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What is the Corporate Tax Rate in UAE?

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What is the Corporate Tax Rate in UAE?

Historically, businesses in the United Arab Emirates (UAE) have enjoyed zero income tax on their profits. The country’s tax-free status has long attracted global investors and multinational companies from around the globe. However, the tax haven status of UAE is soon going to change, with the Ministry of Finance (MOF) announcing the implementation of Federal Corporate Tax in the country.

The announcement is a significant move by the UAE to align itself closer to other global markets. The UAE corporate tax regime has been designed to incorporate the best global practices and minimise the compliance burden on businesses.

Younis Haji Al Khoori, Under Secretary of the Ministry of Finance, said in the statement, “With the introduction of corporate tax, UAE reaffirms its commitment to meeting international standards for tax transparency and preventing harmful tax practices.”

Furthermore, the MOF has taken this step to support the minimum effective tax rate under the Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) 2.0 project.

In this article, we will throw light on some of the common concerns of UAE businesses:

  • What is the corporate tax rate in UAE?
  • When is corporate tax being implemented in UAE?
  • What is the scope of UAE corporate tax?
  • Is corporate tax applicable to free zone entities?

So let us get started!

Corporate Tax Rate in the UAE

The UAE corporate tax rate has been classified into two slabs with varying percentages.

The corporate tax rate will be 0% for taxable income up to AED 375,000 and 9% for taxable income above AED 375,000.

Taxable Income

Corporate Tax Rate

Up to AED 375,000 Nil
Above AED 375,000 9%

Furthermore, a different tax rate of 15% would be applicable for large multinationals that meet specific criteria set with reference to “Pillar Two” of the OECD BEPS project. Large multinationals refer to corporations having a consolidated global revenue exceeding € 750 million (AED 3.15 billion).

Effective Date for Implementation of Corporate Tax in UAE

The new corporate tax regime will be effective for financial years starting on or after 1 June 2023. In the case of companies following the calendar year as their financial year, corporate tax will be applicable from 1 January 2024 onward.

The below table will help you determine the UAE corporate tax timeframe.

Financial Year End

First Corporate Tax Period

30th June 1 July 2023 – 30 June 2024
31st December 1 January 2024 – 31 December 2024
31st March 1 April 2024 – 31 March 2025

MoF has given sufficient time to businesses in the UAE to restructure or reorganise themselves to meet the corporate tax requirements.

Corporate Tax Base

Corporate tax will apply on the profits of the UAE businesses as reported in their financial statements prepared following the internationally accepted accounting standards, with minimal exceptions and adjustments.

Adoption of internationally accepted accounting standards and principles reduces the complexity and minimises compliance costs. Furthermore, businesses are relieved from the burdensome requirement of maintaining different sets of records for financial reporting purposes and corporate tax purposes.

On meeting specified conditions, businesses are allowed to carry forward and offset their losses against future taxable income. Moreover, they are also allowed to utilise their losses against the taxable income of another group company, on meeting specified conditions.

Scope of UAE Corporate Tax

Corporate tax will apply to all persons (individual as well as corporate) carrying out business activities (commercial, industrial and professional) under a business license or permit in the UAE. It includes income earned by freelance professionals for activities carried out under a freelance license or permit.

Having said that, businesses engaged in the extraction of natural resources which are already subject to the Emirate level tax rules will be outside the scope of corporate tax.

The corporate tax regime will also apply to banking operations in the UAE including those currently being taxed at the Emirate level tax rules.

Income Exempted from UAE Corporate Tax

The Ministry of Finance has declared that certain income will be exempted from the scope of corporate tax regime which are as follows:

  • Income earned by an individual from employment, real estate and other investments
  • Any other income earned by an individual that does not arise from a business or other form of commercial activity licensed or otherwise permitted to be undertaken in the UAE
  • Income derived from the extraction of natural resources
  • Dividends and capital gains earned by a UAE business from its qualifying shareholdings
  • Dividends received from foreign companies
  • Domestic dividends earned from UAE companies
  • Dividends received from UAE Free Zone companies (even if the income of such companies is subject to nil corporate tax rate).
  • Qualifying intra-group transactions and reorganizations subject to certain conditions being met
  • Income in the form of dividend, capital gains, interest, royalties and other investment returns earned by foreign investors

Applicability of Corporate Tax for Free Zone Entities

Businesses that are established in the UAE free zones (including financial free zones) are subject to corporate tax. However, they will continue to receive the incentives currently being offered to them on meeting the specified conditions i.e. they comply with all the applicable regulatory requirements and do not conduct business with mainland UAE.

This means, companies in the free zone will continue to enjoy 0% corporate tax and shall be required to pay 9% corporate tax only on profit originating from UAE mainland territory.

However, companies in the free zone will be required to register themselves under the corporate tax regime and will need to file a corporate income tax return.

Conclusion

It is worth noting that the 9% corporate tax rate is still the lowest corporate tax rate among non-offshore jurisdictions. Furthermore, the 9% corporate tax rate is one of the lowest corporate tax rates globally. This ensures that UAE will still remain an attractive destination for doing business and will continue to attract foreign investors from across the globe.

For more information on UAE corporate tax regime, reach out to Aviaan Accountingcorporate tax experts in Dubai, UAE.

 

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