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Taxation in the UAE.

Overview and essential requirements for UAE businesses
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Taxation in the UAE

The United Arab Emirates (UAE) has long been a haven for businesses, attracting foreign investment with its tax-friendly environment. However, a significant shift occurred in June 2023 with the introduction of corporate tax. This article provides a comprehensive overview of the current taxation system in the UAE, outlining the key aspects and essential requirements businesses need to be aware of.

Key takeaways

  • The UAE implemented a federal corporate tax of 9% on business profits exceeding AED 375,000 (around USD 102,000) in June 2023. This marks a significant shift from their previous tax-free environment.
  • The system offers significant benefits for startups and small businesses. They are exempt from corporate tax on profits below the threshold. Additionally, qualified free zone businesses can enjoy a 0% tax rate on specific income categories.
  • Businesses operating in the UAE must comply with the new regulations. This includes obtaining a tax registration number, maintaining proper records, filing tax returns electronically, and settling tax liabilities. Staying updated on any revisions to the tax framework issued by the authorities is crucial.

Corporate income tax

The UAE’s corporate tax regime applies a 9% tax rate on any business profits exceeding AED 375,000 (approximately USD 102,000). This tiered structure offers a significant advantage for small and medium-sized enterprises (SMEs) as businesses with taxable income below this threshold are exempt. This exemption reflects the government’s commitment to fostering entrepreneurship and maintaining the UAE’s attractiveness for startups.

Who is subjected to corporate tax in the UAE?

The UAE’s corporate tax applies to a broad range of business entities operating in the country. Here’s a breakdown of who is subject to the tax:

  • Resident businesses: Any company or legal entity established in the UAE mainland, even if its entire income is derived from foreign sources.
  • Non-resident businesses: Branches of foreign companies operating in the UAE are subject to corporate tax on their UAE-sourced profits.
  • Free zone companies: With some exceptions, companies operating within designated free zones in the UAE are also subject to corporate tax. However, they may benefit from a 0% tax rate on Qualifying Income as defined by the relevant free zone authority.

It’s important to note that some entities are exempt from corporate tax in the UAE. These exemptions typically come with certain conditions:

  • UAE government entities: Government ministries, departments, and other entities wholly owned by the UAE government are exempt from corporate tax.
  • Public benefit entities: Non-profit organisations established for charitable or public service purposes may be exempt, subject to meeting specific criteria set by the authorities.
  • Qualifying investment funds: Certain types of investment funds may be exempt from corporate tax, depending on their structure and activities.

Corporate tax rates

The UAE operates a tiered corporate tax system with two primary rates:

  • 0% rate: Businesses with taxable income up to and including AED 375,000 are subject to a 0% tax rate. This exemption significantly benefits small businesses and startups.
  • 9% rate: Any taxable income exceeding AED 375,000 is taxed at a standard rate of 9%. This applies to most businesses in the UAE, except for those with specific exemptions or those falling under the next category.

Large multinationals

The UAE has indicated that a separate tax regime may apply to Multinational Enterprises (MNEs) meeting specific criteria set with reference to “Pillar Two” of the OECD’s Base Erosion and Profit Shifting (BEPS) Project. While the exact details of this regime haven’t been finalised yet, it’s expected to target large MNEs with consolidated global revenues exceeding EUR 750 million.

Free zone businesses qualifying for 0% CT

Qualifying Free Zone Persons (QFZP) refers to businesses registered and operating within designated free zones in the UAE. These entities enjoy an additional layer of tax advantages, specifically a 0% Corporate Tax (CT) rate on their Qualifying Income. Qualifying Income comprises specific business activities approved by the UAE authorities, exempting them from corporate tax. These activities generally include:

  • Export of goods and services
  • Manufacturing within the free zone
  • Certain types of financial services offered outside the UAE

Any income generated outside the scope of Qualifying Income will be subject to the standard 9% tax rate. Therefore, businesses in free zones should meticulously review the definitions of Qualifying Income to ensure they receive the optimal tax treatment.

Essential requirements for businesses

  • Tax registration number (TRN): Businesses operating in the UAE must obtain a TRN from the Federal Tax Authority (FTA) within the stipulated timeframe. This TRN is crucial for filing tax returns and ensuring compliance.
  • Record-keeping: The UAE mandates robust record-keeping practices for businesses. Companies must maintain accurate financial records for a minimum of five years to support their tax filings and potential audits.
  • Tax return filing: Businesses are required to file tax returns electronically with the FTA within nine months of the relevant tax period. Accurate and timely filing is essential to avoid penalties.
  • Tax payment: Tax liabilities must be settled before filing the tax return. The FTA offers various payment methods to facilitate a smooth process.

Beyond corporate tax

While corporate tax is the most significant development, it’s important to note that the UAE still imposes other forms of indirect taxation, including:

Value added tax (VAT)

  • Rate: A standard rate of 5% VAT applies to the supply of most goods and services within the UAE.
  • Exemptions: Certain essential items are exempt from VAT, including basic foodstuffs, some public transportation services, and residential rents. Additionally, specific sectors like education, healthcare, and financial services generally benefit from VAT exemptions.
  • Impact: Businesses need to factor in the cost of VAT when pricing their goods and services, and ensure they are registered for VAT if their taxable supplies exceed the threshold set by the authorities.
  • Compliance: VAT compliance involves registering for VAT, collecting VAT on taxable supplies, issuing VAT invoices, claiming input tax credits on VAT incurred on business purchases, and filing periodic VAT returns with the Federal Tax Authority (FTA).

Customs duty

  • Purpose: Customs duties are levied on imported goods to generate revenue for the government and protect domestic industries.
  • Rates: Rates vary depending on the type of goods being imported. The standard rate is 5% of the Cost, Insurance, and Freight (CIF) value of the import. However, higher rates (up to 100%) may apply to certain goods like tobacco and alcohol. Additionally, some goods may be subject to specific excise duties on top of customs duties.
  • Free zone benefits: Companies operating within designated free zones in the UAE typically enjoy exemptions from customs duties on goods imported for use within the free zone. This can be a significant advantage for businesses involved in import and re-export activities.
  • Compliance: Businesses importing goods into the UAE must comply with customs regulations, which may involve obtaining import licenses, paying customs duties and any applicable excise duties, and clearing goods through customs.

Navigating the new tax landscape

The introduction of corporate tax in the UAE demands a proactive response from businesses. To navigate this new landscape effectively, companies should conduct a thorough analysis of the tax’s impact on their financial health. This analysis should involve calculating potential tax liabilities and incorporating them into future budgets to ensure financial sustainability.

Seeking professional guidance from tax advisors familiar with the UAE’s specific tax regime is also crucial. Financial and tax advisors can provide tailored advice specific to each business, considering factors like industry and financial structure. Their expertise can ensure compliance with regulations and potentially identify opportunities to minimise tax burdens.
Finally, with any new regulatory framework, staying informed is paramount.

The UAE’s tax framework is likely to evolve over time, so businesses should remain updated on any revisions or clarifications issued by the Federal Tax Authority. This can be achieved by monitoring official government channels or establishing relationships with tax advisors who can keep them apprised of any relevant changes. By taking these proactive steps, businesses operating in the UAE can effectively adapt to the new corporate tax regime and ensure continued success.

Streamline your tax compliance with Acclime

The implementation of corporate tax in the UAE in June 2023 represents a significant departure from its previous tax-free status. This shift introduces new requirements for businesses, including obtaining a tax registration number, maintaining records, and filing returns. While challenges accompany the tax, there are opportunities for startups and SMEs with exemptions below a profit threshold. Navigating this new landscape demands proactive analysis, professional guidance, and staying informed of regulatory changes. By doing so, businesses can adapt effectively and ensure continued success and compliance in the UAE.

Optimise your operations in the UAE by partnering with Acclime. Our team of tax and legal experts is dedicated to guiding you through the intricacies of UAE regulations, ensuring full compliance and minimising the risk of penalties. In addition, Acclime offers a wide range of services, from company formation to accounting and bookkeeping, designed to equip your business for success in the UAE.