The first time in history, the UAE has imposed tax laws on the business profits with statutory rates of 0% and 9%. This development for businesses is a notable shift for the reputation of UAE’s business landscape. The tax rates when compared to other countries are lower and according to the global standards that ultimately reflect the commitment to maintaining a credible business hub in the world.

All companies and commercial operations operating in the UAE are subject to the UAE Corporate Tax (CT) system, with the exception of those involving the extraction and non-extraction of natural resources, which are still taxed at the Emirate level.

Under the CT system, the accounting net profit is used to determine taxable income after being adjusted for certain factors like:

• Profits or losses that have not been realized (depending on election).
• Costs for entertainment.
• Payments for interest.
• Contributions and other designated deductions.

Instead of being applied to the company’s total income, the corporation tax rate is fixed at 9% and is applied to taxable earnings. Profits up to AED 375,000 (about $100,000 USD) are tax-exempt in order to assist small businesses.

The companies eligible for tax need to start registering and filling the tax form. This article walks you through the complete guide of corporate tax and its compliance in the UAE.

Corporate Tax: What is it?

Corporate tax is a direct tax imposed on firms’ and corporations’ net income. The UAE is joining a large number of nations that have already set up corporate tax rates systems by using this taxing approach. On December 9, 2022, the United Arab Emirates released the company Tax Law, which established the legal foundation for the adoption of a federal company tax that would take effect for fiscal years beginning on or after June 1, 2023. According to corporate tax in UAE, taxable business income over AED 375 000 will be subject to a 9% statutory tax rate unless it is exempt. Taxes will not be applied on income below this amount. According to the UAE Corporate Tax law’s transfer pricing (TP) rules, taxpayers must adhere to the arm’s length concept in all related party transactions and agreements. This guarantees that both local and cross-border agreements are charged the proper transfer prices.

The recommended TP techniques must be supported by thorough documentation and strictly follow the OECD Transfer Pricing Guidelines.

What Related Parties Are

Like in other corporate tax regimes, “related parties” are defined as including:

• 50% or more of the ownership or control.
• kinship-based interactions that go all the way up to the fourth degree, including guardianship or adoption links.

The idea of “connected” people
The idea of “connected persons,” which is uncommon in other jurisdictions, is introduced in the United Arab Emirates. This comprises:

• officers, directors, or owners of a company.
• Anybody who was linked to them.
• By include associated individuals, it is ensured that excessive payments to firm owners or their affiliates won’t undermine the corporate tax base.

Because it might have a big influence on their company tax planning and financial arrangements, this idea is especially pertinent for family-owned corporations in the United Arab Emirates.

The General Anti-Abuse Rules (GAAR) are introduced by the UAE Corporate Tax (CT) Law to prevent transactions or arrangements that are principally intended to secure a CT advantage and lack a legitimate economic reason. Notably, the UAE has not established any particular thresholds for activating GAAR rules, in contrast to many other countries. Even throughout the transitional phase after the law’s implementation on June 1, 2023, these regulations are in effect.

When compared to other international tax systems, the UAE’s corporation tax rate of 9% is still quite competitive. Investor trust in the UAE’s regulatory structure is strengthened by the implementation of corporation tax, which improves accountability, transparency, and compliance.

Businesses should do the following to successfully adjust to the new tax environment:

• Examine and modernize their existing processes and systems.
• To guarantee compliance and maximize tax strategies, seek professional counsel.
• To be competitive in the ever-changing cost environment, they must reevaluate and improve their business plans.
• Businesses will need to plan ahead and comply with the new tax structure in order to prosper in the UAE’s fast-paced business climate.

Who Needs to Register for UAE Corporate Tax?

Residents and non-residents with a permanent establishment or nexus who are taxable in the United Arab Emirates must register and get a company tax registration number.

Resident Persons

• Whether headquartered on the mainland, in free zones, or offshore, entities incorporated in the United Arab Emirates are considered residents.
• Foreign organizations under UAE management and control.
• People doing business in the United Arab Emirates.
• These taxpayers’ worldwide income is liable to corporation tax.

The requirement to register:

• Regardless of the year the trade license was issued, resident taxpayers are required to register according to the requirements associated with that date.

Non-Resident Persons

• Businesses that have a permanent location in the United Arab Emirates are examples of non-resident individuals.
• Entities without a permanent establishment that generate revenue from the UAE.
• Companies with a connection to the United Arab Emirates.

Who Is Not Subject to UAE Corporate Taxation?

Government entities and entities under government control are among the entities that are eligible for automatic exemptions.

Other types of exempt individuals include:

• Enterprises that deal with natural resources, both extractive and non-extractive.
• Qualifying organizations for public benefit.
• Investment funds that meet the requirements.
• Social Security or pension money (both public and private).
• Subsidiary that are fully owned by exempt organizations.

Assistance for Small Enterprises

For tax years ending on or before December 31, 2026, companies with yearly revenues under AED 3 million are eligible for small company assistance.
Qualifications:

• Must reside in the United Arab Emirates.
• Revenue from the relevant or prior tax periods cannot exceed AED 3 million.
• Cannot be a holding corporation or financial institution.
• Eligible businesses are exempt from corporate tax on profits and benefit from reduced compliance obligations, such as simplified transfer pricing requirements.

Qualifying Free Zone Persons (QFZPs)

Entities that meet the QFZP criteria can take advantage of a 0% corporate tax rate on qualifying income.

Requirements:

• Keep a free zone in the United Arab Emirates with sufficient economic substance.
• Produce eligible income in accordance with UAE tax laws.
• Respect transfer price guidelines and keep the necessary records.
• Comply with International Financial Reporting Standards (IFRS) while preparing and submitting audited financial accounts.
• Make sure that income that does not qualify stays below the specified de minimis amount.