Corporate tax in the UAE

United Arab Emirates (UAE) signed the Multilateral Tax Convention (MLI) to implement measures related to the Agreement on Avoidance of Double Taxation and Counteracting Base Erosion and Profit Shifting (BEPS), issued by the Organization for Economic Co-operation and Development (OECD) on June 27, 2018.

Corporate Tax (CT) was announced on January 31, 2022, by the UAE Ministry of Finance.

The public discussion document was published on April 28, 2022.

The Corporate Tax Law was issued on December 9, 2022.

Corporate tax is a form of direct tax imposed on a company's net income or profit. The UAE's corporate tax is based on the best international practices and aims to strengthen the UAE's position as a leading global business and investment center, as well as to accelerate the country's development and transformation to achieve its strategic goals. The introduction of corporate tax regime confirms the UAE's commitment to complying with international standards to ensure tax transparency and prevent harmful tax practices. UAE corporate tax is a federal tax and therefore will be applicable in all emirates.

Comparing the tax rate in the UAE with other European countries and Gulf countries, the corporate tax rate of 9% is relatively low.

Tax rates, filing requirements, and payments:

• 0% - if the taxable income does not exceed AED 375,000;
• 9% - on taxable income exceeding AED 375,000;
• 15% - tax rate for large multinational corporations meeting certain criteria set in accordance with the second component of the OECD BEPS project.

A multinational corporation is a corporation that operates in its home country as well as in other countries through a foreign subsidiary, branch, or other form of presence/registration. Simply earning income outside its home country without foreign presence or registration does not make a business a multinational corporation.

In the context of the global minimum effective tax rate proposed under the second component of the OECD BEPS project, the term "large" refers to a multinational corporation consolidating global revenues exceeding EUR 750 million (AED 3.15 billion).

A taxpayer must file a return within 9 months after the end of the relevant Corporate Tax period, with payment due within 9 months after the end of the relevant tax period (financial year).

Applicable from tax periods beginning on or after June 1, 2023.

A business whose financial year begins on July 1, 2023, and ends on June 30, 2024, falls under the UAE Corporate Tax from July 1, 2023, and these companies will be provided with a period from June 1, 2024, to February 28, 2025, to file CT declarations and make payments.

A business whose financial year (calendar year) begins on January 1, 2024, and ends on December 31, 2024, falls under the UAE Corporate Tax from January 1, 2024, and for such companies, the declaration and payment must be filed during the period from January 1, 2025, to September 30, 2025.

For each financial period, only one corporate tax declaration will need to be filed.

Corporate tax will not apply to an individual's salary and other income from employment (whether received in the public or private sector).

However, business income received under a commercial license will be subject to corporate tax in the UAE.

What is Permanent Establishment (PE)

Permanent Residence in a State refers to:

Place of management where managerial and commercial decisions necessary for conducting business are made:

Branch;

Office;

Factory;

Workshop;

Land, buildings, and other real estate;

Installation or structure for the exploration of renewable or non-renewable natural resources;

Mine, oil or gas well, quarry, or any other place of natural resource extraction, including vessels and facilities used for such extraction.

Application of Corporate Tax to Individuals Conducting Business

in a Free Zone

Individuals in a Free Zone are those who meet the following conditions:

Comply with the "arm's length" principle and transfer pricing documentation;

Receive qualified income;

Have real business activity in the UAE.

Individuals in the Free Zone meeting the requirements will be subject to a tax rate of 0%, but only if they do not meet any of the conditions listed above (which comply with all regulatory requirements and do not conduct business with the mainland of the UAE) during any specific tax period, after which they will be subject to a tax rate of 9% from the beginning of the tax period.

An individual meeting the requirements in the Free Zone has the right to choose whether to be subject to a 9% corporate tax.

Business established in the Free Zone will be required to register and file a corporate tax return.

Entities exempted from corporate tax:

Government entities and government-controlled organizations;

Extraction of natural resources (water, oil, gas, coal, natural minerals, and other non-renewable, inanimate natural resources that can be extracted from the UAE territory);

But they will be subject to corporate taxation at the level of each individual emirate.

This does not apply to contractors, subcontractors, suppliers, or any other entity used or intended for use in any part of the activity of extracting minerals (without a license to extract minerals).

Public and charitable organizations:

Exclusively for religious, charitable, scientific, artistic, cultural, sports, educational, medical, environmental, humanitarian, animal protection organizations, or similar purposes;

For the purpose of ensuring ongoing compliance with the requirements of a public or charitable organization, authorities may request any relevant information or records from organizations within the deadlines set by the authorities;

No part of its income or assets is payable or otherwise available for the personal benefit of any shareholder, member, trustee, founder who themselves do not meet the requirements to be considered a socially beneficial legal entity, a government legal entity, or a state-controlled legal entity.

Investment funds:

An investment fund or fund manager subject to regulatory supervision by the competent authority of the state or foreign competent authority recognized for these purposes.

Shares in an investment fund that are sold on recognized stock exchanges or offered for sale and are widely available to investors.

Pension or social funds;

A legal entity registered in the UAE, which is fully owned and controlled by an exempted person, is also exempted from taxation subject to certain conditions.

Dividends, capital gains, income derived from owning shares or other securities, and other personal income from bank deposits of individuals if such income is received by them personally from their own account.

Investments in real estate by individuals (to be specified), however, companies engaged in property management, construction, development, agency, and brokerage activities will be subject to corporate taxation in the United Arab Emirates.

Capital gains and dividends from shares of international companies;

Corporate tax in the United Arab Emirates generally applies to income derived from activities conducted under a freelancer's license/permit, although corporate tax will not be levied if the freelancer's annual net income does not exceed AED 375,000 (USD 102,180).

Income excluded from corporate tax:

• Dividends and other profit distributions received from:
• 
  
• A legal entity registered or resident in the UAE;
• Participation in a foreign legal entity;

Other income from equity participation.

• Income of a foreign permanent establishment eligible to claim tax exemption.
• Income received by a non-resident from the operation of aircraft or ships for international transportation.
• Income from equity participation is exempt from tax subject to certain conditions of ownership (minimum 12 months), tax rate in the foreign jurisdiction (rate not less than 9%, applicable in the UAE), ownership rights (not less than 5%), etc.
• Foreign legal and natural persons will be subject to UAE corporate taxation only if they conduct trade or business in the UAE on a permanent or regular basis.

Rules for carrying forward commercial losses to future periods:

• Tax loss can be offset against taxable profits of subsequent tax periods (from the effective date of corporate tax in the UAE).
• Only up to 75% of taxable income can be offset using carried forward tax loss.

The following losses cannot be used for tax loss relief:

• Losses before the effective date of corporate tax;
• Losses before the person becomes a taxpayer;
• Losses from exempted activities.

Conditions to be met for tax relief:

• At least 50% ownership must belong to the same person or persons, or
• The same or similar business continues if ownership changes by more than 50%.
  

How companies can carry forward their losses and obtain tax benefits:

The parent company must consolidate the financial results, assets, and liabilities of all member companies, excluding intra-group transactions.

Unused tax losses of a new subsidiary can be utilized by the tax group to offset the taxable profits of the tax group relating to that subsidiary.

Unused taxable losses of the tax group cannot be used to offset the taxable income of a new subsidiary.

If a participating company exits the tax group within 2 years after the transfer of assets/liabilities, such income must be accounted for as of the date of the participating company's exit from the tax group.

Any unused Tax Losses remain with the Parent Company in the event of the cessation of the Tax Group's activities.

Corporate Tax for Group of Companies

A group of UAE resident companies can form a tax group, which will be treated as a single taxable entity, if they meet certain conditions.

Benefits:

Efficient cost and time management;

Single tax return for the group;

Ability to consolidate the amount of group tax paid if some companies generate taxable profits while others incur tax losses.

Requirements:

The tax group is considered a single taxpayer, represented by the parent company;

The parent company must own at least 95% of the share capital or voting rights or profits and net assets of the subsidiary companies;

Companies must not be exempted from tax or free zone qualified persons;

The parent company and its subsidiary companies must have the same financial year and the same accounting standards.

Foreign Corporate Tax

Foreign corporate tax paid on taxable income in the UAE can be credited as a tax deduction against corporate tax liabilities in the UAE.

What is Transfer Pricing and How Does It Impact Business?

Transfer pricing refers to transactions and agreements between related parties in accordance with the arm's length principle.

(The arm's length principle is a specific standard that establishes a special relationship between parties entering into a transaction. The idea is that the price should directly reflect all the terms of the agreement that might apply between independent companies.)

The tax authority must adjust the taxable income when transactions or agreements are not made in accordance with the arm's length principle.

If the competent authority of a foreign state adjusts the income of a taxable entity, that entity may apply to that authority for the corresponding adjustment.

The enterprise will be required to maintain documentation to verify the arm's length principle.

Methods and Documentation for Transfer Pricing

There are five methods prescribed by the OECD (Organization for Economic Co-operation and Development) for determining market prices. The selection of any other method is also possible with proper justification:

1. Comparable Uncontrolled Price Method
2. Cost Plus Method
3. Resale Price Minus Method
4. Transactional Net Margin Method (TNMM)
5. Profit Split Method

Documentation required for transfer pricing:

1. Taxpayer must submit a report on transactions or agreements with its related parties and associated person together with its tax return;
2. If the submitted transaction report complies with the conditions set by the minister, the taxpayer must maintain both the master and local files;
3. Documentation (master file and local file) must be submitted within 30 days from the request for the profit split method.

Key aspects:

The year according to the Gregorian calendar or a 12-month period for which the taxpayer prepares financial statements.

Documents must be retained for 7 years.

Each taxpayer must register as a corporate taxpayer regardless of whether they reach the taxable income threshold of 375,000 dirhams or not.

Tax will be calculated in UAE dirhams, other currencies need to be converted at the exchange rate of the Central Bank of UAE.

The declaration will be filed within 9 months of the relevant tax period.

Anti-Abuse Rules (AAR) prevent any transaction or agreement from gaining a corporate tax advantage.

The balance at the end of the financial year ending immediately before the first tax period will be considered the starting balance for corporate tax.

How The Level Consulting can help you?

In-depth review of existing structure and practices:

• Review of existing practices and processes;
• Identification of potential gaps;
• Identification of potential mismatches that may cause harm in the future;
• Assessment of existing opportunities and at the client level regarding their employees;
• Comparison of the corporate tax law with the client's existing practice and impact assessment;
• Company structure review;
• Providing recommendations along with a complete transition plan.

Execution of recommendations:

• Ensuring proper implementation of recommendations in accordance with corporate tax legislation;
• Ensuring a smooth transition to the corporate tax regime;
• Training sessions to enhance the client's staff potential;
• Providing direct support to the client in developing its SOP/policy/procedural documentation.

Consultations on corporate taxes and its calculation:

• Managing the client's corporate tax;
• Calculation of taxable income;
• Calculation of tax liability;
• Ensuring timely filing of corporate tax returns;
• Assisting the client in tax assessments by the authorities.