UAE Corporate Tax

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UAE Corporate Tax

The United Arab Emirates (UAE) has adopted a new corporate tax system for the Taxation of Corporations and Businesses, marking a significant shift in its tax landscape.

Here are the key details of the UAE corporate tax:

Implementation and Rates

Applicability

The corporate tax applies to:

  • UAE companies and other juridical persons incorporated or effectively managed in the UAE
  • Natural persons conducting specified business activities in the UAE
  • Non-resident juridical persons with a permanent establishment in the UAE

 

Exemptions and Special Provisions

  • Taxable income below AED 375,000 is not subject to corporate tax
  • Certain entities are exempt, including UAE government entities, qualifying public benefit entities, and investment funds
  • Dividends and capital gains from domestic and foreign shareholdings are generally exempt to prevent double taxation

Additional Tax for Multinational Enterprises

Starting January 1, 2025, the UAE will implement a Domestic Minimum Top-up Tax (DMTT) for large multinational enterprises (MNEs). This applies to MNEs with consolidated global revenues of €750 million or more in at least two of the four preceding financial years.

The DMTT aims to ensure a minimum effective tax rate of 15% on profits for these large MNEs

Compliance and Registration

Eligible companies must register and file UAE corporate tax as per FTA Decision No. 3 of 2024 on the Registration Timeline for Corporate Tax. The tax period aligns with the company’s financial year.

While some details are still pending, the Ministry of Finance has released FAQs to clarify various aspects of the new tax regime.

Impact and Objectives

The introduction of corporate tax in the UAE is designed to:

  • Aligning with international tax standards and transparency
  • Preventing harmful tax practices
  • Maintain the UAE’s position as a leading business and investment hub
  • Support the country’s strategic objectives and development

Despite this new tax, the UAE’s corporate tax rate remains competitive globally, reflecting its commitment to attracting and retaining businesses.

The UAE corporate tax system has undergone significant updates, particularly with the introduction of new effective rules for financial years starting on or after January 1, 2025.

The Ministry of Finance is expected to issue further details on the implementation and specific guidelines for the DMTT in due course.

Tax Reliefs for Specific Businesses

The UAE corporate tax system has given various reliefs to meeting the conditions laid down under Federal Decree Law no. 47 of 2022, with relevant cabinet and ministerial decisions.

Natural Person Relief

A natural person is only subject to corporate tax if their total turnover from business or business activities in the UAE exceeds AED 1 million within a Gregorian calendar year. If the turnover is within this threshold, the natural person is not required to register for or pay corporate tax on their business income. Natural persons are eligible to claim slight business relief.

Exempt Incomes

Certain types of income are exempt from corporate tax for natural persons, including:

  • Wage or employment income
  • Personal investment income
  • Real estate investment income

These types of income are not considered when determining whether the AED 1 million turnover threshold has been exceeded

Double Taxation Agreements

International agreements, including Double Taxation Agreements (DTAs), take precedence over the UAE Corporate Tax Law in case of any inconsistency. Natural persons can invoke these agreements to avoid double taxation.

In summary, natural persons in the UAE can benefit from exemptions on certain types of income, a threshold for taxability, and specific relief mechanisms like Small Business Relief, which can help reduce or remove their corporate tax liabilities.

Small Business Relief

The Small Business Relief under the UAE Corporate Tax (CT) is a considerable advantage designed to support small and micro businesses in the UAE. Here are the key points related to this relief.

  • The business’s revenue must not exceed AED 3 million in the relevant and previous tax periods.
  • This relief applies to tax periods starting on or after 1 June 2023 and will continue to apply to subsequent tax periods that end before or on 31 December 2026.
  • This relief is not available to Qualifying Free Zone Persons and members of multinational enterprises (MNE) groups as defined in Cabinet Decision No. 44 of 2020.
  • Cannot carry forward tax losses to subsequent tax periods, where small business relief is availed.
  • General Interest Deduction Limitation Rule
  • Artificial separation of business is disallowed

Overall, Small Business Relief aims to lower small businesses’ Corporate Tax obligations and compliance costs, allowing them to focus on growth and development within the UAE.

Tax Losses Relief

Under the UAE Corporate Tax Law, tax losses are managed through specific provisions that allow businesses to offset these losses against future taxable income, thereby decreasing their tax liability. Here are the key features regarding tax loss relief:

Definition of Tax Loss

A tax loss occurs when the allowable expenses or deductions for a tax period exceed the revenue, resulting in negative taxable income.

Tax Loss Relief (Article 37 of Federal Decree-Law no. 47 of 2022)

A tax loss incurred in a tax period can be carried forward to subsequent tax periods and set off against the taxable income of those periods. This reduces the taxable income and, consequently, the tax liability The amount of tax loss that can be set off in a subsequent tax period cannot exceed 75% of the taxable income for that period

Carry Forward of Tax Losses

Tax losses can be carried forward indefinitely to subsequent tax periods. If there is any remaining tax loss after setting it off against the taxable income of a period, it can be carried forward to the next period

Transfer of Tax Losses (Article 38)

  • Tax losses can be transferred to another taxable person, provided certain conditions are met. The transfer is subject to the same 75% limit of the taxable income of the recipient
  • A taxable person whose shares are listed on a Stock Exchange is not eligible for the transfer of tax losses

Conditions for Tax Loss Relief

Tax loss relief cannot be claimed for losses incurred before the UAE Corporate Tax regime commences.

Losses incurred before the entity became a taxable person under the Corporate Tax Law are also not eligible.

Losses from activities or assets whose income is exempt under the law cannot be claimed for tax loss relief

Limitations Tax losses cannot be carried back to previous tax periods; they can only be carried forward

The tax loss must be set off against the taxable income of the subsequent tax periods before any transferred tax losses are considered

By identifying and adhering to these provisions, businesses in the UAE can effectively manage their tax losses and minimise their corporate tax liabilities. It is advisable to consult tax professionals to ensure compliance with the latest regulations and to maximise the benefits of tax loss relief.

Qualifying Group Relief

The Qualifying Group Relief under the UAE Corporate Tax Law is proposed with the intention of the tax-neutral transfer of capital assets or liabilities between members of the same qualifying group. Here are the key requirements and effects of this relief:

Eligibility Conditions

  • Both the Transferor and Transferee must be juridical persons, such as private or public joint stock companies, limited liability companies (LLCs), or incorporated partnerships. Natural persons and unincorporated partnerships are not eligible, although a juridical person who is a partner in an unincorporated partnership or held by an unincorporated partnership can qualify
  • Both the Transferor and Transferee must be Taxable Persons under the UAE Corporate Tax Law, which includes resident persons or non-resident persons with a Permanent Establishment in the UAE
  • The Transferor and Transferee must be part of the same Qualifying Group, which means:
    • The Transferor holds a direct or indirect ownership interest of at least 75% in the Transferee.
    • The Transferee holds a direct or indirect ownership interest of at least 75% in the Transferor.
    • A third person holds a direct or indirect ownership interest of at least 75% in both the Transferor and the Transferee
  • Exempt Persons, Qualifying Free Zone Persons (QFZP), and Resident Persons opting for Small Business Relief are not eligible for the Qualifying Group Relief. However, Free Zone Persons who are not elected for qualifying free zone person can be part of a Qualifying Group
  • All members of the Qualifying Group must have a financial year that ends on the same date, confirming that the tax period for all members ends on the same date
  • The assets and liabilities transferred must be recorded at netbook value in the accounting books of both the Transferor and the Transferee to prevent any gain or loss for corporate tax purposes
  • The transfer of assets or liabilities is considered at netbook value to guarantee that no gain or loss is recorded for corporate tax purposes
  • The relief will be clawed back if, within two years, the Transferee sells the asset or liability outside the Qualifying Group or if the Transferor or Transferee leaves the Qualifying Group
  • The Federal Tax Authority (FTA) guide outlines compliance requirements and interactions with other UAE Corporate Tax Law provisions. It is needed to read this guide in conjunction with the Corporate Tax Law and other relevant guidance

Qualifying Group Relief is a valuable mechanism for tax-neutral restructuring within a group. It ensures that the overall ownership structure of assets or liabilities remains intact without incurring corporate tax liabilities. However, it is crucial to adhere strictly to the conditions and compliance requirements outlined by the FTA.

Tax Group Relief

Article 40 of UAE Corporate Tax Law permits two or more subsidiary companies to be treated as a single taxable entity for corporate tax purposes by forming a single tax group and filing a single corporate tax return. 

Eligibility Requirements conditions for forming a Tax Group, the following conditions must be met:

  • All members of the Tax Group must be juridical persons, such as private or public joint stock companies, limited liability companies, or incorporated partnerships. Natural persons and unincorporated partnerships are not eligible
  • All members must be tax residents of the UAE, meaning they are either incorporated under UAE legislation or effectively managed and controlled in the UAE
  • The parent company must own at least 95% of the share capital, voting rights, and entitlement to profits and net assets of each subsidiary, either directly or indirectly through one or more subsidiaries
  • The parent company and each subsidiary must have the same financial year and prepare their financial statements using the same accounting standards
  • Neither the parent company nor the subsidiaries can be Exempt Persons or Qualifying Free Zone Persons

Formation Process

To form a Tax Group, the following steps are required:

The parent company and each subsidiary must jointly apply to the Federal Tax Authority (FTA) to form a Tax Group

The FTA will review the application to ensure all conditions are met. Upon approval, the Tax Group will be established on a specified date, which the FTA may vary

A separate Tax Registration Number will be issued for the entire Tax Group, and individual Tax Registration Numbers will also be required for each member

Benefits and Implications

The parent company can file a single Corporate Tax return on behalf of all members of the Tax Group, consolidating financial statements and simplifying tax administration

Losses of one member can be set off against the income of other members of the Tax Group automatically.

Transactions between the parent company and each subsidiary, as well as between subsidiaries, are eliminated when determining the Taxable Income of the Tax Group

All members of the Tax Group are jointly and severally liable for any corporate tax and administrative penalties. However, the Tax Group can apply to the FTA to limit this liability to one or more members

Taxable Income Calculation

The parent company must consolidate each subsidiary’s financial results, assets, and liabilities to determine the Taxable Income of the Tax Group. This includes eliminating transactions between group members to calculate the Taxable Income.

Forming a Tax Group can streamline tax obligations, optimise tax liabilities, and lower compliance burdens in the UAE.

 

Participation Exemption Relief

The Participation Exemption under the UAE Corporate Tax Law prevents double taxation of corporate profits. It is governed by specific conditions summarised in Federal Decree-Law No. 47 of 2022 and further explained by Ministerial Decision No. 116 of 2023 on conditions for Participation Exemption.

  • The taxable person must hold an ownership interest of at least 5% in the shares or capital of a juridical person under participation or aggregate cost of acquisition exceeding AED 4 million.
  • This condition can also be met if the total ownership interest from all members of a qualifying group in the same participation adds up to at least 5%
  • person
  • The taxable person must have maintained or intend to keep the participating interest continuously for a minimum period of twelve months
  • The participation must be subject to corporate tax or an equivalent tax in its country or territory of residence at a rate equal to or greater than 9%
  • If the 9% effective tax rate (ETR) is not applicable based on the relevant jurisdiction’s tax regime, it can be recalculated based on the provisions of the UAE Corporate Tax Law to meet the 9% ETR requirement
  • Not more than 50% of the direct and indirect assets of the participation can consist of ownership interests or entitlements that would not have qualified for the participation exemption if held directly by the taxable

Types of Income Exempted

The participation exemption applies to income such as dividends, other profit distributions,
capital gains, and foreign exchange and impairment gains or losses derived from the
participating interest

 

Exceptions and Limitations

The exemption does not apply to losses recognised on the liquidation of the participation.
Such losses are calculated based on the acquisition cost, any partial disposal, and the fair
value of the liquidation proceeds.

The exemption also does not apply if the payer can claim a deduction for the dividend or
other distribution made or if the taxable person or its related party has recognised a
deductible impairment loss in respect of the participating interest before meeting the
exemption conditions

Additional Clarifications

  • For holding companies, the effective tax rate of 9% condition may be waived if the
    participation is directed and managed in its relevant foreign jurisdiction and meets other
    specified conditions
  • Income derived in relation to but not directly from an ownership interest in participation will
    not be exempt from corporate tax
  • These conditions and explanations ensure that participation exemption is applied constantly and
    fairly, avoiding double taxation and promoting economic growth by attracting foreign investment.

Business Restructuring Relief

Business Restructuring Relief is a provision under Article 27 of the UAE Corporate Tax Law that
permits certain restructuring transactions to occur tax-neutrally. This relief is intended to eliminate
the impact of corporate tax on specific transactions undertaken as part of business restructuring or
reorganisation.

Business Restructuring Relief Applies to

Transfer of an entire business or an independent part of the business from one Taxable
Person to another
2. Transfer of an entire business from one or more Taxable Persons to another, where the
Transferor ceases to exist

 
To qualify for Business Restructuring Relief, the following conditions must be met  

The transfer of business complies with UAE regulations
2. Both the transferor and transferee are either UAE-resident companies or foreign companies
with a permanent establishment in the UAE
3. The transferor elects for the relief to apply when submitting the Corporate Tax return

When the relief is applied

Assets and liabilities can be transferred at net book value, resulting in no gain or loss for
corporate tax purposes
2. Unutilized tax losses of the transferor can be transferred to the transferee
3. The consideration for the transfer can be in the form of shares or other considerations, with
specific value restrictions

Implementation and compliance on an election process basis

The relief is an election made at the time of filing the corporate tax return

No separate application is required

 
The relief may be clawed back if, within two years of the transfer

There is a sale or disposal of shares (partial or complete) of the transferor or transferee to a
person outside the qualified group

 A subsequent business restructuring under Article 27 occurs

Interaction with Other Provisions

Participation Exemption: The ownership acquired through a transaction exempted under
Article 27 must be held for at least two years to avail of the Participation Exemption

 Qualifying Group Relief: Transactions may qualify for both Business Restructuring Relief and
Qualifying Group Relief if specific conditions are met

Qualified Free Zone Person Relief

The Corporate Tax Law’s legal framework permits certain businesses in Free Zones to benefit from a 0% corporate tax rate on qualifying income. This relief is available to entities classified as Qualifying Free Zone Persons

To qualify as a QFZP and enjoy the benefits of the 0% tax rate, a business must satisfy the following conditions: (QFZPs), provided they meet definite criteria and engage in qualifying activities.To qualify as a QFZP and enjoy the benefits of the 0% tax rate, a business must satisfy the following conditions:

A Juridical Person registered with a free zone.

Maintain adequate substancein the UAE

The entity must have sufficient operational presence in the Free Zone, demonstrating that it is not merely a shell company. It must also have adequate assets and employees and conduct core business activities inside the free zone area as defined in the law.

Derive Qualifying Incomeas specified by the Cabinet

The income must come from activities qualifying under the Corporate Tax Law. This includes income from transactions with other Free Zone entities or certain foreign transactions. exceedthe lower of AED 5 million or 5% of total Revenue (de minimis requirement)

Not elect to be subject to standard Corporate Tax rates

 

Conditions for Qualifying Free Zone Person Status

To be considered a Qualifying Free Zone Person (QFZP) and benefit from the 0% Corporate Tax rate on Qualifying Income, a Free Zone Person must meet the following conditions:

Benefits for Qualifying Free Zone Persons

The primary benefit for QFZPs is the application of a 0% Corporate Tax rate on Qualifying Income

Other key benefits include

Preferential tax treatment specific activities and transactions

Exemption from the standard 9% Corporate Tax rateon Qualifying Income

Ability to conduct business with both Free Zone and non-Free Zone entities while maintaining preferential tax status Qualifying Income and Activities

Qualifying Income subject to the 0% Corporate Tax rate includes:

  • Income from transactions with other Free Zone Persons
  • Income from Qualifying Activities, even when sold to non-Free Zone Persons, such as:
    • Manufacturing of goods or materials
    • Processing of goods or materials
    • Trading of Qualifying Commodities
    • Holding shares and securities for investment purposes
    • Ownership, management, and operation of Ships
    • Reinsurance services
    • Fund management services
    • Wealth and investment management services
    • Headquarters services to Related Parties
    • Treasury and financing services to Related Parties
    • Income from ownership or exploitation of intellectual property(excluding Qualifying Income from Qualifying Intellectual Property)

Important Considerations

  1. Income not Qualifying Incomeis subject to the standard 9% Corporate Tax rate.
  2. QFZPs are not eligiblefor the 0% Corporate Tax rate on Taxable Income up to AED 375,000
  3. If a QFZP fails to meet any conditions or elects to be subject to standard Corporate Tax rules, it will cease to be a QFZPfor the current Tax Period and the four subsequent Tax Periods
  4. Profits attributable to a Permanent Establishment outside Free Zones(in the UAE or foreign countries) will be subject to the 9% Corporate Tax rate.

By adhering to these conditions and understanding the benefits, Free Zone Persons can effectively navigate the UAE Corporate Tax landscape and potentially enjoy significant tax advantages.

Failure to meet any of these criteria during a tax period results in the loss of QFZP status and the entity is then subject to the standard corporate tax rate of 9% of its taxable income. purposes

General Interest Deduction Limitation Rule

The UAE Corporate Tax Law familiarises a General Interest Deduction Limitation Rule under Article 30. This rule purposes to limit the amount of interest that can be deducted for tax

Key aspects of the rule:

  1. Net Interest Expenditure: This is calculated as the difference between interest expenditure incurred and taxable interest income received during the tax period
  2. Deduction Limit: A taxable person may deduct up to 30% of their earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) as Net Interest Expenditure
  3. Exclusions: The calculation of Net Interest Expenditure excludes interest expenditure that is not allowed by any other provision of the UAE Corporate Tax Law

Specific Interest Deduction Limitation Rule

Article 31 of the UAE Corporate Tax Law provides additional provisions for interest expenditure on loans from related parties.

Threshold for Applicability

The General Interest Deduction Limitation Rule may not apply if a taxable person’s Net Interest Expenditure for the applicable tax period does not exceed a certain threshold set by the Minister.

Group Considerations

For taxable persons associated with one or more persons through ownership or control and required to consolidate financial statements, the Minister may issue a decision specifying the applicability of Net Interest Expenditure deduction provisions.

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