Corporate tax in the UAE: Everything you need to know
The UAE government had introduced the federal corporate tax with a standard statutory rate of 9% starting from the financial year beginning on or after 1st June 2023. After 18 months, it announced the introduction of domestic minimum top-up tax (DMTT) for large multinational companies. Both taxes come under the umbrella of corporate tax.
Read on to find out what the end of the ‘no corporate tax policy’ means for companies operating in the UAE.
UAE CORPORATE TAX EXPLAINED
The tax regime aligns with global best practices, aiming to minimise compliance burden on businesses. Before introducing corporate income tax in the UAE, the Ministry of Finance rolled out three main decisions. These include the preparation of financial statements and exemptions, the exemption of privately regulated pension funds and social security funds and the conditions for claiming exemption.
The application of corporate tax in the UAE has been discussed in financial circles for some time. So, the initial announcement didn’t come as a complete surprise.
From 1st June 2023, authorities implemented a tax on business and commercial activities in the country. This tax is payable on all profits the business earns and reports in its financial statement.
Also, companies must produce the statement according to the internationally accepted accounting standards barring minimal exceptions or adjustments.
Moreover, the Federal Tax Authority (FTA) is responsible for implementing and collecting corporate tax.
MAJOR UPDATES ABOUT CORPORATE INCOME TAX IN THE UAE 2024
UAE PASS APP
Accessing the Federal Tax Authority (FTA) portal has changed. You can now only log in using the UAE Pass app, which is linked to your Emirates ID.
This enhances security but also means having a backup plan in case you lose your phone or disable it. This could be crucial since the UAE Pass is used for various tax-related activities, including VAT, excise tax, refunds and appeals.
CORPORATE TAX REGISTRATION
Registering your business for corporate tax UAE 2024 has become easier. Previously, you needed to update your formation documents before starting the registration. Thankfully, the FTA no longer requires this upfront step. This simplifies the process significantly and speeds up the overall registration time.
DEREGISTERING YOUR BUSINESS AFTER CORPORATE TAX
If your business has shut down, there are new guidelines for deregistration with the corporate tax system. Recent legislation outlines the process for businesses to officially deregister. Importantly, you’ll need to submit a tax report covering the partial year your business operated before completing the deregistration process.
NEW PAYMENT METHOD
There’s a new way to pay your corporate tax. The UAE introduced new Generated International Bank Account Numbers (GIBANS) specifically for entities registered for corporate tax. These differ from the GIBANS used for VAT purposes.
Businesses will receive notifications with their new GIBAN details, which should be used for all future corporate tax payments. Remember to update your bank information with this new GIBAN to ensure smooth tax payments.
Now, let’s look at some key details of corporate tax UAE 2024.
WHO IS ELIGIBLE FOR CORPORATE TAX IN THE UAE
Corporate tax (CT), as defined by the UAE Federal Decree-Law No. 47 of 2022, applies to:
- Businesses and individuals conducting business activities with a valid commercial licence.
- Free zone businesses (Remember that the UAE CT regime will continue along with the CT incentives offered to companies in the free zone).
- Foreign entities and individuals, only if they conduct business in the UAE regularly or continuously.
- Banking operations.
- Real estate management, construction, development, agency and brokerage businesses.
WILL COMPANIES OPERATING IN FREE ZONES HAVE TO PAY THE TAX?
Free zones are within the scope of the corporate tax regime and will come under the compliance and administrative obligations outlined by the law. Qualifying Free Zone Persons (QFZPs) can work with a zero per cent corporate rate on their “qualifying activities and transactions.”
These activities include manufacturing, reinsurance services, holding of shares and securities, ship ownership and operation and regulatory investment management services. Other qualifying activities are treasury and financing services, financing and leasing of aircraft and logistics.
Non-qualifying revenue must not exceed 5% of total revenue or AED 5 million. Noncompliance results in ineligibility for the free zone corporate tax regime for a minimum of five years. Contact the free zone authority to see if the zone qualifies for the 0% tax rate.
Any income generated by a Free Zone by doing business within the same Free Zone or any Free Zone within the UAE could be considered “qualifying income”, and 0% tax will apply. However, any income that isn’t qualifying would be charged a 9% tax.
To qualify as QFZP, an individual must:
- Maintain adequate substance in the country
- Derive “qualifying income” (Cabinet decision expected)
- Not have made an election to “opt-out” of the Free Zone corporate tax regime
- Comply with all the transfer pricing rules and documentation
- Adhere to all other conditions as may be outlined by the minister
WHAT FINES WILL BE IMPOSED IF BUSINESSES FAIL TO ADHERE TO THE REQUIREMENTS?
Here’s a list of fines depending on the type of violation.
- Failure to keep the record and relevant information as required by the law will result in a fine of AED 10k for the first violation. A repeat violation within the next 24 months will result in a fine of AED 20k.
- Failing to submit the required data, records and documents in Arabic can bring about an AED 5k fine.
- A fine of AED 1,000 to AED 10,000 can be levied on the registrant for failing to submit a deregistration application within the designated timeframe.
- If the registrant fails to inform the tax authority about an amendment to the information in the tax records, a fine of AED 1,000 will be incurred for the first violation. Each repeat violation within 24 months will be charged at AED 5k.
- If the legal representatives fail to provide notification of their appointment, expect a penalty of AED 1,000.
- In case the legal representative fails to file a tax return within the given timeframe, an AED 500 per month fine will be imposed each month for a year. From the 13th month onwards, the fine will rise to AED 1,000 per month.
- A failure to pay the tax would lead to a 14% fine per annum on the liable amount.
- On submission of incorrect final tax returns, a fine of AED 500 is levied.
UAE CORPORATE TAX RATE
The standard statutory tax rate on profits is 9%. However, the tax rate for profits up to AED 375,000 will be 0%. This move is designed to encourage small businesses and startups in the region. A different tax rate is expected to be announced for large multinationals because of ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting Project.
The Ministry of Finance last year also announced that company owners would be subject to corporate tax only if their turnover within a calendar year is over AED 1M. This ensures that only business or business-related activity income is taxed.
UAE CORPORATE TAX 2024 EXEMPTION
Under the corporate tax law in the UAE, certain entities and businesses are exempted. For instance, businesses working on natural resource extraction are exempted. Such companies will remain on the Emirate level of corporate taxation. Similarly, government entities, charities, investment funds, pension funds and public benefit organisations are also exempt.
Furthermore, UAE businesses are exempt from paying taxes on dividends and capital gains from their qualifying shareholdings. Foreign taxes will be credited against UAE corporate tax payable – meaning that if a company is making profits outside of the UAE and paying taxes in that country, it won’t have to pay corporate tax on those gains in the UAE.
In addition, exemptions could potentially extend to subsidiary companies an exempt person owns entirely. This includes a holding company used by an investment fund to hold a certain asset.
In April 2023, the government announced that Qualifying Public Benefit Entities would be exempt from paying a mandatory corporate tax fee. This would typically include organisations which focus on the following:
- Science
- Education
- Religion
- Charitable activities
- Culture
The Qualifying Public Benefit Entities must still register with the Federal Tax Authority and attain a Tax registration number for Corporate Tax purposes.
COMPANIES GOING INTO LIQUIDATION
The UAE Ministry of Finance issued Ministerial Decision No (105) of 2023 in May, explaining that UAE companies going into liquidation or termination proceedings would not pay corporate tax. Any such company must notify the Federal Tax Authority (FTA) within 20 working days of the liquidation or termination procedure.
If there is a change in status as an exempt person, an application must be submitted to the FTA within 20 working days. The person is also expected to rectify the failure to meet the conditions within 20 days. If things are beyond a person’s reasonable control, an additional 20 working days can be added.
EXEMPTIONS FOR INVESTMENT FUNDS OTHER THAN REITS
In July 2023, the government announced exemption conditions for investment funds other than Real Estate Investment Trusts (REITs).
Exemptions apply if:
- The primary business activity is related to investment and incidental and ancillary activities remain less than 5% of the total annual revenue.
- A single investor and related parties’ share of ownership interests cannot be more than 30% to 50%. This percentage difference can depend on the number of investors in the investment fund.
- It is overseen by an investment manager who employs a minimum of three investment professionals.
- The day-to-day management of the business is not in the hands of the investors.
WHAT WOULD BE CONSIDERED TAXABLE INCOME
As mentioned earlier, taxable income will be determined by the company’s financial statements. Adjustments are expected, including:
- Any unrealised gains or losses made in connection to capital items.
- Income and associated expenses made by an exempt individual concerning their exempt activity.
- Any dividend income and other profit distributions from a resident person.
- Dividend income and capital gains under the participation exemption.
- Any income from a PE not located in the country that is subject to CT at a rate of at least 9%.
- Income generated by a nonresident from the operation.
- Leasing of ships and aircraft in international transportation.
- Profits or losses from reorganisations or intragroup transfer of assets and/or liabilities, subject to certain conditions.
- Net interest expenditure shall be capped at 30% of the earnings before interest, taxes, depreciation and amortisation (EBITDA).
- Entertainment-related expenses of up to 50% of the total amount incurred can be deducted.
DOMESTIC MINIMUM TOP UP TAX
Domestic Minimum Top up Tax (DMTT) has also been introduced by the government. Large multinational enterprises (MNEs) will be required to pay a minimum of 15% tax on profits from 1st January 2025. This is up from the 9% corporate tax rate that applied previously.
This new tax would be applicable on companies that have a consolidated global revenues of $793M or higher in at least two of the four financial years immediately preceding the financial year in which the tax applies.
This is part of the Organisation for Economic Co-operation and Development’s (OECD) two-pillar solution. The aim is to address taxing challenge that comes from globalisation and digitalisation of the economy.
DMTT is expected to account for around $220 billion.
FAQS ABOUT CORPORATE INCOME TAX IN THE UAE AND MORE
WILL INDIVIDUALS ALSO BE TAXED UNDER THE NEW LAW?
The Ministry of Finance has confirmed that individuals operating businesses in the UAE will pay corporate tax if their combined turnover goes beyond AED 1M per year.
Personal income from employment, real estate, equity or investments without licensing requirements will not be subject to corporate tax. Similarly, income or interest from bank deposits or savings schemes will not be taxed.
For foreign investors, any income generated via dividends, interest, royalties, captain gains or investment returns will not be taxed.
WILL A WITHHOLDING TAX BE ALSO COLLECTED?
Since the UAE is an international business hub, no withholding tax will be applied on domestic and cross-border payments. Foreign investors will only be taxed if they conduct business in the country.
WILL A GROUP OF COMPANIES BE ALLOWED TO REGISTER AS A SINGLE TAX ENTITY?
The UAE corporate tax law will have generous loss utilisation rules. This means that UAE companies can be taxed as a single entity. They can apply for relief as a group (units) in case of a loss and/or concerning intragroup transactions.
Registration as a single tax entity is another key factor to consider when starting a business in Dubai.
WHAT ARE THE LAWS REGARDING TRANSITIONAL RULES FOR CORPORATE TAX?
The government has also clarified transitional rules for corporate income tax in the UAE. This allows businesses to determine their opening balance sheet and ensures a fair approach towards liabilities and assets before the new corporate tax regime. It includes assets and liabilities such as immovable property, financial assets, intangible assets and financial liabilities.
Businesses can adjust their tax treatment for these liabilities and assets based on particular rules. This has to be decided before the submission of the first Tax Return. Apart from exceptional circumstances, this selection is permanent.
The real estate sector will benefit from further flexibility as companies owning immovable property recorded on a historical basis can select the basis of relief. This can be based on a time apportionment method or valuation method.
WILL BUSINESSES HAVE TO MAKE ADVANCE TAX PAYMENTS?
No, businesses are not required to make any advance tax payments. Neither will they be asked to prepare provisional tax returns. The compliance burden has been minimised as companies adapt to these changes.
DO COMPANIES HAVE TO ALIGN THEIR FINANCIAL YEAR TO THE FISCAL TAX YEAR?
There is no such requirement. However, many companies will likely voluntarily move to align their operations with the new tax year.
And so, we reach the end of our guide on corporate tax in the UAE. This initiative will not only help to ensure tax transparency and prevent harmful tax practices but the challenges of economic digitalisation will be addressed to a degree.
Did you know that the corporate tax in the UAE is the lowest in the GCC region? However, as things stand, Bahrain is the only country that hasn’t imposed such a tax.
If you plan to start a business in the UAE, it always helps to be familiar with tax rules. You can also learn more about taxes in the UAE for a basic understanding. Here is how businesses can register for VAT in the UAE. Similarly, VAT in the UAE is another crucial consideration for residents and tourists.
Remember, knowing about the country’s tax rates and exemptions will help you prepare a better-forecasted plan and lay the foundations for a thriving business. You can also contact tax or VAT consultants in the UAE for further advice.
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Disclaimer: Please contact The UAE Ministry of Finance and the Federal Tax Authority for queries, clarification or further information.
