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UAE Corporate Income Tax | Dubai Income Tax

The United Arab Emirates (UAE) recently incorporated the UAE Corporate Tax regime which shall come into effect from 1^st June 2023.

Tax Rate	0-9%
Period for which it is applicable	Tax period starting on or after 1^st June 2023
Who are covered	Companies, individuals carrying on business in UAE
Withholding Tax	0% on all income
Foreign Tax Credit	Applicable
Tax Payable at	Federal level

UAE Corporate Tax is applicable for a covered person from the Tax period starting on or after 1st June 2023 on profits arising from sale of goods and services. The Law covers taxation of business profits of UAE Residents (earned in UAE and foreign profits). It is applicable on both corporate entities and individuals. However, certain income would be exempt from the corporate tax. Where foreign profits are liable to tax in the UAE, UAE Corporate Tax liability shall be reduced by the tax paid in foreign country on UAE taxable income.

Except Bahrain, the UAE has introduced the lowest corporate tax rate within the GCC region i.e. 9% on Taxable Income. Income of Free Trade Zone shall continue to be exempt from tax, where they earn certain qualified income, and meet certain specified conditions. For this purpose, taxable income refers to income exceeding AED 375,000.

Corporate Income Tax in UAE is also applicable on Non-Residents. However, the Non-resident would be taxed only in respect of the income from a UAE Permanent Establishment (PE) or income sourced from UAE (referred to as State Sourced Income).

Generally, an individual will not be liable to UAE Corporate Tax, except when they are carrying on a business or profession in the UAE, in which case the corporate tax will be applicable at the rate of 9% if they exceed AED 375,000.

Key Features of the UAE Corporate Tax system

UAE CT is a Federal Tax, applicable across all Emirates. The tax revenue collected as tax shall be shared between the Federal and Emirati Government
UAE Corporate Tax will apply to all UAE businesses and commercial activities alike, with certain given exceptions.
The Federal Tax Authority will be responsible for the administration, collection and enforcement of UAE CT.
The Ministry of Finance will remain the ‘Competent Authority’ for purposes of bilateral/ multilateral agreements and the international exchange of information for tax purposes.

Watch this Video on Corporate Tax in UAE. For more videos, enroll in our UAE Corporate Tax Course

Pre-requisite for Tax practitioners / Tax professionals: –

The application of UAE Corporate Tax would require knowledge of the following aspects: –

Who would be considered as UAE tax Resident or UAE tax Non-Resident?
Which income of UAE tax Resident or UAE tax Non-Resident would be liable to tax?
Exempt Income and Exempt Entities – Which entities are exempt from UAE tax and in respect of taxable entities, which income is exempt from tax?
Calculation of Taxable Income: –
- Which income are taxable?
- Which expenses would be deductible from revenue?
Formation of Tax Groups by entities with multiple companies in the UAE, which would reduce the tax liability of groups having multiple entities in the UAE. If a company is eligible to form a Tax Group, they can file one single income Tax Return for all the entities of the group.
Transfer Pricing, in respect of transactions between Associated Enterprises and Connected person.
Connected Person concept whereby, certain expenses may not be allowed as a deduction if they are in excess of the prescribed limit
Calculation of Corporate Tax Liability, for entities who are covered within the scope of UAE CT.
Administration of UAE CT, like filing of returns, assessment, a deposit of taxes, etc.

In conclusion, the UAE has a relatively low corporate tax regime, which along with other factors such as a dynamic business environment and a strategic location, make the UAE an attractive destination for businesses and investors.

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UAE Corporate Tax Law (Announced on 9 Dec 2022)

Chapter One – General provisions

Article 1 – Definitions – The section defines various terms used in the UAE corporate tax law. The knowledge of these terms is very important to understand the meaning and purpose of the various provision of the Law.

Chapter Two – Imposition of Corporate Tax and Applicable Rates

Chapter Two of the UAE Corporate Tax provides that the tax will be Corporate Tax is to be paid on the Taxable Income to the Federal Tax Authority. The rates provided are as follows:

Corporate Tax Rate on Businesses:

If the Taxable Income of the business doesn’t exceed AED 375,000, the Corporate Tax will be 0 %.
If the Taxable Income of the business exceeds AED 375,000, the Corporate Tax will be 9 %, of such excess amount

Corporate Tax Rate on Qualifying Free Zone

If the Taxable Income qualifies as a Free Zone by satisfying the condition, then the Corporate Tax will be 0 %.
If the Taxable Income doesn’t qualify as a Free Zone by satisfying the condition, then the Corporate Tax will be 9 %.

Article 2 – Imposition of Corporate Tax
Article 3 – Corporate Tax Rate

Chapter Three – Exempt Person under UAE Corporate Tax Law

Article 4 – Exempt Person
Article 5 – Government Entity
Article 6 – Government Controlled Entity
Article 7 – Extractive Business
Article 8 – Non-Extractive Natural Resource Business
Article 9 – Qualifying Public Benefit Entity
Article 10 – Qualifying Investment Fund

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An Exempt person under the UAE Tax Law is a person who would generally be liable to tax, but by virtue of the specific exemption, they are exempted from taxation. The exemption in some cases is available after making an application to the FTA.

An exemption can be automatic or by application for various entities that are discussed as under: –

Entity	Type of Exemption
A Government Entity	Automatic Exemption
A Qualifying Public Benefit Entity	Automatic Exemption
A person engaged in the Extractive Business	Automatic Exemption
A Government Controlled Entity	Automatic Exemption
A person engaged in the Non-Extractive Business	Automatic Exemption
A Qualifying Investment Fund	Exemption on application
A public pension fund, or a social security fund	Exemption on application
A juridical person entirely owned and controlled by Exempt Persons	Exemption on application
The Cabinet can determine any other persons, who may be exempt from UAE CT.

For details on the provision relating to exemption from Corporate Tax, please click the relevant term hereunder: –

Chapter Four – Taxable Person and Corporate Tax Base

Article 11 – Taxable Person
Article 12 – Corporate Tax Base
Article 13 – State Sourced Income
Article 14 – Permanent Establishment
Article 15 – Investment Manager Exemption
Article 16 – Partners in an Unincorporated Partnership
Article 17 – Family Foundation

Taxable Person

Taxable Person is a person, on whom Corporate Tax will be levied
A Taxable Person can be a Resident or a Non-Resident Person.

Resident Person

A Resident person would cover the following person: –

Natural person undertaking business activity in UAE, or
A company or juridical person incorporated in UAE, including Free Zone Person
A foreign company or juridical person that is incorporated in a foreign jurisdiction but is controlled and managed in UAE
Any such other person as may be prescribed by the Cabinet

Non-Resident Person

A Non-Resident person is a person who is not a Resident of the UAE and:

Has Permanent Establishment or PE in the UAE; or,
Derives State-Sourced Income; or,
Has a Nexus or connection in the UAE.

Watch this Video on UAE Sourced Income. For more videos, enroll in our UAE Corporate Tax Course

Corporate Tax Base

The Corporate Tax Base provides for income on which Corporate Tax shall be levied:

For a Resident

Income of a natural person derived from UAE, or outside UAE, if it relates to an activity conducted in UAE.
A juridical person deriving income from UAE or outside UAE

For a Non-Resident

In case the Non-Resident, has a PE in the UAE, income attributable to such PE;
In case Non-Resident earns State-Sourced Income, the income not attributable to a PE established in the UAE;
In case where a Non-Resident has a UAE nexus, income attributable to such nexus or connection in the UAE.

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Permanent Establishment or PE

The Permanent Establishment for a Non-Resident Person will be:

A ‘fixed or permanent place’ where activities of the Non-Resident are undertaken
A place where a person in UAE acts, on behalf of the Non-Resident and ‘habitually exercises authority to conduct the business of the Non-Resident in the UAE
There exists a nexus in the State as per the decision of the Cabinet

Additionally, UAE CT law also consists of provisions, which detail State-Sourced Income, Investment Manager Exemption, Partners in an Unincorporated Partnership and Family Foundation.

For details on the provision relating to Taxable Person and Corporate Tax Base, please click the relevant term hereunder: –

Chapter Five – Free Zone Person under UAE Corporate Tax Law

Article 18 – Qualifying Free Zone Person
Article 19 – Election to be Subject to Corporate Tax

This chapter talks about the concept of Qualifying Free Zone Person, and the conditions required to be fulfilled for being a QFZP, which are as under:

Such entity complies with Articles 34 and 55 of the UAE Tax Law;
Such entity receives Qualifying Income;
Such entity does not fall under Article 19 of the UAE Tax Law;
Such entity has adequate economic substance in the State.

The tax rate on a UAE Free Zone Person will be 0%, for the tax incentive period as mentioned in the legislation not exceeding a period of 50 years. A Qualifying Free Zone Person may make an election to be subject to Corporate Tax at the normal rate of 9%.

The Minister may specify any criteria for disqualification to be the Qualifying Free Zone Person.

For details on the provision relating to Free Zone Person under UAE Tax Law, please click the relevant term hereunder: –

Chapter Six – Calculating Taxable Income under UAE Corporate Tax Law

Article 20 – General Rules for Determining Taxable Income
Article 21 – Small Business Relief

General Rules for Determining Taxable Income:

Based on the financial statements created in line with the accepted accounting standards in the UAE, Taxable Income shall be computed as follows:

Taxable Income is the accounting income adjusted, among other things, for the following:
1. An unrealized gain or loss;
2. Exempt Income;
3. Reliefs under UAE CT;
4. Deductions under UAE CT;
5. Adjustment for taxable income in respect of transactions involving Related Parties;
6. Deductions for Tax Loss relief; and
7. Incentives or special reliefs approved by the Minister.
A Taxable Person who prepares financial statements on accrual basis has the option of accounting for gains and losses on realization basis in relation to either of the following:
1. Assets and liabilities, subject to fair value or impairment accounting; or
2. Assets and liabilities held on capital account at the end of the Tax Period.

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Small Business Relief:

When revenue for the current Tax Period and any prior Tax Periods does not exceed a threshold determined by the Minister, a resident Taxable Person may choose to be treated as not having generated any Taxable Income for that Tax Period. There may be other requirements that the Minister may provide if he deems fit.

Chapter Seven – Exempt Income

Article 22 – Exempt Income
Article 23 – Participation Exemption
Article 24 – Foreign Permanent Establishment Exemption
Article 25 – Non-Resident Person Operating Aircraft or Ships in International Transportation

Chapter Seven furnishes details of Exempt Income which includes dividend and profit distribution, Participating Interest, Foreign PE income, and income from Non-Resident operating aircraft and ships.

Dividend and Profit Sharing

Dividend and profit sharing from a Resident juridical person;
Dividend and profit sharing from a foreign juridical person, where UAE investor has a Participating Interest.

Participating Interest

Income from Participating Interest will be exempt if it satisfies certain conditions, including 5% ownership interest for an uninterrupted 12 months, etc.
There are certain situations where this exemption to Participating Interest will not apply.

Foreign Permanent Establishment

In respect of a Foreign PE, the Taxable Person has the option to exclude income and expenditure of the Foreign PE, while computing UAE taxable income.
In such a case, Foreign Tax Credit shall not be allowed.

Operating and Leasing Activities

Income from operation of aircraft or ships in international transportation can be exempted, subject to certain conditions ;

Chapter Eight – Reliefs

Article 26 – Transfers Within a Qualifying Group
Article 27 – Business Restructuring Relief

Chapter Eight – Reliefs under UAE’s Corporate Tax Law details the taxability in the following cases:

Transfer of Assets and Liabilities within a Qualifying Group:

There will be no gains or losses from transfer of assets or liabilities, between two Taxable Persons who are part of the same Qualifying Group.
The transfer would be considered to have taken place at the Market Value on the date of the transfer if the relief is withdrawn within two (2) years for not meeting specified conditions to claim exemption.

Business Restructuring:

When there is transfer of shares or ownership interest between two Taxable Persons under a business restructuring, there will be no taxable gains or losses from such a transfer.
The exemption is subject to certain conditions to be fulfilled by the Taxable Persons.
Furthermore, the relief given can be withdrawn within two years in some situations, in which case, the taxable gains will be calculated at the Market Value on the date of the transfer for Taxable Income.

Chapter Nine – Deductions under UAE Corporate Tax Law

Article 28 – Deductible Expenditure
Article 29 – Interest Expenditure
Article 30 – General Interest Deduction Limitation Rule
Article 31 – Specific Interest Deduction Limitation Rule
Article 32 – Entertainment Expenditure
Article 33 – Non-deductible Expenditure

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Deductible Expenditure

There are certain expenses that are incurred solely and exclusively for business activities that are not of a capital nature and are deductible in the Tax Period in which they are incurred. This includes- any expenditure used to generate Taxable Income or a share of expenditure calculated on fair and reasonable basis, but does not include, expenditure incurred in connection with Taxable Person’s business, cost incurred in exempt income, losses not attached to Taxable Person’s business or as per the Minister’s recommendation.

Interest Expenditure

30%(max.) deduction is provided in Net Interest Expenditure from Accounting Earnings. A taxable Person’s Interest Expenditure is the difference between the Interest Expenditure and Taxable Interest Income incurred during the Tax Period. No deduction in the Interest incurred by the related party.

Entertainment Expenditure

Deduction of 50% is allowed in the expenditure incurred in entertainment, amusement, or recreation of clients, shareholders, suppliers, or other business partners.

Chapter Ten – Transactions with Related Parties and Connected Persons

Article Number 34 – Arm’s Length Principle
Article 35 – Related Parties and Control
Article 36 – Payments to Connected Persons

Chapter Ten primarily details that:

The arrangements and transactions between Related Parties should be in consonance with the Arm’s Length Principle as per OECD Guidelines.
It lists down the Transfer Pricing methods that can be used for ascertaining Arm’s Length Price in a transaction.
Additionally, it prescribes the provisions for adjustments in the Transfer Price by the Federal Tax Authority under certain circumstances.
Details the treatment of payments made to Connected Person.
Lastly, it comprehensively defines ‘Related Party’, ‘Connected Person’, and ‘Control’.

Chapter Eleven – Tax Loss Provisions under UAE Corporate Tax Law

Article 37 – Tax Loss Relief
- Tax Loss can be set off in the subsequent Tax Periods but not above the amount of seventy five percent (75%).
- It also prescribes situations when Tax Loss cannot be claimed like when the loss had already been incurred before the commencement of Corporate Tax.
Article 38 – Transfer of Tax Loss
- It provides conditions which are required to be fulfilled so as to transfer Tax Loss from one Taxable Person to another.
Article 39 – Limitation on Tax Losses Carried Forward
- Lastly, it provides that Tax Losses carried forward will be subject to limitation if the same person owns an ownership interest of fifty percent (50%) or conducts the same or similar business activity.
- Such limitation will not be applicable where the shares of the Taxable Person are listed on the Recognized Stock Exchange.

Chapter Twelve – Tax Group Provisions

Article 40 – Tax Group
Article 41 – Date of Formation and Cessation of a Tax Group
Article 42 – Taxable Income of a Tax Group

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Tax Group:

If all of the following requirements are satisfied, a resident person (i.e., a parent company) may submit an application to the FTA to form a Tax Group with one or more additional resident persons:

The residents are legal individuals;
Neither the parent company nor the subsidiary is an exempt person or a Qualifying Free Zone Person;
Neither the parent company nor the subsidiary is a Qualifying Free Zone Person;
The parent company and the subsidiary have the same financial year and prepare their financial statements in accordance with the same accounting standards.

The CT Law specifies the circumstances under which a subsidiary may join an existing Tax Group, cease to be part of the Tax Group and the date on which the Tax Group shall cease to exist. A Tax Group is recognized as a single Taxable Person.

Taxable Income of a Tax Group:

The parent company shall eliminate transactions between the parent company and each subsidiary that is a member of the Tax Group and consolidate the financial results, assets, and liabilities of each subsidiary.
When a new subsidiary joins the Tax Group or departs the Tax Group, or when the Tax Group is terminated, specific regulations will apply with respect to the use of any unutilized tax losses of the new subsidiary.

Chapter Thirteen – Calculation of Corporate Tax Payable

- Article 43 – Currency
- Article 44 – Calculation and Settlement of Corporate Tax
- Article 45 – Withholding Tax
- Article 46 – Withholding Tax Credit
- Article 47 – Foreign Tax Credit

Currency:

The Tax Payable i.e., the tax liability incurred under the UAE CT Law has to be paid in AED.

Calculation and Settlement of Corporate Tax:

Corporate Tax Payable can be paid only in the following manner:

First by utilizing the Withholding Tax Credit that the Taxable Person is eligible for.
Then to the extent, there is any residual amount left, utilize the Taxable Person’s available Foreign Tax Credit.
After which, in case there is any further residual amount left, one has to apply credits or any other form of relief available with it.
Any remaining tax liability shall have to be settled as per provisions of Article 48.

Withholding Tax:

The following incomes are subject to withholding tax at the rate of 0% –

Any income not attributable to a Permanent Establishment of the Non-Resident Person in the State
Any other income specified by the Minister

Withholding Tax Credit:

The Corporate Tax due under Article 3 of the UAE Tax Law may be reduced by the Withholding Tax Credit attributable to that Tax Period.

Foreign Tax Credit:

The amount of the Foreign Tax Credit for the applicable Tax Period may be deducted from the Corporate Tax.
The quantum of Foreign Tax Credit cannot be greater than the amount of Corporate Tax owed on the relevant revenue.
In order to claim a Foreign Tax Credit, a Taxable Person must maintain all relevant records.
Any unused Foreign Tax Credit cannot be carried forward or carried back.

Chapter Fourteen – Payment and Refund of Corporate Tax

Article 48 – Corporate Tax Payment
Article 49 – Corporate Tax Refund

Corporate Tax Payment:

Corporate Tax Payable must be settled within 9 months from the completion of the relevant Tax Period, or any date specified by the Authority.

Corporate Tax Refund:

A Taxable Person may claim Tax Refund if –

Available Withholding Tax Credit exceeds Corporate Tax Payable
The Authority thinks that tax has been paid in excess of what was owed

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Chapter Fifteen – Anti-Abuse Rules

Article 50 – General Anti-abuse Rule

Anti-Abuse Rules have been adopted so as to target the transactions and arrangements that lack any valid commercial reasons to get a Corporate Tax advantage.

Chapter Sixteen – Tax Registration and Deregistration under UAE Corporate Tax Law

Article 51 – Tax Registration
Article 52 – Tax Deregistration

Tax Registration

The Taxable Person must register in a manner, form, and within the timeline specified by the Authority.
The Authority will have discretion with respect to the registration of a Taxable Person

Tax Deregistration

After the business or business activity ends, whether by dissolution, liquidation, or another means, the Taxable Person has to fill a deregistration form in the format specified.
A Taxable Person may not be deregistered until he has submitted all the required documents.
The Authority must deregister the property if the Tax Deregistration Application is approved.
If any of the requirements for Tax Deregistration as mentioned under this Article are violated, then the Authority on its discretion may deregister the Taxable Person on later of the below-mentioned dates:
- the final day of the Tax Period on which the Authority became aware that this provision was not complied with;
- the time when the Taxable Person no longer exists.

Chapter Seventeen of UAE Corporate Tax Law – Tax Returns and Clarifications

Article 53 – Tax Returns
- The Tax Return is to be filed within nine (9) months from the date of the end of the relevant Tax Period.
- The provision provides for certain specific information to be provided while filing the Tax Return.
- The Minister of Finance can prescribe the manner of filing the Tax Return in case of national security or public interest.
Article 54 – Financial Statements
- The Federal Tax Authority can request for submission of Financial Statements of the Taxable Person.
- Certain Taxable Persons may be asked by the Minister to maintain Financial Statements.
Article 55 – Transfer Pricing Documentation
- The Taxable Persons have to give disclosure of their transactions with Related Parties or Connected Persons to the Federal Tax Authority.
- As prescribed by the Minister, the Taxable Person may be asked to maintain a ‘Master File’ and ‘Local File’ to be submitted within thirty (30) days of request by the Authority.
Article 56 – Record Keeping
- After the end of the relevant Tax Period, the records are to be maintained for seven (7) years.
- The Exempt Persons are to maintain records of their status as Exempt Persons for a period of seven (7) year
Article 57 – Tax Period
- A Tax Period is one for which Tax Return is to be filed. It will be as per the Gregorian Calendar of twelve (12) months.
- An application can be made for change in the start date, end date, or the Tax Period by the Taxable Person to the Authority.
Article 58 – Change of Tax Period
Article 59 – Clarifications
- Clarifications can be asked related to the conclusion of the Advance Pricing Agreement or the application of the UAE’s Corporate Tax Law.

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Chapter Eighteen – Violations and Penalties.

Article 60 – Assessment of Corporate Tax and Penalties

This Chapter provides that:

The Taxable Person can be subjected to Corporate Tax Assessment
The Taxable Person can also request for Corporate Tax Assessment to the Federal Tax Authority
The penalties and fines will be as per the Tax Procedure Laws.

Chapter Nineteen – Transitional Rules

Article 61 – Transitional Rules

This Chapter talks about Transitional Rules. These provide:

The opening balance sheet should be the closing one. It will be drawn for financial reporting purposes as per the accounting standards on the last date of the previous Financial Year,
The opening balance sheet should be in consonance with the universal principle of Arm’s Length Price;
Any additional rules can be prescribed by the Cabinet,
The anti-abuse provisions of Article 50 will be applicable for transactions entered on or after the UAE Corporate Tax law’s publication.

Chapter Twenty – Closing Provisions under UAE Corporate Tax Law

Article 62 – Delegation of Power
Article 63 – Administrative Policies and Procedures
Article 64 – Cooperating with the Authority
Article 65 – Revenue Sharing
Article 66 – International Agreements
Article 67 – Implementing Decisions
Article 68 – Cancellation of Conflicting Provisions
Article 69 – Application of this Decree-Law to Tax Periods
Article 70 – Publication and Application of this Decree-Law

This Chapter provides for the closing provisions. It details the delegation of powers, administrative policies and procedures, cooperation with the Authority, revenue sharing, international agreements, implementing decisions, etc. It also states that:

The UAE’s Corporate Tax law will begin from the Tax Period starting on or after June 1, 2023;
The Corporate Tax law will have an overriding effect in case there are conflicting provisions,
The publication will be in the Official Gazette of the UAE Federal Government, and

The application of the provisions of the Corporate Tax Law will be within fifteen (15) days of the publication.

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