Introduction – UAE corporate tax law
Today, Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (hereinafter referred to as the “Corporate Tax Law”) was issued by the United Arab Emirates (“UAE”).
The UAE Corporate Tax Law provides the legal basis for the introduction of corporate tax in the UAE. It will be effective for financial years starting on or after 1 June 2023.
Why is the UAE introducing corporate tax?
The introduction of Corporate Tax is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation.
Further, by introducing a regime that better reflects international standards, it is hoped these changes will fortify the UAE’s growth as a jurisdiction for business and investment.
Persons subject to UAE corporate tax
Taxable persons – generally
The following will be “Taxable Persons”:
- UAE companies and other non-natural persons that are incorporated or effectively managed and controlled in the UAE;
- Natural persons (individuals) who conduct a Business or Business Activity in the UAE as specified in a Cabinet Decision to be issued in due course; and
- Non-resident non-natural persons (foreign legal entities) that have a Permanent Establishment in the UAE
Taxable persons in a Free Zone
Non-natural persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons”. As such, they will need to satisfy the requirements set out in the Corporate Tax Law.
An important qualification is around so-called Qualifying Free Zone Persons. These characters will pay 0% on their Qualifying Income. We discuss these terms below.
The scope of UAE corporate tax
General
The UAE Corporate Tax Law taxes income with regard to the following bases:
- The residence status of the person; an
- The source of the relevant income
Residence
Broadly, the exposure to UAE corporate tax is as follows:
- Resident Person: such a person is taxable on income derived from both domestic and foreign sources
- Non-Resident Person: such a person is taxed only on income derived from sources within the UAE
Determining residence
General
Residence for Corporate Tax purposes is not determined by where a person resides or is domiciled but instead by specific factors that are set out in the Corporate Tax Law. If a Person does not satisfy the conditions for being either a Resident or a Non-Resident person then they will not be a Taxable Person and will not therefore be subject to Corporate Tax.
Resident Persons
Companies and other non-natural persons that are incorporated or otherwise formed or recognised under the laws of the UAE will automatically be considered as Resident Persons.
This covers non-natural persons incorporated in the UAE under either mainland or the applicable Free Zone legislation.
In addition, foreign companies and other foreign non-natural persons may also be treated as Resident Persons. Generally, this will be where they are effectively managed and controlled in the UAE.
Natural persons will be subject to Corporate Tax as a “Resident Person” on income from both domestic and foreign sources. However, this will only be in respect of income derived from a business activity conducted in the UAE.
Non-Resident Persons
Generally, Non-Resident Persons are non-natural persons who are not Resident Persons and have a Permanent Establishment in the UAE.
They will be subject to corporate tax on taxable income that is attributable to their Permanent Establishment.
A special 0% Withholding Tax will apply to certain UAE source income arising to a Non-Resident Person.
Exempt Income
The new legislation also sets out exemptions in relation to certain types of income.
The stated aim of the exemptions is to eliminate the potential for double taxation on certain types of income.
As a result, dividends and capital gains earned from domestic and foreign shareholdings will largely be exempt from Corporate Tax.
In addition, a Resident Person can also elect in certain circumstance to not take into account income from a foreign Permanent Establishment for UAE Corporate Tax purposes.
UAE Corporate Tax rates
General
The headline rate of corporate tax is 9%.
This applies to Taxable Income exceeding AED 375,000. Below this threshold, the rate of tax is 0%
Resident Persons
| Threshold | Rate of tax |
| 0 – AED 375,000 | 0% |
| > AED 375,000 | 9% |
Qualifying Free Zone Persons
| Type of income | Rate of tax |
| Qualifying income | 0% |
| Non-Qualifying income | 9% |
The special 0% withholding tax rate
A special 0% withholding tax applies to certain types of UAE sourced income that is received by non-residents.
There is no need for UAE businesses or foreign recipients of UAE sourced income to register for the withholding tax or to undertake other filing obligations.
Withholding tax does not apply to transactions between UAE resident persons.
When is a Free Zone Person a Qualifying Free Zone Person?
General
A special rate of 0% applies to Free Zone Persons that are both:
- Qualifying Free Zone Persons; and
- Receive “Qualifying Income”
In such circumstances, the Free Zone Person will pay 0% on their Qualifying Income.
What is a Qualifying Free Zone (“QFP”) Person?
In order to be a QFP, a Free Zone Person must:
- maintain adequate substance in the UAE;
- derive Qualifying Income;
- not have made an election to be subject to Corporate Tax at the standard rates; and
- comply with the transfer pricing requirements under the Corporate Tax Law.
Where a Free Zone Person does not satisfy these requirements, then the standard rates apply.
Qualifying Free Zone entities that are part of a large multinational group are anticipated to be subject to a different CT rate once the Pillar Two rules are embedded into the UAE CT regime.
What is Qualifying Income?
As per Article 18 of the legislation, “Qualifying Income” is defined as that specified in a decision issued by the Cabinet at the suggestion of the Minister.
Compliance & UAE corporate tax
All Taxable Persons are required to register for Corporate Tax and to obtain a Corporate Tax Registration Number. This includes Free Zone Persons.
Taxable Persons are required to file a Corporate Tax return for each Tax Period within 9 months from the end of the relevant period.
The same deadline would generally apply for the payment of any Corporate Tax due in respect of the Tax Period for which a return is filed.
If you have any queries about the UAE corporate tax or UAE tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article