Explore the UAE corporate tax landscape, including taxable persons, tax rates, residency criteria, free zone taxation, and small business relief. Understand the intricacies of calculating taxable income and the concept of small business relief for simplified compliance.
Who is a taxable person and at what rate the corporate tax is imposed?
A Taxable Person as defined in the CT Law, is an individual and/or entity that is subject to UAE CT. For the purposes of the CT Law, a distinction is made between a Resident Person and a Non-Resident Person and the applicable Tax base will depend on the nature of the Taxable person.
A Resident Person is any of the following Persons:
- A juridical person that is incorporated or otherwise established or recognised under the applicable legislation of the State, including a Free Zone Person.
- A juridical person that is incorporated or otherwise established or recognised under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the State.
- A natural person who conducts a Business or Business Activity in the State.
- Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.
A Non-Resident Person is a Person who is not considered a Resident Person under Clause 3 of this Article and that either:
- Has a Permanent Establishment in the State as under Article 14 of this Decree-Law.
- Derives State Sourced Income as under Article 13 of this Decree-Law.
- Has a nexus in the State as specified in a decision issued by the Cabinet at the suggestion of the Minister.
The CT Law provides for the following statutory tax rates:
| Taxable Income | Rate of Tax |
|
0% |
|
9% |
Who is a resident in UAE?
The determination of tax residency status is an important aspect of the taxation system, and it is critical to consider both domestic tax laws and tax treaties to unlock the maximum benefits of tax treaties.
A juridical person shall be considered a Tax Resident in the State in either of the following cases:
- It was incorporated, formed or recognised in accordance with the legislation in force in the State, and that does not include the branch that is registered by a foreign juridical person in the State.
- A juridical person that is incorporated or otherwise established or recognised under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the State.
A natural person shall be considered a Tax Resident in the State where any of the following conditions are met:
- If his usual or primary place of residence and the centre of his financial and personal interests are in the State, or he meets the conditions and criteria determined by a decision from the Minister.
- If he has been physically present in the State for a period of (183) one hundred and eighty-three days or more, within the relevant (12) twelve consecutive months.
- If he has been physically present in the State for a period of (90) ninety days or more, within the relevant (12) twelve consecutive months, and he is a UAE national, holds a valid Residence Permit in the State or holds the nationality of any member state of the Gulf Cooperation Council, and meets any of the following:
- He has a Permanent Place of Residence in the State.
- He carries on an employment or Business in the State.
Who is a qualifying free zone person and its taxation? (Article 18-19)
Free zones in the UAE offer various tax incentives, however as per Article 3 and Article 18 of the federal decree law no. 47 of 2022, the qualifying freezone person shall be subject to corporate tax at 0% on the Qualifying income and others shall be taxed at 9%. The freezone person shall be considered as Qualifying freezone person after fulfilling the following conditions:
- Maintain adequate substance in UAE
- Derives Qualifying Income as specified in a decision by the Cabinet
- Non-election to be subject to Corporate Tax at 9%
- Compliant with Arm’s Length Principle and Transfer pricing documentation for related party transactions
A Qualifying Free Zone Person that fails to satisfy any of the given conditions at any time during a Tax Period shall cease to be a Qualifying Free Zone Person from the beginning of that Tax Period and shall be taxed at a rate of 9% on taxable income.
The given rate of 0% shall apply to a Qualifying Free Zone Person for the balance tax incentive period. This period can be extended by the cabinet but for a maximum of 50 years.
Further, the Qualifying Free Zone Person will have to make an election to be subject to Corporate Tax at 0%. The election comes into effect from the beginning of the tax period in which the election is made or the beginning of the next tax period.
There are a number of areas that remain uncertain, including the definition of Qualifying Income (subject to a Cabinet Decision yet to be released), the treatment of transactions between Free Zone entities and related/unrelated entities/branches in mainland UAE, what will be regarded as ‘adequate substance in the UAE’ for a Free Zone Person. At a minimum though, we expect that the Qualifying Income definition should arguably include income derived from outside of the UAE or within Free Zones (as highlighted in the recent public consultation document).
How to calculate taxable income? What about the concept of small business relief?
The taxable income for a Tax Period will be the accounting net profit (or loss) of the business, after making adjustments for certain items specified in the Corporate Tax Law.
→ The accounting net profit (or loss) of a business is the amount reported in its financial statements prepared in accordance with internationally acceptable accounting standards.
→ Adjustments to the accounting net profit (or loss) will need to be made for the following items:
1. Unrealised gains and losses (subject to the election made regarding the application of the realisation principle);
2. Exempt income such as qualifying dividends and capital gains;
3. Income arising on intra-group transfers;
4. Deductions which are not allowable for tax purposes;
5. ransactions with Related Parties and Connected Persons;
6. Transfers of tax losses within the group where relevant;
7. Incentives or tax reliefs; and
8. Any other adjustments as specified by the Minister.
In the case of any conflict between the provisions of this Decree-Law and the applicable accounting standards, the provisions of this Decree-Law shall prevail to that extent.
Small Business Relief
Revenue of the Taxable Person for the relevant Tax Period and previous Tax Periods does not exceed a threshold to be set by the Minister and meets all other conditions prescribed by the Minister can claim special relief and be treated as having no taxable income during the relevant Tax Period and may be subject to simplified compliance obligations. Entities claiming the relief may lose the benefit of
- Exempt Incomes specified in the Decree Law shall be added back considering the revenue threshold
- Reliefs available on transfers within qualifying group and business restructuring will be added back
- General Deductions are not allowed in computation of revenue.
- Tax Losses shall not be allowed to carried forward and adjust in the subsequent tax periods.
- Transfer pricing documentation requirement will not be applicable.
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