The UAE has long been recognized as a prime location for entrepreneurs and investors seeking to establish new ventures. The nation’s appeal lies in its highly stable political climate, strategic geographical position, excellent business infrastructure, and historically favorable tax regime, including a 0% corporate tax rate.

According to the International Monetary Fund (IMF), the UAE ranks as the fifth-largest economy in the Middle East. While the economy has traditionally relied on oil and natural resources, there has been a noticeable shift towards diversification away from oil dependency in recent years.

Distinction Between Corporate Tax and VAT

When the UAE government announced the introduction of corporate tax, many businesses mistakenly equated it to Value Added Tax (VAT). However, these two taxes are fundamentally different.

Corporate tax is compulsory for all companies operating in the UAE, whereas VAT is only applicable to businesses that exceed certain revenue thresholds. VAT is a consumption tax imposed on the sale of goods and services, collected from consumers at the point of sale. Conversely, corporate tax is charged on the taxable income of businesses, calculated based on annual net profits, rather than total sales revenue.

Who is Liable for Corporate Tax in the UAE?

Generally, all companies within the UAE are subject to corporate tax, including those in free zones, with specific exemptions noted below.

As per the UAE Ministry of Finance (MOF), the following entities will be liable for corporate tax:

• Corporations and legal entities with operations or primary management located in the UAE.
• Individuals conducting business activities within the UAE.
• Foreign legal entities that maintain a Permanent Establishment in the UAE, as detailed in Section 8 of the Corporate Tax Law.

Starting June 1, 2023, all entities operating in the UAE will be governed by this new tax regime. Tax calculation commencement dates will vary based on financial reporting periods:

• For businesses with financial years starting July 1, tax calculations will begin July 1, 2023.
• For businesses with financial years starting January 1, tax calculations will commence January 1, 2024.

Most commercial activities within the UAE will require registration and filing under the corporate tax regime.

Corporate Tax Rates in the UAE

The MOF has established a tiered corporate tax structure:

• 0% Tax Rate: Applicable to businesses with net annual profits up to AED 375,000.
• 9% Tax Rate: Applies to businesses with net annual profits exceeding AED 375,000.
• 15% Tax Rate: Large multinational corporations with total global revenue surpassing EUR 750 million (approximately AED 3.15 billion) will incur a minimum tax rate of 15%, in alignment with the OECD’s Base Erosion and Profit Shifting Project’s Pillar Two guidelines.

Corporate Tax Registration Process:

To register for corporate tax in the UAE, businesses must access the Federal Tax Authority’s (FTA) website, complete the required forms, and submit necessary documents. Required documentation includes the entity’s Emirates ID, trade license, passport, financial records, and information about business activities and corporate structure. Upon submission, the authorities will review the application and, if approved, issue a Tax Registration Number (TRN) within approximately 20 days. If additional information is needed, the review period may extend by another 20 days. At Seven Smart Business Setup Consultants in Dubai, we provide assistance with the application process.

Exemptions from Corporate Tax:

The MOF has outlined certain exemptions for specific entities, which will not be required to file a tax report or pay corporate tax. These exempt entities include:

• Governmental or public institutions, including federal and local agencies.
• Businesses involved in natural resource extraction or mining, which are already subject to emirate-level taxation.
• Charitable organizations, provided they are registered with the MOF and meet the requirements set forth in Cabinet Decision No. 37 of 2023.
• Regulated investment funds, which must also apply for exemption approval from the MOF and FTA.
• UAE companies fully owned and controlled by the government, recognized through a ministry-level decision for tax exemption.
• Public or private pension or social security funds, contingent upon compliance with conditions stated in Ministerial Decision No. 115 of 2023.

Income Exemptions from Corporate Tax

In addition to the above exemptions, companies may qualify for income tax exemptions in the following scenarios:

• Earnings from dividends or profit distributions received from UAE-based entities, as per Article 22 of the Corporate Tax Law.
• Earnings from dividends or profit distributions from a participating interest in foreign entities.
• Capital gains from the sale of shares in subsidiary companies.
• Foreign exchange gains or capital gains derived from domestic or foreign participating interests.
• Earnings from non-residents engaged in the operation or leasing of ships or aircraft in international transport.
• Earnings from Permanent Establishments or foreign branches that have elected for the ‘Foreign Permanent Establishment’ exemption.

To qualify for dividend income deductions, the UAE company must own at least a 5% share of the foreign subsidiary. Specific ownership thresholds may apply depending on the country, such as a minimum of 10% ownership for ten consecutive months for UK companies.

Corporate Tax Implications for Free Zone Entities

Entities established within a UAE Free Zone may qualify for a 0% corporate tax rate under specific conditions:

To be classified as a Qualifying Free Zone Person (QFZP) and benefit from the 0% rate, an entity must:

• Generate “Qualifying Income.”
• Maintain adequate economic substance within the Free Zone.
• Not opt for standard corporate tax rates.
• Adhere to transfer pricing requirements.

Qualifying Income includes:

• Earnings from transactions with other Free Zone Persons.
• Domestic and foreign income from specified ‘Qualifying Activities’ as defined in Ministerial Decision No. 139 of 2023.

Excluded Activities, as specified in the same ministerial decision, will not qualify for this income classification. Additionally, a QFZP’s non-qualifying income must not exceed either 5% of total revenue or AED 5 million, whichever is lower.

Corporate Tax for Freelancers

Individuals conducting business independently—without establishing a separate legal entity—will fall under the corporate tax framework once their annual revenue exceeds AED 1 million. The UAE, particularly Dubai, remains an attractive hub for freelancers due to its favorable taxation policies and availability of flexible coworking spaces.

Freelancers must obtain a professional license to operate legally within the UAE.

Tax Deductions for Companies

Typically, expenses incurred in generating taxable revenue may be deducted. While specific limitations exist under Corporate Tax Regulations, the timing of deductions can vary depending on the nature of the expense and the accounting methods employed.

For long-term assets, expenditures are usually accounted for via depreciation or amortization over their useful life. If an expense serves both personal and business purposes, it must be appropriately allocated to reflect the business-related portion.

Eligible business deductions include:

• Donations to registered charities as per Cabinet Decision No. 37 of 2023.
• Interest and financing costs for businesses with net interest expenditures exceeding AED 12 million, allowing deductions up to the greater of 30% of adjusted EBITDA or AED 12 million, to discourage excessive high-risk debt financing.
• Royalties paid to foreign group companies, provided they are necessary and arm’s length.
• Irrecoverable input Value Added Tax.
• Business-related employee entertainment costs, with only 50% of the expenditure eligible for deduction.
• Doubtful debts, as per International Financial Reporting Standards (IFRS).
• Government fees, business setup, and license renewal charges.

Additional Tax Exemptions

Further exemptions are available for companies under the following circumstances:

• Earnings from dividend payments or profit distributions from UAE-incorporated entities, in accordance with Article 22 of the Corporate Tax Law.
• Earnings from dividend payments or profit distributions from participating interests in foreign entities.
• Capital gains from the sale of shares in subsidiary companies.
• Foreign exchange gains/losses or capital gains from domestic or foreign participating interests.
• Earnings from international transportation operations by non-residents.
• Earnings from Permanent Establishments or foreign branches claiming the ‘Foreign Permanent Establishment’ exemption.

To qualify for dividend payment deductions, the UAE company must own at least a 5% share in the foreign subsidiary. Ownership requirements may vary by country, with specific stipulations, such as a minimum of 10% ownership for ten consecutive months for UK companies.

Tax Deductions for Foreign Branches

The UAE government allows foreign company branches located within the UAE to choose between two options:

• Claim a foreign tax credit equivalent to the tax paid in the host country, limited to the lower of the foreign tax paid or the UAE corporate tax due on the corresponding revenue. Unused foreign tax credits cannot be carried forward to previous or future tax periods.
• Alternatively, apply for an exemption based on profits generated by foreign branches outside the UAE.