Summary and Key Questions Related to UAE Corporate Tax 2024

Corporate tax (CT) is a type of direct tax imposed on the net income or profits generated by companies and other entities through their business activities. In different regions, corporate tax may also be known as ‘Corporate Income Tax (CIT)’ or ‘Business Profits Tax’.

Historically, the United Arab Emirates (UAE) was known as a zero corporate tax jurisdiction. The individual Emirates had their own corporate tax decrees but, in practice, corporate tax was imposed only on oil and gas producing companies and branches of foreign banks.

In January 2022, however, the UAE Ministry of Finance (MOF) announced that the UAE would be introducing a federal corporate tax (CI) effective for financial years starting on or after 1 June 2023, with a headline rate of 9%.

Introduction

This change was driven by the OECD’s Base Erosion and Profit Shifting (BEPS) project, an ongoing initiative that is designed to establish an international framework to combat tax avoidance by multinational enterprises (MNEs). The UAE joined the G20/OECD Inclusive Framework on BEPS in 2018, which committed it to implement the BEPS minimum standards.

In line with this commitment to global best practice, while also working to diversify state revenue sources away from hydrocarbons, the UAE’s journey began with the introduction of Value Added Tax (VAT) in January 2018. This was followed by the introduction of economic substance rules (ESR) and Country-by-Country Reporting (CbCR) regulations in April 2019.

The introduction of a federal corporate tax (CT) regime, via the UAE Federal Decree Law No. (47) of 2022 on the Taxation of Corporations and Businesses (CT Law), was the next step in its commitment to comply with the international tax transparency and fairness standards.

The UAE’s new Corporate Tax (CT) law imposes a tax on the business profits earned by UAE companies during a given tax accounting period. It is designed to align with international standards while minimising the compliance burden on businesses.

What is the effective date of UAE CT?

The CT applies to financial years starting on or after 1 June 2023.

Any company in the UAE that adopts a fiscal year starting on 1 June 2023 and ending 31 May 2024 will be subject to CT starting 1 June 2023. The first tax return filing needs to be submitted before the end of February 2025.

Any company in the UAE that adopts a calendar year starting 1 January 2023 and ending 31 December 2023 will be subject to CT starting 1 January 2024. The first tax return filing needs to be submitted before the end of September 2025.

What is the scope of UAE CT?

The UAE has introduced a federal tax system that applies to all businesses and commercial activities operating within the seven emirates. However, there are certain exceptions:

• Businesses operating in the extraction of natural resources. These will continue to be subject to the tax decrees issued by the respective Emirate.
• Individuals earning income in an individual capacity (i.e. salary or passive investment income) provided that the income generating activity does not require a commercial licence.
• Businesses registered in Free Zones, provided they comply with all the regulatory requirements and do not conduct business with Mainland UAE.
• Certain government entities and public benefit organisations may be exempt under specific conditions.

What are the rates of UAE CT?

The UAE CT regime operates a tiered system with three rates:

• All annual taxable profits that fall under the minimum threshold of AED375,000 (C. €100,000) will be subject to a zero rate of CT.
• All annual taxable profits above under the minimum threshold of AED375,000 will be subject to 9% rate of CT.
• All multinational enterprises (MNEs) that fall under the scope of Pillar 2 of the OECD’s BEPS 2.0 framework – MNEs with consolidated global revenues above AED3.15 billion (€750 million) – will be liable to different rates subject to a global minimum effective tax rate of 15%.

What types of income are exempt from UAE CT?

The following categories of income are exempt:

1. Dividends and Profits Distributions

   • Dividends received from UAE-resident ‘juridical persons’ (corporates) are exempt.
   • Dividends from foreign juridical persons in which the recipient has a significant ownership interest are also exempt. This is termed a ‘Participation Interest.

2. Capital Gains

   Capital gains arising from the sale of shares or other securities from a Participating Interest are exempt, provided the conditions of the Participation Exemption are met.

3. Income from Foreign Permanent Establishments

   Income earned from a foreign branch or Permanent Establishment (PE) can be exempt if the appropriate election is made under the CT Law.

4. Non-Resident Income

   Income earned by non-residents from operating or leasing aircraft or ships in international transportation is exempt, subject to certain conditions.

5. Qualifying Investment Funds

   Income received by qualifying investment funds that meet specific conditions is exempt from Corporate Tax, provided they apply for this exemption.

6. Public Benefit Entities

   Qualifying public benefit entities are exempt, provided they meet the necessary criteria outlined in the relevant legislation.

7. Government Entities

   UAE federal and emirate governments, along with their departments and authorities, are automatically exempt from CT.

8. Extractive and Non-Extractive Natural Resource Businesses

   Businesses engaged in the extraction of UAE natural resources or related activities that are subject to emirate-level taxation may also qualify for exemptions

How is a ‘Participating Interest’ defined under the UAE CT Law?

A ‘Participating Interest’ is defined as an ownership interest in the shares or capital of a juridical person that meets the conditions referred to in Article 23 of the Corporate Tax Law, which broadly include:

• An ownership interest of at least 5%.
• A 12-month uninterrupted holding period (or the intention to hold for 12 months).
• The Participation is subject to tax in its country or territory of residence at a rate that is not lower than 9%.
• Not more than 50% of the direct and indirect assets of the Participation consist of ownership interests that would not have qualified for an exemption if held directly by the Taxable Person.

The term ‘ownership interest’ for the purposes of the CT Law is defined as a holding interest in the form of ordinary, preferred or redeemable shares, a membership and partner interest, and / or any other types of securities, capital contribution and rights that entitle the owner to receive profits and liquidation proceeds. This may include Islamic Finance Instruments or arrangements that form part of Islamic Finance Instruments. Most importantly, the ownership interest should be classified as an equity interest under the accounting standards to qualify for an exemption.

Are Free Zone companies exempt from UAE CT?

Companies operating in UAE Free Zones may be exempt from CT under certain conditions. Free Zone companies that qualify can benefit from a preferential 0% CT rate on income derived from qualifying activities and transactions.

To be classified as a ‘Qualifying Free Zone Person’ (QFZP) and to enjoy the 0% tax rate, companies must meet specific criteria, including:

• Maintaining Adequate Substance – Free Zone companies must demonstrate sufficient operational presence in the Free Zone.
• Deriving Qualifying Income – Income must be derived from activities that are recognised as qualifying under the CT Law.
• No Election for Regular CT – Free Zone companies must not have opted to be subject to the standard UAE CT regime.
• Compliance with Transfer Pricing Rules – Free Zone companies must adhere to arm’s length principles, for which proper documentation is required.
• Audited Financial Statements – Free Zone companies must prepare and maintain audited financial records.

Are UAE companies subject to Transfer Pricing rules?

All UAE companies engaging in transactions with related parties or connected persons are required to follow the UAE Transfer Pricing (TP) regulations, maintain documentation and ensure the transactions are at arm’s length, regardless of their corporate tax status or whether they are part of a multinational or domestic group.

• Arm’s Length Principle

  • All transactions between related parties or connected persons must be conducted at arm’s length, meaning the terms and conditions would be the same as if the parties were independent and acting freely.
  • Companies must maintain TP documentation to demonstrate that their related party transactions meet the arm’s length standard.

• Related Party Definition

  • Related parties include associated persons with a specified degree of association, such as through ownership, control or kinship up to the fourth degree.
  • Connected persons is a broader term that also brings transactions within the scope of TP rules.

• Documentation Requirements

  • Companies that meet certain thresholds for related party transactions must prepare a master file and local file.
  • A TP disclosure form must be filed with the annual tax return providing details on related party transactions.
  • Multinational Enterprises (MNEs) above a revenue threshold must also file Country-by-Country Reports (CbCRs).

• Applicability

  • The TP rules apply not only to MNEs, but also to domestic groups and all transactions with related parties or connected persons.
  • Free Zone companies that qualify for a 0% tax rate are still subject to the TP rules and must ensure arm’s length pricing and maintain relevant documentation.

Are losses allowed to be carried forward?

Businesses in the UAE are allowed to carry forward losses incurred in one tax period to offset against taxable income in future periods, subject to certain conditions:

• Carry Forward of Losses

  • Losses can be carried forward indefinitely.
  • Losses incurred in one tax period can be offset against up to 75% of the taxable income in each future period.
  • Businesses must still pay tax on at least 25% of taxable income even if all losses are not fully offset.

• Conditions for Carrying Forward Losses

  • There must be continuity of ownership, with the same shareholder(s) holding at least 50% of the share capital from the start of the loss period to the end of the period in which the loss is offset.
  • If the continuity of ownership test is not met, losses can still be carried forward if there is continuity of business. The same business activity must be conducted following a change in ownership of more than 50%.
  • Losses incurred before the effective date of UAE corporate tax (1 June 2023) cannot be carried forward.
  • Losses from activities generating exempt income cannot be carried forward.

Are Tax Groups allowed to be formed? What are the requirements?

Tax Groups may be formed in the UAE under the Corporate Tax Law. To form a Tax Group, the following conditions must be met:

1. Ownership

   The parent company must directly or indirectly own at least 95% of the share capital, voting rights or profits and net assets of each subsidiary.

2. Residency

   All companies in the group must be resident juridical persons that are incorporated or effectively managed and controlled in the UAE.

3. Exemption Status

   None of the entities in the group can be exempt persons or qualifying Free Zone persons.

4. Accounting Consistency

   All companies must have the same accounting period and use the same accounting standards (such as IFRS).

5. Application Timing

   A joint application to form a Tax Group must be submitted to the Federal Tax Authority (FTA) before the end of the tax period in which grouping is desired.

Are Foreign Tax Credits available to UAE companies?

Companies in the UAE are permitted to claim foreign tax credits (FTC) to offset their UAE corporate tax liability, subject to certain conditions:

• Eligibility for Foreign Tax Credits

  • The foreign tax must be of a similar character to UAE corporate tax, meaning it is imposed on profit or net income, is compulsory and enforceable under the foreign jurisdiction’s tax laws, and paid to the government of that jurisdiction.
  • The foreign tax credit cannot exceed the amount of UAE corporate tax due on the relevant foreign source income.
  • FTC is not available for exempt income like foreign dividends under the Participation Interest exemption, or when no UAE corporate tax is payable such as for qualifying Free Zone persons subject to 0% tax.

• Calculation and utilisation of FTC

  • FTC is calculated on an income-by-income basis and cannot be used to offset UAE tax on other foreign income sources.
  • Excess FTC cannot be carried forward to future periods or back to prior periods – it is forfeited if unused.
  • FTC is utilised by deducting the lesser of the foreign tax paid or the UAE corporate tax due on the relevant foreign income.

• Documentation Requirements

  • Adequate documentation must be maintained to substantiate the foreign income, exchange rates used, details of foreign tax paid and proof of payment.
  • Documents must be in Arabic or English, or certified translations must be provided.

Does UAE CT regime offer any reliefs for small businesses?

Small business relief will be available for tax periods that end before or on 31 December 2026.
Small business relief is available for companies that are resident in the UAE with revenues below AED3 million (c. USD817,000) for the latest and all previous tax periods.
If a business meets the criteria for small business relief, it will not have to pay any corporate tax on its profits. It will also be subject to reduced compliance requirements, such as simplified transfer pricing rules.

When is the CT return filing deadline?

After registration, companies must prepare for their first corporate tax filing, which is due within nine months after the end of their relevant tax period. Any UAE corporate tax payable must also be settled within this timeframe.

With most companies operating on a fiscal year that ends on 31 December, the initial taxable period will be from 1 January 2024 to 31 December 2024. This sets the filing deadline for the first corporate tax return on 30 September 2025.

Businesses will need to maintain all relevant records and documents for seven years following the end of the tax period to which they relate. This is critical for maintaining compliance with UAE tax regulations and facilitating any future audits.

How to calculate the taxable income?

To reduce complexity and compliance costs, the UAE CT regime uses the accounting net profit (or loss) as stated in the financial statements of a business as the starting point for determining its Taxable Income.

For this purpose, the financial statements should be prepared in accordance with accounting standards that are accepted in the UAE. The UAE does not have its own Generally Accepted Accounting Principles (GAAP), so International Financial Reporting Standards (IFRS) are commonly used by businesses in the UAE.

In order to arrive at Taxable Income, expenditure incurred wholly and exclusively for the purposes of the Taxable Person’s business that is not capital in nature may be deductible in the tax period in which it is incurred. However, the CT Law disallows or restricts the deduction of certain expenses. This is to ensure that relief can only be obtained for expenses incurred for the purpose of generating Taxable Income, and to address possible situations of abuse or excessive deductions.

The CT Law prescribes a number of key adjustments to the accounting net profit (or loss) in order to compute the Taxable Income. These include, for instance, unrealised gains/losses (Taxable Persons have an election to make on how to treat it), exempt income, certain tax reliefs, non-deductible expenditure, transfer pricing adjustments and tax loss reliefs.

What is the Registration Timeline for Taxable Persons in the UAE?

Decision No. 3 of 2024, issued by the FTA, sets out the corporate tax registration timelines for taxable persons. Persons who are required to register for corporate tax under Federal Decree-Law No. 47 of 2022 should follow these timelines to ensure that they comply with the UAE’s CT laws.

For juridical persons (corporates) resident in the UAE and established before 1 March 2024, the deadline for submitting a tax registration application is staggered through 2024, based on the month in which the company obtained its commercial licence.

Where a company did not have a commercial licence at 1 March 2024, the deadline is three months from 1 March 2024.

Where an entity has multiple commercial licences, the commercial licence with the earliest issuance date should be used to determine the relevant filing deadline.

For corporates resident in the UAE established on or after 1 March 2024, the deadline for submitting a tax registration application is as follows:

• If the company is established under the laws of the UAE (including a Free Zone), the deadline is three months after the date on which the company was established.
• If the company is established under the laws of a foreign jurisdiction but centrally managed and controlled in the UAE, the deadline is three months after the end of the financial year of that company.

If the company is a Non-Resident Person for the purposes of CT prior to 1 March 2024, the deadline for submitting a tax registration application is either nine months after the creation of a Permanent Establishment in the UAE or, where nexus applies, three months after 1 March 2024.

If the company is a Non-Resident Person for the purposes of CT on or after 1 March 2024, the deadline for submitting a tax registration application is either six months after the creation of a Permanent Establishment in the UAE or, where nexus applies, three months after the establishment of the nexus.

For resident natural persons engaged in business activities, the deadline for submitting a tax registration application is 31 March in the year following the year in which the person’s turnover exceeds the AED1 million (c. USD275,000) threshold for registration.

For non-resident natural persons engaged in business activities, the deadline for submitting a tax registration application is the date falling three months after the date on which the person meets the requirements to be subject to UAE corporate tax.

How can Sovereign assist?

Sovereign can assist with applying for tax registration in the UAE and our in-house team of highly qualified chartered accountants will provide your company with comprehensive accounting services in Dubai and across the UAE that are tailored to your needs and budget as follows:

• Prepare your accounts and ensure they meet IFRS Accounting Standards
• Ensure that your business takes advantage of all appropriate tax reliefs and exemptions.
• Comply with all UAE regulatory requirements.

Our team has a deep understanding of all areas of tax, providing specialist advice, ranging from corporate and employment tax, transfer pricing and corporate structuring, national and international transactions, to ensuring tax compliance.