Dr. jur. Jörg WernerSince 1 June 2023, the Corporate Tax Law has been in force in Dubai, introducing a new tax regime for businesses and commercial activities. The regulations establish a standard tax rate of 9%.
Read on to find out exactly who is taxed, how the system works, and which exemptions apply.
On 9 December 2022, the UAE Ministry of Finance published the Federal Decree-Law on the Taxation of Corporations and Businesses. This legislation created a new corporate tax regime across the UAE. It applies to financial years starting on or after 1 June 2023. A 12-month transition period was provided for companies with a financial year ending in December to prepare for the new rules. However, anti-avoidance measures and transitional rules applied from the date the law was published in the Official Gazette.
Here are the key highlights at a glance:
- The UAE Ministry of Finance published the Corporate Tax Law, effective from 1 June 2023.
- The standard tax rate is 9%.
- The new regime applies to all businesses in the UAE (except for those involved in the extraction of natural resources).
- There are exemptions for specific sectors, and individuals in Free Zones may remain tax-exempt provided they meet certain conditions.
Key Features and Principles of the Corporate Tax System
Who is considered a Taxable Person in Dubai?
Broadly speaking, a "Taxable Person" can be either a resident or a non-resident person.
The following are considered resident and taxable:
- A legal entity incorporated or recognised in the UAE (including Free Zones).
- A legal entity incorporated outside the UAE but effectively managed and controlled within the UAE.
- A natural person (individual) conducting business activities in the UAE.
This means that foreign companies and individuals are liable for Corporate Tax if they conduct business in the UAE on a permanent or regular basis. The tax authority has indicated that any activity performed by a legal entity is considered a "business activity" and therefore falls within the scope of Corporate Tax.
The following are considered non-resident but taxable:
- A non-resident person may be subject to Corporate Tax (CT) if they have a Permanent Establishment (PE) in the UAE, derive UAE-sourced income, or have a specific nexus to the UAE.
Essentially, foreign companies with a fixed place of business or operational facility in the UAE are subject to Corporate Tax just as if they were resident in the country.
Employment Income
Salaries and other income derived from employment, as well as income from personal real estate and other private investments, generally do not fall under Corporate Tax, provided the individual conducts these activities in a personal capacity and does not require a commercial license.
Therefore, no tax is levied on employee salaries, nor on personal income from real estate or capital gains held personally.
Dubai Tax Rates
Since June 2023, businesses in the United Arab Emirates have been subject to a 9% tax rate.
EXCEPTION: Taxable income not exceeding the threshold of AED 375,000 (approx. EUR 95,000) remains exempt from tax.
Note: This threshold is set by a Ministerial Decision. While AED 375,000 is the expected figure, it is subject to final confirmation via official channels.
Multinational Enterprises
Although the Ministry of Finance had previously indicated that a higher rate might apply to large multinationals under Pillar Two, the Corporate Tax Law currently contains no specific provisions for this. However, the documentation emphasises that the UAE intends to adopt these rules shortly and further developments are expected.
Exemptions
Certain entities are exempt from Corporate Tax in the UAE provided specific conditions are met.
These include entities involved in the extraction of natural resources in the UAE, government entities, government-controlled entities, qualifying public benefit entities, pension or social security funds, and certain investment funds.
A company incorporated in the UAE that is owned and controlled by such an exempt person may also be exempt if it undertakes part or all of the exempt person's activities, holds assets or invests funds for their benefit, or carries out ancillary activities. Some exemptions, including those for qualifying investment funds, require a formal application to the Federal Tax Authority (FTA).
Tax Base in Dubai
UAE companies are generally taxed on their worldwide income. However, dividend income and capital gains are exempt, provided the participation exemption conditions are met.
The law also provides an exemption for profits from foreign permanent establishments if those profits have already been subject to tax abroad at a rate of at least 9%.
Foreign tax credits are available for taxes paid abroad on income that is not exempt from UAE Corporate Tax.
Natural persons resident in the UAE who are subject to CT are only taxed on income derived from business activities within the UAE.
Non-residents must pay CT on any taxable income attributable to a Permanent Establishment or nexus in the UAE, or which is considered UAE-sourced income.
Permanent Establishment (PE)
Non-residents are considered to have a Permanent Establishment (PE) in the UAE if they have a fixed place of business. A PE also arises if they have a dependent agent in the country. The Corporate Tax Law states that other forms of nexus in the UAE creating a PE may be determined by a Ministerial Decision.
UAE-Sourced Income
The Corporate Tax Law defines various types of income as UAE-sourced. In general, this includes any income generated by a UAE resident person. It also covers income derived from activities performed in the UAE, assets located in the UAE, or rights used for economic purposes within the UAE.
Free Zones and the "Qualifying Free Zone Person"
The Corporate Tax Law introduces the concept of a "Qualifying Free Zone Person" (QFZP), broadly defined as a company or branch registered in a Free Zone that:
- Maintains adequate substance in the UAE.
- Derives "Qualifying Income" (as specified by a Ministerial Decision).
- Complies with transfer pricing requirements.
- Meets any other conditions prescribed by Ministerial Decision.
A QFZP is still subject to Corporate Tax but can benefit from a 0% rate on its qualifying income. A QFZP can elect to waive this preferential regime, in which case it will be subject to the standard Corporate Tax rate.
Simply put: Corporate Tax applies to Free Zone companies, which must file a Corporate Tax return. If a company does not conduct business with mainland UAE and meets "other necessary requirements," it may retain the fiscal incentives of the Free Zone. The precise extent of this is still being clarified, as the Ministry has yet to provide full details. Companies in the UAE's numerous Free Zones have long enjoyed tax exemptions and full foreign ownership rights.
Taxable Income in Dubai
Taxable income is determined based on the accounting net profit (or loss) as stated in the financial statements. However, this is subject to adjustments, including:
- Unrealised gains or losses related to capital items.
- Income and related expenses generated by an exempt person in connection with their exempt activity.
- Dividend income and other profit distributions from a resident person.
- Dividend income and capital gains under the participation exemption.
- Income from a non-UAE Permanent Establishment that has been taxed at a rate of at least 9%.
- Income earned by a non-resident from operating or leasing aircraft or ships in international traffic.
- Gains or losses from restructuring or intra-group transfers of assets/liabilities under certain conditions.
- Net interest expenditure is capped at 30% of EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation).
- Entertainment-related expenses are deductible only up to 50% of the amount incurred.
Regarding the interest deduction cap, the Corporate Tax Law states that the non-deductible amount can be carried forward for 10 years. Further restrictions may apply to related-party debt.
The law also includes a list of non-deductible expenses, such as donations, administrative penalties, recoverable VAT, and dividends or similar payments to an owner of the taxable person.
In Simple Terms
Taxable income in the UAE is calculated based on the accounting profit from your financial results. This is then adjusted for factors such as: unrealised gains/losses, income/costs of an exempt person, dividends, capital gains under participation exemption, and foreign branch income already taxed abroad. Certain costs, such as donations, fines, or dividends paid to owners, cannot be deducted. There is also a cap on interest deductibility.
Companies registered in a designated Free Zone that meet specific conditions (e.g., adequate presence in the UAE and income from qualifying sources) may benefit from a tax exemption on their taxable income.
Tax Loss Relief
Under certain conditions, companies can carry forward tax losses indefinitely to offset up to 75% of their future taxable income. Losses incurred before the commencement of the Corporate Tax regime cannot be utilised.
Tax Groups
A parent company can apply to the Federal Tax Authority (FTA) to form a Tax Group with its UAE subsidiaries. Specific conditions must be met, such as a 95% ownership stake. Tax losses can also be transferred between companies if there is a 75% ownership relationship.
Withholding Tax
A 0% withholding tax applies to payments made by UAE companies to non-residents deriving UAE-sourced income. Exceptions may apply to payments to branches or permanent establishments in the UAE. The withholding tax rate can be adjusted by government decision.
Administration and Compliance
UAE businesses affected by Corporate Tax must register and obtain a Tax Registration Number. Registration applications generally need to be submitted to the FTA before the law applies to the specific entity. Further guidance on this process is expected.
Taxable businesses must file an annual tax return and pay any tax due within nine months of the end of their financial year. Parent companies of Tax Groups only need to file one consolidated return.
Companies may also be required to submit their financial statements to the FTA and have them audited by an accredited auditor.
Transfer Pricing (TP)
Companies in the UAE must ensure that transactions with related parties and connected persons comply with the arm's length principle. The definitions of related parties and connected persons are broader than international norms; even kinship up to the fourth degree can trigger a relationship. Companies must maintain TP documentation (Master File and Local File) and submit it to the FTA within 30 days upon request. They are also expected to file a TP disclosure form alongside their tax return. Businesses can apply for an Advance Pricing Agreement (APA).
Anti-Abuse and Transitional Provisions
The Corporate Tax Law includes a General Anti-Abuse Rule (GAAR) which allows the authority to disregard transactions or arrangements where the main purpose is to obtain a Corporate Tax advantage. These rules apply from the date the law was published in the Official Gazette.
As part of the transitional rules, the opening balance sheet for CT purposes will be the closing balance sheet of the financial year immediately preceding the first tax year.
Summary
The new tax regime in the United Arab Emirates has far-reaching implications for all businesses and individuals conducting commercial activities in the region. It is vital to start assessing the impact of these rules immediately. This includes reviewing applicability, considering cash flow implications, checking exemption criteria, and developing compliance processes. As further details are released via Ministerial Decisions in the coming months, businesses should monitor developments closely and prepare for compliance before the rules fully impact their operations.
