Following the publication of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the Corporate Tax Law), the UAE has introduced corporate tax on the taxable income of businesses, effective June 1, 2023. Businesses and individuals alike need to consider whether their activities in the UAE will be captured under this new regime.
Who is subject to corporate tax?
Under the Corporate Tax Law, unless specifically identified as exempt, the following individuals and legal entities are subject to corporate tax:
- Natural persons engaged in a business or commercial activity in the UAE
- UAE companies and other legal persons incorporated in the UAE
- Foreign legal entities that have a Permanent Establishment (PE) in the UAE
- Limited Liability Companies (however Limited and general partnerships will be treated as ‘transparent’ for UAE corporate tax purposes); and
- Free zone entities
What income is taxable?
If your business is considered a UAE resident under the Corporate Tax Law, your taxable base will be formed by your worldwide income, subject to any available exemptions. Individuals carrying out business activities in the UAE should also consider whether the income earned from their business activities would be subject to corporate tax.
You should also assess whether your business derives any exempt income, can apply foreign tax credits, or is eligible for the tax reliefs available under the Corporate Tax Law, such as business restructuring relief, small business relief or relief for transfers within a qualifying group.
At what rate?
Generally, corporate tax applies at the rate of 0% on taxable income not exceeding AED 375,000 and 9% on taxable income exceeding AED 375,000. As an exception, free zone entities that meet certain prescribed conditions may be considered a “Qualifying Free Zone Person” and can benefit from a corporate tax rate of 0% on their “qualifying income”.
Recently, the Corporate Tax Law has been amended to introduce a top-up tax mechanism, with standalone legislation expected soon. The UAE Ministry of Finance plans to impose a 15% tax rate on large multinational groups meeting the OECD Pillar Two criteria (i.e.with a global group revenue exceeding EUR 750 million).
Compliance
Effective from 1 June 2023, all taxable persons are required to register for corporate tax in the form and manner and within the timeline prescribed by the Federal Tax Authority. Once registered, you must electronically file tax returns within 9 months from the end of the relevant tax period and pay the amount due.
In practice, this means that if your business has a financial year ending (FYE) 31 December, your compliance obligations have already begun. With your first reportable period being 1 January 2024 to 31 December 2024, you will be expected to file your first corporate tax return and make your first corporate tax payment by 30 September 2025.
Here are 5 steps to get ahead of your compliance obligations:
- Registration: Consider whether you are required to register and if so, register and obtain your tax identification number (TIN).
- Financial Statements: Ensure your financial statements are in accordance with accounting standards and principles accepted in the UAE (e.g., IFRS).
- Prepare, file and pay: Carry out a self-assessment or seek an external assessment of your tax liability and determine whether you are eligible for any exemptions or reliefs. Pay your taxes and file your return within nine months from your FYE.
- Record-keeping: Maintain documentation and records to substantiate the information contained in your corporate tax return, including any transfer pricing policies and documentation.
- Business planning: Think about how you can adapt your business framework and implement policies to be prepared for this new paradigm. We’ll discuss this more next week.
