Corporate Tax in UAE

The Ministry of Finance, United Arab Emirates (UAE) announced the Corporate Tax levy at 9% from June 1, 2023. The tax-free era ends soon for the Corporate Tax in the UAE as the country progresses towards making a robust taxation system for businesses. 

This blog explains the applicability of the UAE Corporate Tax, the rate at which the tax will be applicable, taxation in exceptional circumstances, and the availability of the tax credit. 

Applicability of the UAE Corporate Tax (CT)

The UAE Corporate Tax applies to businesses and commercial activities with taxable income of more than AED 375,000 in a financial period.  For the UAE CT, the accounting profit stated in the entity's financial statement will be considered taxable income for the UAE CT. 

However, the Federal Tax Authority (FTA) may specify the adjustments from the accounting profit to be regarded as taxable income. Hence, the Corporate Tax will be calculated on the adjusted accounting net profit for a financial period.

When is the UAE Corporate Tax not Applicable?

• Dividend and capital gains made from qualifying shareholdings* are exempt from UAE CT
• Business activities of extraction of natural resources will continue to be taxed under Emirate-level corporate taxation. Hence, they are exempt from the UAE Corporate Tax.
• Qualifying intragroup transactions and restructurings will not be charged for Corporate Tax.
• Income earned by individuals from real estate, employment, investment in shares, and other personal income not related to the business or trade in UAE will not be charged to Corporate Tax.

*Qualifying shareholding refers to the ownership interest in the UAE or foreign company meeting specific criteria.

Rate of the UAE Corporate Tax

For example, if an entity made a taxable income of AED 395,000, then the tax will be calculated as follows:

• 0% up to AED 375,000 = 0
• 9% of (395,000 - 375,000) = AED 1,800

Special Circumstances for the Applicability of the CT

➢ UAE Corporate Tax in case of Foreign Person

If foreign persons carry out trade or business in UAE regularly then they will be subject to UAE CT. 

A foreign investor’s income from dividends, capital gains, royalties, interest, and other investment returns will not be subject to UAE CT.

➢ UAE Corporate Tax in Case of Free Zones

Free zones will continue to enjoy the CT incentives currently provided to businesses that adhere to all regulatory requirements and do not carry out activities with mainland UAE. However, the CT will be levied after considering the CT incentives. 

➢ UAE Corporate Tax in case of Losses

Losses arise for UAE CT purposes when total allowable deductions are higher than the total income for a financial period.

Such loss occurring after the effective date of the corporate tax will be allowed to set off against the future taxable income in the subsequent economic periods, subject to certain conditions. It means the FTA will allow generous loss transfers by providing utilization rules.  

Withholding Tax

The FTA specified that there would be no withholding tax on cross-border and domestic payments. 

Tax Credit on UAE CT Liability

Businesses can claim a tax credit of any foreign Corporate Tax paid on UAE taxable income against the UAE CT liability.

The Bottom Line

Although the administrative procedures are yet to be specified by the FTA, a basic understanding of the UAE Corporate Tax will help you be ready with the new taxation and avoid non-compliance. 

At Flyingcolour Accounting and Tax Services, our expert professional can guide you to comply with the new UAE Corporate Tax law, help you with the backlog and current accounting, internal financial review, UAE VAT and conduct audits of the books of accounts.