The UAE Corporate Tax: A Primer for Business Owners

In January 2022, the United Arab Emirates announced it would start imposing a federal corporate tax in the UAE. The tax would apply to all UAE businesses beginning on their first financial year on or after 1 June 2023.

 

The UAE introduced the new federal corporate income tax scheme to comply with internationally established fiscal standards that ensure tax transparency and prevent harmful tax practices. Corporate income taxes can also help the UAE economy. The activation of non-oil-related income is not only in line with the country's vision; it also means more resources the UAE can use on infrastructure development.

 

The implementation of the new corporate tax regime in the UAE has left many enterprises wondering about its impact on their businesses. Read on for a summary of the corporate tax provisions and how corporate tax can potentially affect UAE businesses.

The UAE corporate tax has the following rates:

The UAE federal government levies a tax on the business income of the following taxable entities:

As a general rule, the corporate tax applies to all businesses engaged in economic activities under a commercial license issued anywhere in the UAE. Contractors, freelancers and other individuals with business licenses are liable for corporate taxes on their business income.

 

Do you own a business or conduct a licensed economic activity in the UAE? Unless your business qualifies for a specific exemption, you can assume that you must pay corporate income tax.

In the past, it was common for free zone companies to pay nothing in corporate income taxes. Free zones typically offer their resident businesses a renewable, 50-year, 0% corporate tax incentive.

 

Under the new UAE corporate tax scheme, free zone entities must pay corporate income tax. The 0% and 9% rates apply to free zone companies.

A free zone entity that earns only qualifying income is essentially an income tax-free company. Qualifying income includes all income:

 

Takeaway: If you want your free zone company to continue enjoying a 0% corporate income tax rate, engage only in qualified activities and avoid excluded activities. Additionally, you should maintain adequate substance and comply with financial reporting requirements.

Any foreign entity or individual that conducts business or trade in the UAE regularly or on an ongoing basis is subject to corporate tax.

All banking operations are subject to the new federal corporate tax scheme. In the past, banks were subject to emirate-level corporate income taxes.

All income from real estate management, development, construction, and brokerage activities are subject to federal corporate tax.

The following are exempt from the UAE federal corporate tax:

 

The following incomes are generally exempt from corporate tax:

In line with the UAE government's thrust to comply with international taxation standards, the new federal corporate tax regime adopts the OECD transfer pricing rules. These OECD transfer pricing guidelines prescribe the arm's length principle to multinational enterprises (MNEs) or organizations that operate in multiple territories or jurisdictions.

 

Under the new transfer pricing rules in the UAE, intercompany transactions (e.g., the sale of goods and services between two subsidiaries of the same company) must be conducted with unimpeachable independence and according to prevailing fair market valuations.

This helps prevent MNEs from artificially shifting out taxable income from the UAE, a ploy used to evade taxes. It also ensures their tax base in the UAE will reflect the actual scope of their in-country/in-territory economic activity.

 

In the UAE, OECD transfer pricing rules are mandated for cross-border inter-company transactions. However, they may also apply to domestic transactions.

If you have a commercial license to conduct economic activities in the UAE, you must register for corporate tax through your account on the EmaraTax platform. This is the most crucial first step in complying with the new federal tax rules.

 

The new transfer pricing rules will affect you if you have multiple subsidiaries that do business with one another. For instance, if you are a plastic pipe company, and your plastic pipe welding subsidiary procures supplies from your pipe manufacturing subsidiary, you must reassess your intercompany arrangements.

You may have to enforce new standard operating procedures and documentation requirements to ensure transfer pricing compliance.

 

The imposition of the corporate tax itself can make doing business more expensive. Thus, it's critical to ensure your business is classified correctly and can take advantage of all applicable exemptions.

 

For these reasons, you're encouraged to consult a UAE tax consultant company.