The introduction of corporate tax in the UAE marks a significant shift in the region’s tax landscape. The corporate tax law, effective for financial years starting on or after June 1, 2023, establishes the framework for imposing a federal corporate tax in the UAE.
Businesses must now adapt to the new tax requirements, including understanding the various exemptions, reliefs, tax rates, and reporting obligations.
Difference between taxable person and taxable income
‘Taxable person’ can be a juridical person or a natural person. A juridical person is a legal person who carries on business or business activity and has a separate legal existence. A natural person is an individual who carries out business or business activities in the UAE, and their total turnover derived from business or business activities exceeds Dh1 million within the calendar year (Jan to Dec).
‘Taxable income’ is the income subject to tax; generally, it’s businesses’ net profit with some exceptions and nuances. Taxable income consists of all revenue generated by any natural or juridical person, less any unrealised gain or loss and exempt income, reliefs, and deductions. A natural person needs to note that income derived from wages, personal investment income, and real estate investment is disregarded when determining taxable income.
Tax rates and thresholds
The corporate tax regime in the UAE features a standard rate of 9% on taxable income exceeding Dh375,000 (approximately $100,000). For taxable income below the threshold of Dh375,000, a rate of 0% applies. Qualifying free zone persons are subject to 0% on qualifying income and 9% on non-qualifying income.
This threshold aims to support small and medium-sized enterprises (SMEs) by exempting them from the higher tax rate, as this rate is among the lowest in the Gulf Cooperation Council (GCC) region, with Bahrain being the only exception as it does not impose a general corporate tax. This decision reflects the UAE’s commitment to fostering a business-friendly environment and supporting startups and smaller businesses.
Reliefs
We must highlight that the corporate tax regime in the UAE provides reliefs that a business can benefit from, qualifying free zone persons would not qualify to benefit from, which are transfer within qualifying group, business restructuring relief, tax loss relief and small business relief.
Compliance requirements
To facilitate understanding and compliance with the new tax regime, the UAE Ministry of Finance and the Federal Tax Authority (FTA) have provided guidelines and resources to assist businesses in navigating the new tax environment. These include an explanation of the corporate tax law. A taxable person needs to understand their obligation with regard to registration, filling and deregistration.
Taxable persons should register for corporate tax with the FTA and obtain a tax registration number before the deadline for filing their tax returns.
The timeline for the filing is nine months from the end of the relevant tax period. Suppose a corporate tax-registered person ceases to be a taxable person. In that case, they should file a tax deregistration application with the FTA within three months of the date the entity ceases to exist, cessation of the business, dissolution, or liquidation.
Aligning with international tax standards
The implementation of corporate tax in the UAE reflects a broader global trend towards more uniform corporate taxation and aligns with international tax standards.
The introduction of corporate tax requires robust compliance mechanisms. Businesses must adapt to new reporting requirements, maintain adequate financial records, and understand their tax liabilities. The new tax regime will impact how businesses in the UAE structure their operations and finances. Companies will need to consider tax implications in their decision-making processes.
While the tax may increase operational costs for some businesses, the competitive rate will likely maintain the UAE’s attractiveness as a global business hub.
