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Corporate tax is a form of direct tax levied on the net income or profits of corporations and other business entities. It is applied annually and is designed to provide the government with a revenue stream from businesses' profits.
In the UAE, the introduction of corporate tax marks a significant shift, signaling the country's efforts to modernize its tax regime and align with global standards. The UAE government announced the tax in January 2022, with enforcement beginning in June 2023 for businesses generating profits over AED 375,000 per year. The primary aim is to diversify revenue sources away from fossil fuels and support long-term sustainable growth.
Who is Subject to Corporate Tax?
The UAE’s corporate tax applies to various entities and individuals conducting business activities in the UAE:
- Businesses and legal entities: These include corporations, partnerships, and sole establishments registered in the UAE.
- Individuals conducting business: If an individual operates as a business entity under a commercial license, they fall under the corporate tax regime.
- Foreign entities: Companies with a permanent establishment or generating income in the UAE must pay corporate tax.
Businesses operating in free zones are subject to corporate tax but may enjoy exemptions on qualifying income
Corporate Tax Rates
The corporate tax rate in the UAE is designed to be competitive, encouraging both domestic and foreign investments:
- 0% rate: Applies to taxable income up to AED 375,000 (approx. USD 100,000).
- 9% rate: For taxable income exceeding AED 375,000.
- Special rate: Large multinational companies falling under the OECD's Pillar Two initiative may be subject to a different rate if they meet certain criteria(
The UAE’s corporate tax rate is among the lowest globally, making it an attractive destination for businesses despite the introduction of the tax.
Exemptions from Corporate Tax
Certain types of income and entities are exempt from paying corporate tax in the UAE. These include:
- Government entities and government-owned companies.
- Charitable organizations and public benefit entities.
- Businesses engaged in oil and gas extraction, which remain subject to Emirate-level taxation(
- Dividends and capital gains: Income earned from qualifying shareholdings is generally exempt to prevent double taxation(
Additionally, foreign investors earning income from dividends, capital gains, or interest are not subject to corporate tax, provided the income is earned in their personal capacity.
Corporate Tax in Free Zones
Businesses operating in UAE free zones, which have traditionally enjoyed tax benefits, are also subject to corporate tax under the new regime. However, Qualifying Free Zone Persons can continue to benefit from a 0% corporate tax rate on qualifying income as long as they meet specific conditions:
- The business must maintain adequate substance in the UAE.
- It should not conduct business with the mainland.
- It must comply with transfer pricing requirements(
Businesses in free zones should ensure they meet all compliance requirements to maintain their tax benefits.
Related Guide: Corporate Tax Rules for Free Zone Businesses in the UAE
Calculating Taxable Income
Corporate tax is applied to a business’s taxable income, which is calculated by deducting legitimate business expenses from revenue. These deductions include operating expenses such as salaries, rent, and utilities, as well as depreciation of capital assets
However, not all expenses are deductible. The following items cannot be deducted for corporate tax purposes:
- Fines and penalties.
- Dividends or other profit distributions.
- Donations made to entities not recognized as public benefit organizations
Tax credits are also available to offset any taxes paid abroad, preventing businesses from paying double taxes on the same income
Related Guide: How is Corporate Tax in UAE Calculated
Corporate Tax Registration and Filing
Businesses subject to corporate tax must register with the UAE Federal Tax Authority (FTA).
For corporate tax registration in the UAE, the deadlines depend on the month of your business license issuance:
- License issued in January - February: Register by May 31, 2024.
- License issued in March - April: Register by June 30, 2024.
- License issued in May: Register by July 31, 2024.
- License issued in June: Register by August 31, 2024.
- License issued in July: Register by September 30, 2024.
- License issued in August - September: Register by October 31, 2024.
- License issued in October - November: Register by November 30, 2024.
- License issued in December: Register by December 31, 2024.
For businesses established after March 1, 2024, the deadline is three months from the date of establishment.
In terms of corporate tax filing, businesses must file their tax returns within nine months after the end of their financial year. For example, companies with a June 1, 2023 - May 31, 2024 fiscal year must file between June 1, 2024, and February 28, 2025.
Failure to register or file on time can result in a fine of AED 10,000 and potentially other penalties.
Related Guide: Avoiding Common Mistakes in UAE Corporate Tax Filings
Impact on Businesses
The introduction of corporate tax in the UAE is a significant development for businesses of all sizes. While larger corporations may have already been preparing for this shift, small and medium-sized enterprises (SMEs) may find the transition more challenging. Here’s how businesses can prepare:
- Financial planning: Businesses should work with tax professionals to ensure that they set aside sufficient funds to cover their tax obligations.
- Record-keeping: Accurate financial records are essential for calculating taxable income and ensuring compliance with tax laws.
- Tax credits: For businesses operating in multiple jurisdictions, understanding tax credits and exemptions is crucial to avoiding double taxation.
Free zone businesses should review their operations to ensure they meet all qualifying criteria to continue benefiting from tax incentives(
Corporate Tax Compliance and Penalties
Under the UAE's corporate tax regime, there are several penalties businesses need to be aware of to remain compliant:
- Late Registration Penalty: Businesses that fail to register for corporate tax on time will face a AED 10,000 penalty. This applies to both mainland and free zone companies that miss their registration deadlines.
- Late Filing of Tax Returns: For late tax returns, the penalties are:
- AED 500 per month (or part of a month) for the first 12 months of delay.
- AED 1,000 per month from the 13th month onwards.
- Incorrect Tax Return Submission: A penalty of AED 500 is applied for submitting incorrect returns, unless amended before the deadline. If mistakes are not disclosed voluntarily, additional penalties up to 15% of the tax difference may apply.
- Failure to Maintain Records: Businesses must keep accurate records as required by the tax law. A failure to do so results in a penalty of AED 10,000 for each violation, increasing to AED 20,000 for repeated violations within 24 months.
- Other Violations: Additional penalties include AED 5,000 for not providing records in Arabic upon request and AED 20,000 for non-cooperation during audits.
These penalties encourage timely compliance with tax obligations and help maintain transparency in the UAE's tax system. It's essential for businesses to register, file, and maintain proper records to avoid significant fines.
Related Guide: New Penalties for Non-Compliance
Future of Corporate Tax in the UAE
The introduction of corporate tax in the UAE marks a new era for businesses in the region. It positions the UAE as a forward-thinking economy that aligns with international tax standards, while maintaining its status as a global business hub with a competitive tax regime.
As the UAE continues to diversify its economy, we can expect further refinements to the corporate tax system, potentially including adjustments to tax rates and the scope of exemptions. Businesses operating in the UAE should remain vigilant and stay informed about any changes to the tax system.
Conclusion
The UAE’s corporate tax represents a significant but manageable change for businesses operating in the country. While the introduction of the tax may require businesses to adjust their financial practices, the UAE’s relatively low tax rates and ongoing exemptions for qualifying entities ensure that it remains an attractive destination for investment.
By understanding the intricacies of the corporate tax system and maintaining compliance, businesses can thrive under the UAE’s evolving regulatory environment.
