Decoding Corporate Tax Complexity in the UAE

27 October 2023
Decoding Corporate Tax Complexity in the UAE

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 the 1st of June 2023. Enhancing international financial compliance and ensuring tax transparency stand as paramount objectives for the UAE.

Understanding Corporate Tax (CT) in the UAE:

The Corporate Tax Law in the UAE constitutes a direct taxation framework that is levied on the taxable income of an entity. This involves meticulous tax adjustments applied to the entity's net income or profit, factoring in both its incorporation and broader business activities. In adherence to this, every taxable entity, categorized as a resident or non-resident as per UAE government stipulations, will be subject to Corporate Tax.

Under the UAE Corporate Tax (CT) Regime, taxation applies to different entities, including natural persons engaged in business activities, legal persons such as UAE and foreign companies, free zone companies (with some exceptions), and under certain conditions, the following persons will be exempt from CT : governments, charities, pension & qualifying investment funds as well as entities engaged in the exploitation of UAE natural resources.

Key points:

  • Registration: Every Company established in the UAE must register for Corporate Tax to the UAE Federal Tax Authority and obtain a Corporate Tax Registration Number (Except exempt entities).
  • Taxable income is determined from the accounting net profit or loss stated in financial statements, with specific rules for unrealized gains or losses. Certain incomes like dividends and capital gains from subsidiary companies are generally exempt. The regime restricts the deduction of expenses, including interest and entertainment costs. Losses can be carried forward, and companies can form tax groups for consolidation.
  • Report Filing: Taxable Persons are required to file a Corporate Tax return - following UAE accounting format (IFRS) - 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.
  • Transfer pricing rules ensure transactions between related parties are at arm's length. Withholding tax rates are generally 0% for domestic and cross-border payments. The standard Corporate Tax rate is 0% for taxable income up to AED 375,000 and 9% for income exceeding that threshold, with different rates for large multinationals are yet to be determined

Significance for UAE Residents and Businesses:

Businesses in the UAE could either be subject to 0% or 9% Corporate tax depending on their scope of work and whether they are located in the mainland or Freezone in the UAE. Companies formed under UAE laws are automatic Corporate Tax residents. This includes mainland and Free Zone entities, as well as those established by special decrees. Foreign companies may also be treated as residents if managed and controlled in the UAE, determined by where key decisions are made.

For Tax Resident Persons: A legal person who has been incorporated or constituted in accordance with UAE corporate legislation (including Free Zone). Any person doing business in the UAE as well as any foreign legal organization that is effectively managed and controlled in the UAE.

For Non-Resident Persons: A non-UAE resident who maintains a permanent establishment in the UAE; OR has a Nexus (Nexus rules are yet to be determined); OR derives UAE sourced Income that is within the scope of Corporate Tax.

For additional insights and further details, interested parties are encouraged to refer to the official websites of the Ministry of Finance and the Federal Tax Authority in the UAE, where additional clarifications will be made available. This newsletter offers general information only and does not constitute legal or financial advice.

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