The UAE is always famous for its attractive business policies and is often called a tax-free haven. The region is now not tax-free; however, it is tremendously attractive with lower tax rates compared to other developed economies of the world. Many businesses fall into the 0% corporate tax rate category; therefore, they still do not have to pay any corporate taxes. In this blog, we explain corporate tax rates applicable in the UAE clearly and understandably, and compare the 0% vs. the standard 9%.
What is the Difference Between 0% and 9% Corporate Tax Rates in the UAE?
In the UAE, the standard corporate tax rate is 9%; however, some businesses will enjoy a 0% rate. Entities with lower taxable income will mainly be subject to 0% corporate tax. However, higher-income firms will be subject to a 9% rate above the specified threshold. Furthermore, free zone entities that are qualified free zone persons will be subject to 0% corporate tax, provided they meet certain conditions.
It is important to distinguish between the 0% rate and the exemption. The 0% rate does not imply that a business is exempt from corporate tax filing; they might have to file corporate tax returns just like other businesses do. However, they will not be liable to pay taxes.
How Does the UAE Corporate Tax Threshold Affect Which Rate Applies?
The UAE corporate tax threshold is applicable slab-wise. Taxable income of up to AED 375,000 in a tax year will be subject to 0% corporate tax. The portion of taxable income greater than AED 375,000 will be subject to a 9% corporate tax rate.
Taxable income up to AED 375,000 – 0%
Taxable income above AED 375,000 – 9%
Taxable Income
It is important to highlight here the concept of taxable income, as the threshold is based on it. In simple words, taxable income is the accounting income of a business adjusted for tax adjustments, including deductions. Accounting income is calculated based on the International Financial Reporting Standards (IFRS). To align the accounting income with the tax laws, firms need to perform certain adjustments as per the corporate tax law. The resultant figure is the taxable income.
Tax Calculation Example:
Suppose an entity has a taxable income after all adjustments of AED 800,000 in a tax year. The tax liability will be as follows: the first AED 375,000 will be subject to 0%, while the remaining AED 425,000 will be subject to a 9% rate.
AED 375,000 x 0% = 0
AED 425,000 x 9% = AED 38,250
Corporate Tax Due = AED 38,250
Do Free Zone Businesses Qualify for 0% Corporate Tax?
Free zone entities are generally not exempt from corporate tax. However, free zone entities that are qualifying free zone persons (QFZPs) will be subject to a 0% corporate tax rate.
To attain the status of a QFZP, the entity has to satisfy the following conditions:
a) Maintain adequate substance in the state.
b) Derive qualifying income.
c) No election to be subject to corporate tax under the tax law.
d) Complies with Articles 34 and 55 of the tax law.
e) Meets any other conditions as may be prescribed by the Minister.
It is worth noting that a qualifying free zone person’s 0% rate is only applicable on qualifying income; non-qualifying income will be subject to a 9% rate. There is no threshold applicable in this case. Not sure if your business qualifies for a 0% rate? Consult our team at CZTA for up-to-date and tailor-made advice and solutions.
What Common Mistakes Cause Businesses to Be Taxed at 9% Unexpectedly?
Every business wants to minimize its tax liability within the boundaries of the law and without any tax abuse. However, sometimes a little mistake or a lack of knowledge can result in higher tax liability. In the UAE, an entity might pay 9% corporate tax, where it has an opportunity to save taxes in both legal and ethical ways. Let’s highlight some common situations.
Not Claiming Tax Reliefs
The UAE tax law offers various tax reliefs, especially for small businesses, to promote overall economic activity, such as the small business relief. Small business relief allows eligible resident entities to elect to be treated as having no taxable income in a tax period where they have revenue of less than or equal to AED 3,000,000 in a relevant tax period and all previous tax periods ending on or before 31 December 2026. As a result of this treatment, they will pay no corporate tax. The important point here is that an “election” is necessary during the tax filing process in every tax year of claiming this relief. Therefore, if a business misses the election, it might be subject to 9%.
Free Zone Entities Not Fulfilling QFZP’s Conditions
A free zone entity is not exempt from corporate tax liability. However, if satisfying certain conditions, it can become a qualifying free zone person and pay 0% taxes. There are two situations where a free zone entity might result in paying 9% corporate tax:
- If not meeting the qualifying free zone person conditions
- Meeting the conditions of QFZP but earning non-qualifying income. There is no threshold for non-qualifying income; it is subject to a 9% rate.
Thus, a free zone person must fulfill all the conditions and minimize their non-qualifying income to get the full benefit. For any assistance on how your business can be subject to a 9% rate unexpectedly instead of 0%, consult CZTA.
Other Issues
There can be numerous ways in which a business can pay 9% tax instead of 0%. For instance,
- Inaccuracies in accounting records,
- Not tracking incomes properly,
- Anomalies in related-party transactions.
- Tax abuse
These anomalies might result in a 0% corporate tax; however, after correction, you might end up paying at 9% rate.
Summary
Who doesn’t like saving taxes? In the UAE, there are generally two corporate tax rates, or slabs: 0% and 9%. Businesses will most likely want to fall in the 0% bracket. However, it is dependent on the level of income, specifically, the taxable income. It states that an entity earning taxable income of up to AED 375,000 will be subject to 0%; however, taxable income higher than AED 375,000 will be subject to 9%. Apart from this threshold, there are other ways in which a business can enjoy a 0% rate, such as through the small business relief. As a UAE business, you must strive to stay updated and get expert advice where necessary.
Creative Zone Tax & Accounting (CZTA)
Taxes are a sensitive issue; therefore, any downside will most likely result in financial losses for a business. Our team will not let this happen to your business. Consult our vast experienced in-house team that will assist your business in every aspect, including the applicable corporate tax rates, and ensure its compliance with the UAE tax laws. Contact us to learn more and protect your business from financial distress.
