Find out everything you need to know about corporate taxes for mainland and free zone companies in the UAE with this comprehensive guide. Learn about the exemptions, tax rates, and the impact on your organization.

The UAE government announced the implementation of a new corporate tax in January 2022, signaling a significant shift in the country's economic landscape. Previously known for its tax-free environment, the UAE's decision to impose a 9% corporate tax on profits, effective from June 1st, 2023, has significant implications for businesses operating in the region.

This article aims to provide a detailed exploration of UAE corporate tax for both mainland and free zone companies, shedding light on its implications, reasons for introduction, global comparisons, and the entities subject to taxation.

Quick Read Section

• The UAE introduced a 9% corporate tax on businesses with profits exceeding 375,000 AED from June 1, 2023.
• The move aims to align UAE with global tax standards, enhance transparency, fund infrastructure, and reduce reliance on oil revenue.
• Despite the introduction, the UAE's 9% corporate tax rate remains notably low compared to other global trading centers, maintaining its appeal for businesses.
• Corporate tax aims at creating a sustainable revenue stream for a more resilient and robust economy.

The UAE's Corporate Tax History

For years, the UAE maintained a tax-friendly environment with citizens exempt from income tax, and most companies untouched by corporate taxes. UAE primarily relied on revenues from nationalized and private fossil fuel extraction industries, with foreign banks and certain sectors paying specific taxes. However, with a strategic move to diversify away from oil-based economy, the government has recognized the need for additional revenue sources.

This prompted the introduction of the Value-Added Tax (VAT) in 2018, followed by the announcement of a 9% corporate tax in January 2022, effective from the financial year beginning June 1, 2023.

What is Corporate Tax?

The corporate tax is a direct tax imposed on the net income of corporations and other businesses. Corporate tax in the UAE will be a 9% levy on the profits of businesses generating over 375,000 AED (approximately USD $100,000). Businesses falling below this threshold will continue to enjoy a 0% tax rate. The UAE began rolling out business tax on June 1^st this year. Companies with a tax year beginning in January will commence tax payments from revenues generated after January 1, 2024.

Entities subject to taxation include legal entities such as LLCs, PSCs, PJSCs, LLPs, and others. Foreign legal entities earning income in the UAE and qualifying as tax residents will also be subject to corporate tax.

Why Corporate Tax in the UAE?

The implementation of corporate taxes in the UAE is driven by multiple strategic objectives. Firstly, it seeks to enhance the country's status as a top business destination by aligning its taxation policies with those of developed economies. This move is set to enhance transparency and stability, making the UAE even more appealing for local and foreign investors. Moreover, the generated revenue is earmarked for crucial infrastructure projects and public services, fostering the country's development. By leveraging corporate tax, the UAE aims to accelerate its development and achieve strategic objectives, benefiting both businesses and residents. This financial injection into essential sectors is poised to reshape the economic landscape, promoting sustainable growth.

Global Perspective: UAE Corporate Tax vs. Other Countries

The UAE’s newly introduced 9% corporate tax rate is remarkably low in contrast to other leading global trading centers. With South America boasting a regional average rate of 31.03%, Africa following closely at 29.74%, and Europe and Asia at 23.97% and 19.62%, respectively, the UAE remains an attractive destination for businesses seeking favorable tax environments. Notable high-tax jurisdictions include India and Australia at 34%, Germany at 29.9%, Japan at 29.74%, and Canada at 25.75%.

Entities Subject to Corporate Tax in the UAE

Previously, only specific industries like resource extraction and foreign banks faced corporate profit taxes in the UAE. However, as of June 1st, 2023, a broader range of businesses will be subject to a 9% corporate tax. Understanding the implications of this new tax is crucial for organizations.

According to the Federal Tax Authority (FTA), corporate tax applies to a variety of entities, encompassing both resident and non-resident individuals and companies, including:

• UAE Companies and Juridical Persons: All UAE companies and juridical persons incorporated or effectively managed and controlled in the UAE are subject to corporate tax, adhering to the requirements outlined in the Corporate Tax Law.
• Natural Persons (Individuals): Individuals conducting business or business activities in the UAE are also subject to corporate tax, as specified in a forthcoming Cabinet Decision.
• Non-Resident Juridical Persons (Foreign Legal Entities): Non-resident juridical persons with a Permanent Establishment in the UAE fall under the corporate tax regime, with the concept of Permanent Establishment elucidated in section 8 of the law.
• Juridical Persons Established in UAE Free Zones: Entities in UAE Free Zones are designated as "Taxable Persons." While subject to corporate tax, Qualifying Free Zone Persons meeting specific conditions outlined in Section 14 can enjoy a 0% corporate tax rate on their Qualifying Income.

Are there exemptions from corporate tax in the UAE?

Yes, certain entities are exempt from corporate taxes. This includes businesses involved in the extraction of oil, charities, public benefit organizations, investment funds, and wholly government-owned companies. Additionally, dividends and share sales may qualify for a participation exemption.

The tax rate is structured such that businesses earning income below AED 375,000 are exempt from tax, while those exceeding this threshold will face a 9% tax rate. Larger multinational corporations face varied rates based on their business conditions.

How is corporate tax calculated?

Calculating taxable income involves using the net profit or loss from a company's financial statements. In case of a business loss, up to 75% of the value can be offset against taxable income in future financial years. Group companies can potentially form a tax group, treated as a sole taxable entity, provided they meet certain criteria.

Will free zone companies be subject to corporate tax?

While current government announcements suggest that they can benefit from existing incentives, future changes might introduce taxes. Free zone companies doing business with mainland entities are likely to pay corporate tax on generated revenues, necessitating tax registration, and filing, even if they don't owe taxes.

Is personal income taxed in the UAE?

As of now, there are no plans to tax personal income in Dubai or the rest of the UAE. The only form of personal income tax is the 5% VAT, which applies to consumer goods and services.

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As the UAE continues its journey of economic diversification, having a trusted insurance broker becomes not just a choice but a strategic necessity for businesses charting a course towards sustained success.

Conclusion

In conclusion, the implementation of corporate tax in the UAE heralds a new era for businesses. Beyond the immediate implications for financial planning, understanding the strategic objectives behind this move is crucial.

Businesses, whether in the mainland or free zones, should proactively navigate this new tax terrain to ensure sustainable growth and compliance with the UAE's progressive corporate tax system.

Contact us today for your corporate insurance needs!