UAE Corporate Tax: What You Need to Know for 2024




The UAE has recently introduced a new federal corporate tax (CT) system that will be effective for financial years starting on or after 1 June 2023. This is a major change for businesses operating in the UAE, as it will affect their tax liability, compliance requirements, and planning strategies. In this blog post, we will cover the following topics:

  • What is the scope and rate of the UAE CT?
  • Who is exempt from the UAE CT and how to qualify?
  • What are the key considerations for free zone businesses?
  • How to prepare for the UAE CT implementation and compliance?
  • What are the benefits and challenges of the UAE CT regime?

What is the scope and rate of the UAE CT?

The UAE CT is a form of direct tax levied on the net income or profit of corporations and other entities from their business. The proposed standard rate of corporate tax in the UAE, at 9%, is one of the lowest in the world12. However, the CT will apply to both resident and non-resident persons, regardless of their legal form, ownership, or activity3.

A resident person is a person that is incorporated, registered, or has its place of effective management in the UAE. A non-resident person is a person that is not a resident person, but has a permanent establishment (PE) in the UAE. A PE is a fixed place of business or a dependent agent that carries on the business of the non-resident person in the UAE3.

The CT will be imposed on the taxable income of a person, which is the gross income from the business less the allowable deductions and exemptions. The gross income includes any income from the sale of goods or services, interest, dividends, royalties, rents, fees, commissions, and any other income from the business. The allowable deductions include any expenses that are incurred wholly and exclusively for the purposes of the business, such as salaries, rent, utilities, depreciation, etc. However, some expenses are specifically regulated by the CT law, such as interest, entertainment, exempt income expenses, etc3.

The CT law also provides for certain income exemptions, such as:

  • Income from oil and gas extraction and related activities;
  • Income from the sale or disposal of shares or other equity interests;
  • Income from the sale or disposal of real estate or other assets used in the business;
  • Income from the liquidation or dissolution of a person;
  • Income from the merger, acquisition, or reorganization of a person;
  • Income from the transfer of assets or liabilities between related persons;
  • Income from the cancellation or waiver of debts or obligations;
  • Income from the settlement of disputes or claims;
  • Income from the receipt of government grants or subsidies;
  • Income from the receipt of insurance proceeds or compensation for damages or losses3.

Who is exempt from the UAE CT and how to qualify?

The CT law also provides for certain persons or entities that are exempt from the CT, either automatically or upon application and approval. The exempt persons or entities are:

  • Government entities, government controlled entities, and their subsidiaries;
  • Extractive businesses and non-extractive natural resource businesses;
  • Qualifying public benefit entities;
  • Public or private pension and social security funds;
  • Qualifying investment funds3.

To qualify for the exemption, the person or entity must meet certain conditions and notify the Ministry of Finance (MoF) or the Federal Tax Authority (FTA) accordingly. The conditions and procedures for the exemption vary depending on the type of person or entity. For example, a qualifying public benefit entity must be a non-profit organization that operates for the public benefit in the fields of education, health, social welfare, culture, environment, or any other field approved by the Cabinet. The entity must also apply to the FTA and obtain a certificate of exemption3.

What are the key considerations for free zone businesses?

Businesses in the free zones (FZs) have the opportunity to benefit from a 0% CT rate, provided that they qualify as a qualifying free zone person (QFZP). However, the conditions to be a QFZP are complex and FZ businesses should not assume that they will automatically meet them. The conditions include:

  • The person must be incorporated or registered in a free zone that is approved by the Cabinet;
  • The person must carry on a business activity that is approved by the Cabinet;
  • The person must have a valid license or permit from the free zone authority;
  • The person must have a physical presence and operational substance in the free zone;
  • The person must not have a PE outside the free zone;
  • The person must not derive any income from sources outside the free zone3.

FZ businesses should review their footprint and profile to ensure that they meet all the conditions on or before 1 January 2024. They should also analyse the pros and cons of qualifying versus remaining in the standard 9% CT regime, as well as the practical requirements to comply and maintain the QFZP status. For example, they may need to update their transactions, pricing, intercompany agreements, documentation, etc., to reflect the QFZP status. They may also need to review and plan their relevant operational substance in light of this critical condition of the regime4.

How to prepare for the UAE CT implementation and compliance?

The UAE CT will become effective for many businesses from 1 January 2024, and there are many things to consider in order to prepare for the implementation and compliance. These include:

  • Reviewing the legal, financial, and operational profile of the business and identifying the CT implications, opportunities, and risks;
  • Reviewing the group structure and considering whether any updates are required to optimize the tax efficiency or enable certain elections, such as grouping;
  • Reviewing the accounting policies and entries that could impact the key areas of tax, such as items recorded in other comprehensive income, provisioning, depreciation, revaluation, amortisation, etc.;
  • Reviewing the major income and expense categories and ensuring that they meet the tax recognition and deduction requirements, especially those that are specifically regulated by the CT law;
  • Reviewing and considering whether deferred tax needs to be provided in the financial statements for FY2023;
  • Developing and implementing the people, processes, and systems required to comply with the CT rules, such as tax accounting, reporting, filing, payment, audit, etc.;
  • Developing and implementing the tax governance and risk management framework, such as tax policies, procedures, controls, documentation, etc.;
  • Engaging with the relevant stakeholders, such as shareholders, investors, lenders, customers, suppliers, employees, etc., to communicate the impact and implications of the CT regime4.

What are the benefits and challenges of the UAE CT regime?

The introduction of the UAE CT regime is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation. The certainty of a competitive CT regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties, will cement the UAE’s position as a leading jurisdiction for business and investment. The UAE CT regime also offers some benefits for businesses, such as:

  • A low and flat CT rate of 9%, which is one of the lowest in the world and in the region;
  • A generous threshold of AED 375,000 for taxable income, below which no CT is payable;
  • A wide range of income exemptions, which can reduce the effective tax rate further;
  • A flexible grouping regime, which can allow for the consolidation of profits and losses within a group;
  • A foreign tax credit regime, which can avoid double taxation on foreign income;
  • A transparent and simple CT regime, which minimizes the compliance burden and complexity for businesses12.

However, the UAE CT regime also poses some challenges and risks for businesses, such as:

  • A broad scope and base of the CT, which covers both resident and non-resident persons, regardless of their legal form, ownership, or activity;
  • A complex and stringent exemption regime, which requires meeting certain conditions and obtaining approvals from the authorities;
  • A limited and conditional deduction regime, which restricts the deductibility of certain expenses, such as interest, entertainment, exempt income expenses, etc.;
  • A comprehensive and robust transfer pricing regime, which requires arm’s length pricing and documentation for transactions between related persons;
  • A strict and rigorous compliance and enforcement regime, which imposes filing, payment, audit, and penalty obligations on taxpayers34.

Conclusion

The UAE CT is a new and significant development for businesses operating in the UAE, as it will affect their tax liability, compliance requirements, and planning strategies. Businesses should be aware of the scope, rate, exemptions, and implications of the CT regime, and prepare accordingly for the implementation and compliance. Businesses should also weigh the benefits and challenges of the CT regime, and seek professional advice if needed.

We hope you found this blog post helpful and informative. If you have any questions or comments, please feel free to contact us. Thank you for reading.


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