, this is not applicable towards Free Zone Companies and multinational groups (with consolidated group revenues below AED 3.15 billion). These exceptions will apply until 31 December 2026. Where the relief is applied, there is no ability to carry forward losses. Artificial separation of businesses with revenues below the threshold will be subject to review by the FTA.

Cabinet Decision No. 75 of 2023 outlines the penalties for non-compliance of the Corporate Tax Law, these rules are applicable to businesses, tax persons, and Free Zone Persons.

  • Financial record not kept up to date: AED 10,000 for each violation, AED 20,000 for repeat offences within 24 months of the last violation.
  • Failure to provide FTA records, documents, and data in Arabic: AED 5,000.
  • Late submission for deregistration: AED 1,000 for late submission, no more than AED 10,000 per month.
  • If legal representatives fail to send appointment notifications: AED 1,000.
  • Not filing a tax return by the legal representative: AED 500 per month for the first 12 months, AED 1,000 for each month or partial month after the thirteenth month.
  • Not submitting tax return by the Registrant: AED 500 per month for the first 12 months, AED 1,000 for each month or partial month after the thirteenth month, penalties begin the day after the tax deadline and are assessed monthly afterwards.
  • Not correcting the tax return before the deadline: AED 1,000.
  • Voluntary Disclosure (errors in tax return, assessment or refund): 1% per month on the difference from the due date to the date of the disclosure.
  • Failure to submit a Voluntary Disclosure before a tax audit: Fixed penalty of 15% on the tax difference, and 1% per month on the difference for each month.
  • Failure to offer facilitation to tax auditors: AED 20,000.
  • Late submission of declaration: AED 500 per month for the first 12 months, and AED 1,000 per month from the thirteenth month.