Changes in UAE corporate taxation-2023

The jurisdiction of the Arab Emirates has gained popularity due to favorable conditions for doing business. Previously, the legislation of this country did not provide any corporate taxes, but at the same time, companies registered in the UAE were not considered as offshore, since they could legally carry out economic activities both on the territory of the emirates and outside their borders. In recent years, there has been an active trend towards tax changes in the countries of the Middle East, which has not escaped the Emirates. So, since 2018, the country has introduced VAT in the amount of 5%. Norms regarding excise tax, economic presence (substance) and reporting were also introduced. The innovations affected, among other things, corporate taxation.

Legal base

On January 31, 2022, the UAE government announced the introduction of a federal corporate tax (CT-corporate tax), which will begin to apply on or after June 1, 2023. At the moment, the UAE legislator has not given an exact date of application of the income tax. The legal basis for such innovations was Federal Decree-Law No. 47, developed by the Ministry of Finance, issued on October 3, 2022, and entered into force on October 17, 2022. However, the lawmaker assured that the planned regime of corporate taxation will be based on the best international practice, and the taxation will involve a minimal burden for business entities.

Tax rate

The UAE federal corporate tax rate is progressive and charged in the amount of:

• 0% – if the taxable income of the company is from 0 to 375 000 dirhams;
• 9% – if the taxable income of the company is more than 375 000 dirhams.

Who is subject to CT tax?

As the UAE is a federated state, corporate tax will apply to companies in all emirates, if they carry on commercial activities for profit. This innovation applies without exception to all companies, regardless of their residency in the Emirates. An exception to the rule is the taxation of companies engaged in the extraction of natural resources, since the tax rates for them are determined individually by each emirate.

Exemption from taxation

According to the law, there are a number of entities that are exempt from corporate taxation:

1. Public companies owned by the UAE government;
2. Charitable and socially beneficial organizations that do not engage in commercial activities;
3. Qualifying investment funds and real estate investment funds whose shares are sold on stock exchanges and are available to investors, etc.

Non-taxable income

The law also provides the types of income that will not be subject to taxation if the taxable base is determined. So, in particular, income tax in the UAE does not apply to dividends and other distributed income received from a resident of the UAE or from participation in a foreign legal entity (if there is a qualified shareholding). Income from a permanent establishment is also exempt from CT if it pays tax at the rate of 9% in the relevant foreign jurisdiction.

Taxation of companies in FEZs UAE (free economic zones)

The rate of income tax in the UAE for companies from a special economic zone is:

• 0% of qualifying income;
• 9% on taxable income that does not fall under the criteria of qualifying, according to the Decree.

According to the law, qualifying income is any income received by a qualifying free zone company. Thus, in order to use the right to zero taxation, companies from the special economic zone must comply with a number of conditions, including:

1. Maintain adequate substance of the company in the UAE;
2. Adhere to the “arm’s length” standard when concluding agreements;
3. On the request of the supervisory body, provide together with the tax declaration information about agreements with related parties or persons;
4. Earn qualified income (income earned outside the UAE mainland);
5. Not to make a decision on corporate income taxation at the rate of 9%;
6. Meet other requirements that may be prescribed by the minister of the relevant economic zone.

A preferential rate of 0% applies to income derived from transactions with companies located outside the UAE, in the same free zone or any other free zone. If a FEZ company receives any income from a mainland source that is not passive in nature (for example, interest, royalties, dividends, capital gains, etc.), all of its income will be disqualified from the 0% corporation tax regime.

If a company from the special economic zone does not comply with at least one of the above conditions, it may lose the status of qualifying, and therefore will not be able to use the tax benefit. In addition, any qualifying company may elect to be taxed on a progressive federal corporate tax scale. 

Reporting and payment of tax

First of all, any taxable company is required to register as a taxpayer and obtain a tax registration number. The calculation of the corporate tax will be carried out annually on the basis of the tax declaration, which must be submitted no later than 9 months after the end of the relevant accounting year. In addition, every company must keep all records and documents for 7 years after the end of the reporting period.

Thus, the tax haven of the United Arab Emirates is gradually being reformed under generally accepted taxation standards. Nevertheless, the jurisdiction remains in demand in the business environment, as even such tax rates in the UAE are relatively low compared to other countries. Even with the introduction of corporate tax, the Emirates government has provided for preferential rates and a number of tax-exempt incomes. That is why the jurisdiction of the UAE does not lose its relevance and is in the top for registering international companies.