The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (generally referred to as the “Corporate Tax Law”) issued by the United Arab Emirates on 09 December 2022 marks a milestone in the UAE legislation: it provides the legislative basis for the introduction and implementation of a Federal Corporate Tax in the country.
Corporate Tax in the UAE is effective for financial years starting on or after 1 June 2023.
The new law covers all business activities in the UAE except for government entities and certain businesses engaged in extractive and non-extractive natural resources; in general, Corporate Tax applies to:
- Juridical persons incorporated or registered at the UAE mainland and free zones in the UAE.
- Natural persons conducting business activities in the UAE.
- Non-resident juridical persons, depending on certain conditions.
The corporate tax is set at a rate of 9% of annual taxable income, making it one of the lowest in the world. This deliberate choice reflects the government's commitment to maintaining a competitive business environment while simultaneously generating revenue for public investment.
Moreover, the tax shall be levied at the rate of 9% only on annual taxable income exceeding AED 375,000 ($100,000) while the annual taxable income below this threshold shall be subject to a 0% corporate tax rate to support small businesses and startups.
A different tax rate (not yet specified) is applied to large multinationals that meet specific criteria set with reference to 'Pillar two' of the OECD Base Erosion and Profit Shifting Project.
Below are a few key points of the Corporate Tax Law which may be of interest to our readers:
The UAE Corporate Tax regime will continue to honor the tax incentives currently being offered to free zone persons; but only under certain conditions that would allow the free zone person to be considered as a “Qualifying Free Zone Person” and thus be eligible for the preferential 0% corporate tax rate on its “Qualifying Income” (as defined under Corporate Tax Law).
The conditions to be considered as a Qualifying Free Zone Person are: maintaining adequate substance in the UAE, preparing audited financial statements, not having elected to be subject to Corporate Tax at the standard rates, complying with the transfer pricing requirements (under the Corporate Tax Law), satisfying the “de minimis” requirement (as specified in Cabinet Decision 100 of 2023) and the business must derive “Qualifying Income” (as defined and enumerated in Cabinet Decision 100 of 2023).
Once verified that the entity can be considered a Qualifying Free Zone Person, the preferential Corporate Tax rate of 0% can be applied to the “Qualifying Income” falling in the list published in Cabinet Decision No. 100 of 2023.
If the free zone person fails to meet the conditions of a Qualifying Free Zone Person in a given tax period, it shall no longer be considered as a Qualifying Free Zone Person from the beginning of that tax period and the subsequent four (4) tax periods.
The corporate tax shall be applicable to natural persons - including sole establishments and individual partners in unincorporated partnerships - who are engaged in business activities (including professional/service activities) in the UAE and whose revenue from business activities exceeds AED 1,000,000 in a Gregorian Calendar Year.
However, corporate tax does not apply to the income of a natural person arising from employment, personal investments, and real estate investments.
It should be noted that in the case of natural persons, residence does not refer to the place where the natural person resides or is domiciled but instead refers to the business connection in the UAE. A natural person is considered a resident under corporate tax regardless of their nationality, whether or not they have a residency visa, or how much time they may physically spend in the UAE.
Therefore, the question of residency or non-residency for natural persons under the corporate tax law deviates from those in other tax jurisdictions; wherein tax residency is typically determined by the jurisdiction where the natural person resides or if the natural person physically stays in the said jurisdiction for 180 days or more within a given tax period.
Non-Resident Juridical Persons
A non-resident juridical person shall be subject to corporate tax if they are either: having a permanent establishment in the UAE, derive UAE sourced income or earn income from immovable property located in the UAE.
In cases wherein the non-resident juridical persons earn UAE sourced income only and the income is not attributable to a permanent establishment in the UAE, the income shall be subject to 0% withholding tax.
Small Business Relief
Recognizing the importance of supporting small and medium-sized enterprises (SMEs), the backbone of the economy, the government has implemented administrative and tax relief measures aimed at alleviating the impact of corporate tax on small businesses, which is referred in the regulations as “Small Business Relief”.
The taxable Person may elect for Small Business Relief and as a result it will be treated as not having derived any Taxable Income for a Tax Period. The business will also benefit from simplified corporate tax return filing and record keeping requirements.
The conditions to apply for Small Business Relief are the following: the business must be resident in the UAE (either juridical or natural person), annual revenues should be below or equal to AED 3,000,000 for each Tax Period (including all previous and subsequent tax periods) and the Taxable Person should not be part of a Multinational Enterprise Group (as defined in the UAE’s Country-by Country Reporting legislation) or be a Qualifying Free Zone Person.
The Small Business Relief is available for eligible taxable persons up to tax periods that end on or before 31st December 2026. In practical terms, it means that the tax authorities have provided a three (3) year period starting from the enforcement of the corporate tax law on 1st June 2023 till 31st December 2026 wherein the Small Business relief is available as a tax relief.
Transfer pricing rules have also been introduced by the corporate tax law, applicable to both cross-border and domestic transactions carried out by natural and juridical persons.
Businesses must apply the arms’ length principle when entering into transactions or arrangements between Related Parties and Connected Persons (such as owners or officers of a company).
In support of the arms’ length principle, companies must maintain documentation that justifies the transfer price of transactions between related parties and connected persons. This documentation should demonstrate that the prices charged in transactions and arrangements with related parties and connected persons are consistent with those that would be charged between unrelated independent parties under similar circumstances.
The authorities can require a taxable person to provide information regarding their transactions and documentation supporting the arrangements with their related parties and connected persons together with the corporate tax return of the taxable person.
In addition to the above general disclosure requirements, taxable persons who are part of a Multinational Enterprise (MNE) Group with total consolidated group revenue equal to or more than AED 3.15 billion in the relevant tax period or taxable persons whose revenue in the tax period is AED 200 million or more, shall be required to maintain a master file and local file in support of its’ transfer pricing policy.
All taxable persons within the scope of Corporate Tax should apply for a tax registration number for Corporate Tax. The tax registration number for corporate tax purposes is a separate application from the tax registration number for VAT purposes.
Non-resident persons that do not have a permanent establishment in the UAE and only earn UAE sourced income can choose to not register for Corporate Tax.
Financial statements will need to be maintained by taxable persons as it shall be the starting point in calculating taxable income. Financial statements must be prepared in accordance with IFRS, however, taxable persons that earn revenue not exceeding AED 50 million may apply IFRS for SMEs.
Audited financial statements are required to be maintained for taxable persons deriving revenue in excess of AED 50 million in a tax period and from taxable persons who are Qualifying Free Zone Persons.
Taxable persons should file their corporate tax return and pay corporate tax within nine (9) months from the end of each relevant tax period. Since majority of taxable persons in the UAE follow the Gregorian calendar year (ending every 31st December) as their financial period, then the first corporate tax period for these taxable persons shall be starting 1st January 2024 and ending 31st December 2024, with the corporate tax return filed and any corporate tax due to be paid on or before 30th September 2025.
The opening balance sheet for corporate tax purposes (and thus the closing balance sheet of the financial year prior to being subject to corporate tax) should be prepared taking into consideration the arms’ length principle.
Certain adjustments in the financial statements can also be made by a taxable person to its’ intangible assets, immovable property and financial assets & financial liabilities which were owned by the taxable person before it becomes subject to corporate tax.
If no books of accounts were prepared for the previous financial year (prior to being subject to corporate tax) a closing balance sheet will have to be prepared under an appropriate accounting standard.
Businesses should evaluate the impact of Corporate Tax, determine whether they need to register for corporate tax and understand if steps should be taken to align their accounting operations with the corporate tax requirements to be compliant and take advantage of tax benefits whereas available.
Corporate tax does not only mean corporate tax registration, filing and payment of the due tax; but it also implies understanding if any tax reliefs can be applied and requested, keeping accounting records and documents within the requirements of the corporate tax law, putting in place transfer pricing policies if required to do so and applying transitional rules which may be applicable to the business.
Being aware and prepared will be essential for businesses navigating the new corporate tax landscape in the UAE.
Diacron provides support in assessing the impact of Corporate Tax, offering dedicated consultancy to ensure full compliance and meet related regulatory requirements.
For any inquiry or to discuss your specific needs, please do not hesitate to contact us at firstname.lastname@example.org