From June 1, 2023, a new corporate tax is enforced in the UAE, levied on companies’ net profits. As a result, The many entrepreneurs have additional obligations to comply with. In this article, we will examine who the new tax applies to, at what rate and on what incomes it is levied, as well as who is exempt from paying it.

What is the new corporate tax?

The corporate tax is a tax that businesses must pay on their net profits, i.e., income received minus expenses incurred. The corporate tax applies for only to a entrepreneurial activities. Income of individuals, such as wages or rental income from real estate, is not subject to this tax. Also exempt from taxation are capital gains and dividends from shares of international companies. The new tax was introduced to increase revenues in the budget for the further development of the country’s economy. Despite the changes, the tax legislation of the United Arab Emirates can still be considered moderate, as the established rate is one of the lowest among countries where a profit tax is levied.

 Who is subject to the new profit tax and how?

As a general rule, taxpayers of the corporate tax include both residents and non-residents of the UAE. They include:

• Legal entities registered in the UAE, including in free economic zones;
• Foreign organizations managed and controlled by the Emirates;
• Individuals conducting business activities in Dubai or elsewhere in the UAE.

Residents are taxed on all profits earned in and outside the country. Non-residents are taxed only on income from sources in the UAE, from representations within the country, and other income received with a connection to the United Arab Emirates. The tax period for corporate tax is recognized as the calendar year. All registered taxpayers must submit a tax return no later than 9 months after the end of the tax period or at another time at the request of the supervisory authority. As part of the control, the tax authority has the right to request financial statements based on which information on taxable income was provided. Therefore, all accounting documents must be kept for 7 years. Corporate tax must be paid once a year. Advance payments and withholdings are not provided for by law.

The following entities are exempt from paying corporate tax:

• Companies with state participation;
• Public organizations, including charitable ones;
• Pension funds and social security funds;
• Enterprises engaged in the extraction and development of natural resources;
• Qualified investment funds.

Additionally, the law provides for the possibility of exempting companies owned and controlled by entities exempt from payment.

Corporate Tax Rates in the UAE

By general rule, the basic corporate tax rate in the UAE is as follows:

0% – if the taxable income does not exceed 375,000 dirhams;

9% – in respect to taxable income exceeding the normatively established threshold.

For “qualified” residents of the UAE free economic zones, which will be discussed in more detail later, the same rates are set:

0% – on “qualified” income;

9% – on “nonqualified” income.

Even when applying a zero tax rate, business entities are required to timely submit the corresponding declarations.

Which Incomes Are Not Taxable?

The object of taxation under the new corporate tax in the UAE is precisely net profit. This amount is defined as all the taxpayer’s income for the tax period minus expenses. The final amount of profit must be reflected in accounting and financial documents.

In the context of taxation under the new corporate tax, the following incomes are not recognized as taxable:

• dividends and other of profit distributions;
• income received by a non-resident from the use of passenger maritime and air vessels;
• income from share participation under certain conditions;
• income of a foreign permanent establishment.

The enumerated incomes are not taken into account when calculating business profits and, accordingly, are not subject to corporate tax in the UAE.

Are Companies in Free Zones Taxable?

Companies operating within the UAE free zones may be exempt from paying corporate tax if recognized as “qualified” residents. To qualify, they must simultaneously meet all the following conditions:

• maintain a sufficient presence in the UAE;
• receive “qualified” income, which is recognized as such according to the decision of the competent authority;
• company with all the legislative requirements;
• meet other introduced conditions.

If a company fails to meet any of the listed conditions, it loses the right to the exemption and is obliged to pay taxes according to the general rules. It should be noted that each resident of a free economic zone in the UAE has the right to voluntarily renounce the benefits and switch to taxation under the general regime.

Conclusion

The introduction of corporate tax in the UAE has somewhat complicated business operations in the country. Now, businesses need to monitor their incomes, timely apply for exemptions, and, if necessary, submit declarations to the supervisory authority. Nevertheless, the United Arab Emirates remains a country with extremely comfortable and lenient legislation for the conducting business. Moreover, all for tax-related matters and compliance with other requirements can be a entrusted to companies specializing in this field.

Injaz Group Company specializes in a comprehensive legal support for this businesses in the UAE. Our specialists are ready to provide consultation on any taxation matters and offer the optimal solution to the problem at hand.