Corporate Tax and VAT in UAE: What New Businesses Need to Know
Introduction
The United Arab Emirates (UAE) is among the premier locations to set up a business for multiple reasons. The most attractive feature for business owners is the relaxed tax structure. However, to make the most of this benefit, it is necessary that you understand how the corporate tax structure in the UAE works.
In this article, we will tell you about corporate tax exemptions, entities that need to pay taxes, and what activities or individuals are exempt from corporate tax in the UAE.
What is corporate tax in the UAE?
Corporate tax, also known as corporate income tax or business profits tax, is a direct tax on the net income of businesses and corporations. The UAE has implemented this tax model, aligning with many other countries that already have corporate tax systems in place.
Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in some jurisdictions of the UAE. The Corporate Tax Law was enacted in the UAE on December 9, 2022, establishing the legal foundation for a federal corporate tax effective from financial years starting on or after June 1, 2023.
Who needs to pay corporate tax in the UAE?
Those who are subjected to corporate tax in the UAE are referred to as ‘Taxable Persons.’ Corporate tax in the UAE applies to:
1. UAE companies and other legal entities: This includes those incorporated or effectively managed and controlled within the UAE.
2. Individuals conducting business activities: Natural persons engaging in business or business activities in the UAE.
3. Foreign entities with a permanent establishment: Non-resident legal entities that have a permanent establishment in the UAE.
Entities in UAE free zones are also considered “Taxable Persons” under Corporate Tax Law and must comply with its regulations. However, those who qualify as a “Qualifying Free Zone Person” can benefit from a 0% corporate tax rate on qualifying income.
Non-resident persons without a permanent establishment in the UAE or earning UAE-sourced income not linked to their permanent establishment may be subject to a 0% withholding tax. This tax is collected at the source by the payer on behalf of the income recipient and typically applies to cross-border payments such as dividends, interest, royalties and other types of income in many tax systems.
Corporate tax rates in the UAE
Under Federal Decree-Law No. 47 of 2022, the standard corporate tax rate in the UAE is 9% on taxable income exceeding AED 375,000 (approximately USD 102,000). If your taxable income is below this threshold, your business will be taxed at a 0% rate.
Companies operating in the UAE free zones are also eligible for a 0% tax rate, provided they meet the Qualifying Free Zone Person criteria and have qualifying income.
Similarly, individual business owners will be subject to a 9% corporate tax on their taxable income only if their annual turnover exceeds AED 1 million. If their annual turnover is below this amount, they are exempt from paying taxes.
Here is a summary of the UAE corporate tax rates:
Resident Taxable Person Taxable income not exceeding AED 375,000
0%
Resident Taxable Person Taxable Income exceeding AED 375,000
9%
Qualifying Free Zone Persons Qualifying Income
0%
Qualifying Free Zone Persons
Taxable Income that does not meet the Qualifying Income definition
9%
Corporate tax in UAE free zones
The new corporate tax framework includes specific provisions for companies in the UAE free zones. Free zone companies may benefit from a 0% tax rate on their qualifying income if they meet the criteria to be classified as a Qualifying Free Zone Person.
What is a Qualifying Free Zone Person?
A QFZP is a business entity registered in a UAE free zone that satisfies the following conditions as per the UAE Corporate Tax Law:
- Has substantial operations within the free zone
- Earns income primarily from qualifying activities conducted within or outside the free zone (Qualifying Income)
- Chooses not to adopt the standard UAE Corporate Tax system
- Adheres to strict transfer pricing rules for transactions with related companies
- Maintains detailed records and financial statements
Note: To benefit from the 0% tax rate, a free zone company must first register for corporate tax. After obtaining the corporate tax number, the company must apply for Qualifying Person status before the end of the financial year.
Conclusion
Apart from relaxed taxation, there are multiple other factors that can contribute to your business’s success. These include simplified business set-up processes, easy access to the workforce, supportive infrastructure and more.
Ras Al Khaimah Economic Zone (RAKEZ) is one of the largest economic zones in the region supporting startups, entrepreneurs, SMEs and industrialists with their business set-up processes and requirements. It gives you all the tools and services necessary to lay the foundation for a successful business.
You can easily decide which custom set of services are necessary for your business and get started in a matter of days. Contact us to know more.
