- January 5, 2024
- Posted by: Vimal Hemachandran
- Category: Blog
In global business, the United Arab Emirates (UAE) has stood out with its iconic skyline, thriving free zones, and strategic East-West location. Long renowned as a tax-friendly destination, the UAE has recently introduced a corporate income tax in 2024, signaling a significant shift.
This concise guide explores the intricacies of business and corporate taxes in the UAE, delving into the implications of these changes. Stay informed about tax regulations, as this knowledge is crucial for businesses navigating this evolving landscape.
Taxation of Businesses in the UAE
Corporate taxation in the United Arab Emirates (UAE) constitutes a direct levy on the net income of corporations and various enterprises operating within the nation. It functions as a financial contribution made by businesses to bolster the economic growth and development of the UAE. The legal framework for corporate tax in the UAE is established by the UAE Corporate Tax Law (CT Law), implemented by the Ministry of Finance. This legislation serves a dual role: curbing harmful tax practices and aligning the UAE with global standards of tax transparency. As stipulated by the CT Law, companies are obligated to remit 9% of their taxable income as corporate tax to the government.
To whom does corporate tax pertain?
Corporate tax in the UAE has a wide application, covering various entities and individuals engaged in business activities within the country:
- Free zone businesses are not exempt from corporate tax, especially if operating on the UAE mainland or failing to comply with regulatory requirements.
- Foreign entities and individuals engaging in ongoing or regular trade in the UAE may be subject to corporate tax.
- Banking operations, including the financial sector, fall under the purview of corporate tax.
- Real estate activities, such as management, construction, development, agency, and brokerage, are subject to corporate tax regulations.
Who does not have to pay corporate tax?
- Businesses engaged in natural resource extraction are subject to Emirate-level corporate taxation to contribute to regional economies.
- Dividends and capital gains from qualifying shareholdings by a UAE business are exempt from corporate tax.
- Qualifying intra-group transactions and reorganizations are exempt if they meet necessary conditions outlined in tax regulations.
- Individuals earning salaries and other employment income are not subject to corporate tax.
- Interest and income from bank deposits or saving schemes are not taxed under the corporate tax framework.
- Foreign investors’ income from dividends, capital gains, interest, royalties, and other returns is exempt from corporate tax.
- Personal real estate investments by individuals and income from owning shares or securities in a personal capacity are not subject to corporate tax.
Taxation Landscape in the UAE
Corporate tax rates in the UAE vary based on income levels. Businesses with annual taxable income below AED 375,000 enjoy a 0% rate, providing relief for smaller enterprises. Those exceeding this threshold face a 9% corporate tax rate, ensuring larger corporations contribute proportionally to the UAE’s revenue.
In addition to corporate tax, the UAE implemented Value Added Tax (VAT) in 2018, mandatory for businesses exceeding an annual turnover of AED 375,000. Customs Duties apply to imported goods, and Excise Tax targets specific items harmful to health or the environment. Some emirates may levy municipal taxes, and property taxes may apply based on the emirate and property nature. While personal income tax is absent, employment-related taxes, such as social security or pension contributions, may be applicable
Tax Shift in the UAE
In 2023, the UAE introduced corporate income tax, marking a departure from its tax-free status. Under the UAE Corporate Tax Law, businesses now contribute a share of their taxable income for economic development.
Strict compliance is essential for businesses in the UAE. Entities meeting VAT thresholds must register and maintain records. Compliance extends to customs duties and excise tax for relevant industries. Registered businesses must file regular VAT returns, ensuring accurate reporting. Compliance with corporate income tax regulations, including record-keeping and adherence to transfer pricing rules, is crucial. Understanding deadlines is vital to avoid penalties and legal consequences.
Tax Incentives and Exemptions in the UAE
- Foreign Tax Credit: It allows a credit for foreign taxes paid on UAE taxable income, limited to the amount of Corporate Tax (CT) due.
- Small Business Relief: It exempts tax resident entities with revenue below AED 3 million and is applicable from June 1, 2023, to December 31, 2026.
- Transfers within a Qualifying Group: It provides tax relief on intra-group transfers of assets or liabilities, subject to conditions such as 75% common ownership, the same financial year, and adherence to identical accounting standards.
- Business Restructuring Relief: Offering tax relief for mergers, spin-offs, and corporate restructuring transactions, this provision requires that the transfer adheres to UAE regulations, and entities involved must have valid reasons for the transfer.
- Free Trade Zones (FTZs): Entities in FTZs are considered taxable persons under CT Law, and Qualifying Free Zone Persons (QFZPs) benefit from a 0% UAE CT rate on qualifying income, contingent upon meeting specific criteria like maintaining substance within a Free Zone and complying with transfer pricing rules.
Economic Substance and Taxation for QFZPs in the UAE
To maintain adequate substance, a Qualifying Free Zone Person (QFZP) in the UAE must conduct core income-generating activities within a Free Zone, adhere to Economic Substance Regulations (ESR), and meet criteria such as maintaining assets and a qualified workforce. Qualifying income includes transactions with Free Zone persons, excluding certain activities. Excluded activities involve dealings with natural persons, regulated banking, intellectual property, and immovable property ownership. De minimis requirements state that non-qualifying revenue should not exceed 5% of total revenue or AED 5 million. Failure to meet qualifying conditions subjects the entity to a 9% corporate tax rate for a minimum of five tax years. The introduction of a Domestic PE considers a QFZP’s presence outside the Free Zone in the UAE, with income attributed accordingly.
Strategic Tax Planning in the UAE
Effective tax planning involves legally minimizing the tax burden to enhance after-tax income, utilizing legitimate methods within the confines of applicable tax laws. It is crucial to distinguish tax optimization from unlawful tax evasion, which involves fraudulent tactics to avoid tax payments.
- Optimal Company Structure: Evaluate and choose the right legal structure for your business, considering free zones, mainland companies, or offshore entities, each with distinct tax implications, including factors like foreign ownership, exemptions, and customs duties.
- Double Taxation Avoidance Agreements (DTAAs): Utilize DTAAs to prevent double taxation on income earned in both the UAE and partner countries, benefiting from reduced tax rates or exemptions outlined in these agreements.
- Tax Incentives and Exemptions: Explore UAE’s incentives to stimulate economic growth, familiarizing yourself with relevant measures to lower overall tax liability.
- Transfer Pricing Optimization: Meticulously structure and document transfer pricing policies for efficient income and expense allocation, ensuring compliance with UAE’s regulations and maintaining proper documentation.
- Research and Development (R&D): Invest in R&D activities for tax benefits, actively reducing taxable income through deductions or credits for qualifying expenditures.
- Free Trade Zones Advantage: Consider establishing operations in UAE’s free trade zones for tax exemptions and customs duty advantages; thoroughly research to identify the most suitable zone for your business and capitalize on available tax benefits.
Carvy Consultants to Assist!
In the UAE, it is crucial for businesses to prioritize the selection of a reputable company with a proven track record in efficiently handling corporate tax matters. If you are seeking expert guidance on corporate tax registration issues, Carvy Consultants is your ideal choice.
Outsourcing corporate tax responsibilities in the UAE comes with numerous business advantages, particularly in light of the recent implementation of new corporate tax regulations in the country. By leveraging these benefits, businesses can free up valuable time and resources, enabling them to concentrate on core activities and maintain a competitive edge. For unparalleled support in navigating the intricacies of corporate tax registration in the UAE, reach out to Carvy.