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UAE Corporate Tax Law
According to the UAE Corporate tax law, businesses earning annual taxable profits up to AED 375,000 will be exempt from taxes starting June 1, 2023. For profits exceeding this threshold, a 9% tax rate will apply. This law establishes the framework for a Federal Corporate Tax Law in the UAE, effective from June 1, 2023. The federal decree law outlines the criteria, tax rates, and other pertinent details necessary for businesses preparing for corporate tax implementation. This tax, levied directly on business profits, was introduced in the UAE to fortify its position as a premier global hub for business and investment.
According to the UAE's Corporate Tax Law, profits exceeding AED 375,000 will be taxed at a standard rate of 9%, while small firms and start-ups with profits up to this threshold will enjoy a 0% tax rate. The Corporate Tax not only supports the growth and transformation necessary to achieve strategic goals but also reinforces the commitment to adhering to international standards of transparent taxation and preventing fraudulent practices. Professional Corporate tax services in UAE help businesses navigate these regulations effectively and ensure full compliance.
When Will Corporate Tax Take Effect?
The Federal Decree-Law applies to financial years beginning on or after 1 June 2023 (i.e., ‘financial years beginning on or after 1 June 2023’). For example:
- Businesses operating with a financial year spanning from July 1, 2023, to June 30, 2024, will be subject to corporate tax starting from July 2023.
- Businesses with a financial year spanning from January 1, 2023, to December 31, 2023, will be subject to corporate tax starting from January 1, 2024, marking the first financial year following June 2023.
What does the UAE Corporate Tax Law entail?
The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses was issued on 9 December 2022; the Ministry of Finance and the Federal Tax Authority (FTA) are the official sources of guidance and implementation for the law.
Key Features of the UAE Corporate Tax Law
- Tax Rate: 0% for taxable income up to AED 375,000 and 9% for taxable income exceeding AED 375,000.
- Taxable Persons: Broadly, Corporate Tax applies to UAE companies and other juridical persons incorporated or effectively managed and controlled in the UAE; certain natural persons who carry on a specified business activity in the UAE; and non-resident juridical persons with a Permanent Establishment in the UAE. Free-zone persons are within scope but qualifying free-zone persons can benefit from a 0% rate on qualifying income subject to the conditions in the law.
- Exemptions: Certain entities, such as government entities and qualifying investment funds, are exempt from corporate tax.
- Taxable Income: Calculated based on accounting profit, with adjustments for tax purposes.
- Tax Compliance: Companies must register for corporate tax, file tax returns, and pay taxes on time.
Domestic Minimum Top-up Tax (DMTT)
The UAE’s Domestic Minimum Top-up Tax (DMTT) was introduced by amendment to the Corporate Tax Law (Federal Decree-Law No. 60 of 2023) and related Cabinet decisions; it applies to constituent entities of Multinational Enterprises whose consolidated annual revenues are €750 million or more in at least two out of the four financial years immediately preceding the DMTT year. The DMTT is effective for financial years starting on or after 1 January 2025 and imposes a top-up to ensure a minimum effective tax rate of 15% in the UAE.
This accords with the OECD's Two-Pillar Solution, which requires large multinational enterprises (MNEs) to pay a minimum effective tax rate of 15% on global profits. Key aspects of DMTT executive regulations include:
- Scope: The DMTT applies to multinational enterprises(MNEs) with a global turnover €750 million or more in the consolidated financial statements of the ultimate parent entity in at least two of the four financial years immediately preceding the financial year in which the DMTT applies.
- Calculation: The DMTT is calculated based on the group's UAE-sourced income, with a minimum effective tax rate of 15%.
- Top-up Tax: If the effective tax rate on UAE-sourced income is below 15%, a top-up tax is payable to bring the effective tax rate up to 15%.
- Purpose: The DMTT aims to prevent base erosion and profit shifting (BEPS) by ensuring that multinational groups pay a minimum level of tax on income earned in the UAE.
The DMTT is an important aspect of the UAE's corporate tax regime, and companies should be aware of its implications for their tax obligations in the UAE
What is the standard rate of Corporate Tax?
As per the federal decree law finalized by the FTA, the Corporate Tax rates are as follows:
- 0%: for income up to AED 375,000
- 9%: for income exceeding AED 375,000
Transfer Pricing Regulations
Transfer pricing refers to the rules and methods for pricing transactions between related parties, such as subsidiaries of a multinational company. The UAE's Corporate Tax Law incorporates transfer pricing provisions aligned with the OECD Transfer Pricing Guidelines. These provisions mandate that transactions between related parties meet the arm's length standard, ensuring that prices are consistent with those between independent entities under similar circumstances.
Businesses are required to maintain detailed transfer pricing documentation and submit a disclosure form, subject to certain conditions. This documentation should include a Master File and Local File, providing comprehensive information about the group's global operations and the local entity's activities, respectively.
Stay Compliant with Reyson Badger
At Reyson Badger, we offer unparalleled Corporate Tax Services in the UAE, designed to guarantee full compliance with the latest UAE Corporate tax law regulations. As leading financial consultants, we deliver top-tier services tailored to your corporate tax needs, guiding you through regulatory compliance and ensuring adherence to tax laws.
Our impact assessment services involve:
- Evaluating Current Tax Positions: Analysing existing tax structures to identify potential risks and opportunities arising from new regulations
- Transfer Pricing Analysis: Reviewing intercompany transactions to ensure they adhere to the arm's-length principle and comply with documentation requirements.
- Strategic Tax Planning: Developing tax-efficient strategies that align with your business objectives while ensuring compliance with UAE tax laws.
- Compliance Support: Assisting in the preparation and submission of required documentation, including transfer pricing disclosure forms and tax returns.
FAQ
UAE Corporate Tax Law
According to the UAE Corporate Tax Law summary, a Qualifying Free Zone Person (QFZP) is a free zone entity that: 1. Retains sufficient substance in the United Arab Emirates, 2. Generates qualifying income as determined by the Cabinet, 3. Adheres to reporting and transfer pricing regulations; and 4. Has not chosen to be liable to regular corporate tax. QFZPs are eligible for a 0% corporate tax rate on qualifying income.
Small Business Relief under the UAE Corporate Tax Law allows eligible businesses with revenue below AED 3 million in a tax period to be treated as having no taxable income. To be eligible, the business must be a resident, not a member of a multinational corporation, and choose to apply for relief. This relief is available for tax periods beginning on or after June 1, 2023 and ending December 31, 2026.
According to the UAE corporate Tax Law, a Qualifying Free Zone Person (QFZP) is a free zone entity that is eligible for 0% corporate tax on qualifying income. To qualify, it must maintain sufficient substance in the UAE, earn money from certain qualifying activities, reject to be taxed at the regular rate, follow transfer pricing laws, and have audited financial accounts. Furthermore, non-qualifying revenue cannot exceed AED 5 million or 5% of total revenue (whichever is lower). Failure to achieve these standards leads to the loss of QFZP status.
Yes, Corporate Tax will impact businesses operating within the free zones of the UAE. However, free zone enterprises that comply with regulatory requirements and exclusively operate within the free zones without conducting business in the mainland UAE may still benefit from corporate tax exemptions. Free zone entities are obligated to register and submit corporate tax returns.
Given that income up to AED 375,000 incurs no tax (0% - NIL), and income exceeding AED 375,000 is taxed at 9%, here's the calculation: Income exceeding AED 375,000 (AED 400,000 - AED 375,000 = AED 25,000) at 9% = AED 2,250 Hence, the Corporate Tax for the financial year amounts to 0 + AED 2,250 = AED 2,250.
Corporate Tax
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