The year 2022 marked a key turning point in the economic history of the United Arab Emirates. This significant moment is highlighted by the announcement of Corporate Taxes. Once known for being a tax-free haven, the UAE’s shift to a taxable environment represents a major change for businesses and individuals. And now in year 2024, most, if not all, are in their first Tax years. The introduction of value-added tax in 2018 hinted at this change, leading to the start of Corporate Taxation on June 1, 2023. The Corporate Tax rate is set at a low 9%, placing the UAE in a competitive position on the global economic stage. I would like to explain the key aspects of the UAE’s corporate tax system in this article, providing detailed insights and exploring its wider implications.
Highlights of UAE Corporate Tax: A Shift from a Tax-Free Haven to a Tax-Friendly Economy
The UAE has traditionally been a top choice for international businesses due to its tax-free status. Despite other fees like business registration and trade licensing, the lack of direct or indirect taxation made the UAE a popular spot for maximizing profits. However, to support sustainable economic growth and global integration, the UAE began introducing tax reforms and building a modern regulatory system. Even after the imposition of Corporate Tax, the UAE still maintains a tax-friendly status in the global economy. This is due to the following reasons:
Low-Tax Rates
The standard Corporate Tax rate in the UAE is 9%, and the value-added tax (VAT) rate is 5%. These rates are significantly lower than in many other economies. For example, the UK’s VAT rate is 20%, and its Corporate Tax rate ranges from 19% to 25%, depending on profit levels. These lower tax rates make the UAE an appealing location for businesses seeking a reduced tax burden. Corporate Tax rates in the UAE are structured as 0% for taxable income up to AED 375,000 in a tax year & 9% for taxable income over AED 375,000 in a tax year.
The basic pillars of Corporate Tax are as follows:
- All businesses, including the Freezones, must register for Corporate Tax.
- Businesses registered for VAT would still need to register for Corporate Tax separately.
- Taxpayers need to maintain records as per the accepted accounting standards.
- Accounting records must be maintained for 7 years.
- All businesses must file an annual return with the FTA, even if they qualify for tax relief.
- The due date to submit CT Return and pay the liability is 9 months from the end of the financial year.
Diversified Economy
From tourism to real estate, finance to logistics, the UAE economy is diversified enough to offer a competitive and attractive environment for businesses. The diversification ensures that businesses have ample opportunities across various sectors, thus mitigating the impact of taxation on any one sector.
Strategic Location
The UAE’s strategic location at the crossroads of East and West provides a gateway to the Middle East, Africa, Asia, and beyond. Companies in the UAE can tap into a large consumer base within a favourable business environment, enhanced by lower tax rates. This combination makes the UAE a highly attractive location for businesses.
Stable Political Environment
The key to business success is stability in the region where it operates. The UAE provides a politically stable and well-regulated environment, giving businesses confidence and security. This stability, along with a strong legal framework, makes the UAE a highly attractive location for businesses.
Exemptions and Incentives for Businesses
Even though the UAE has low tax rates, businesses can still benefit from additional incentives such as tax reliefs, tax credits & so on. Here are a few examples of these incentives:
1. Qualified Free-Zone Persons (QFZPs)
QFZPs (Qualifying Free Zone Persons) can benefit from a 0% Corporate Tax rate on qualifying income, provided they meet specific criteria. A QFZP is a free-zone business that meets the following requirements:
- Maintains adequate substance.
- Derives qualifying income.
- Has not elected to be subject to 9% Corporate Tax.
- Complies with arm’s length principle and transfer pricing documentation requirements.
- Meets any other conditions as may be prescribed by the authorities:
a. Deminis Requirement
b. Maintenance of Audited Financial Statements
2. Small Business Relief for SMEs
Among various reliefs, Small Business Relief (SBR) is significant. It supports small businesses, contributing to economic growth and job creation. As per SBR, the taxable person may elect to be treated as having not earned any taxable income in the relevant and preceding tax years.
Following are the major conditions to qualify for SBR:
- The revenue threshold for the current and previous tax periods must not exceed AED 3,000,000 for each period.
- This threshold applies to tax periods from June 1, 2023, through December 31, 2026.
- If a business’s revenue exceeds AED 3 million in a relevant or preceding tax period, it cannot claim SBR.
3. Foreign Tax Credit
A UAE resident or non-resident with a permanent establishment in the UAE can be subject to tax on income from abroad. To reduce double taxation, the UAE tax law exempts certain types of foreign-sourced income. Additionally, a foreign tax credit can be used to lower or offset double taxation. This credit lets the taxpayer deduct taxes paid in another country from their UAE tax liability.
To qualify for the foreign tax credit, these conditions must be met:
The tax in the foreign country must be legally imposed and payable to its government.
- The foreign tax laws must be enforceable and require mandatory payment.
- The foreign tax must be based on net income or profit, which is the total income after deductions.
Compliance and Administrative Obligations
Businesses in the UAE must maintain proper records and documentation. This includes accurate financial records, invoices, receipts, and other documents supporting tax filings. These thorough records not only help businesses comply with tax regulations but also allow them to monitor their financial performance. Moreover, it’s crucial to file tax returns accurately and on time to meet regulatory requirements. Companies must comply with the Federal Tax Authority (FTA) deadlines for submitting tax returns and paying taxes. Since Corporate Tax (CT) is new, the UAE has issued several Cabinet and Ministerial Decisions to guide businesses through the tax process. This reflects the government’s commitment to a robust tax system, promoting both business growth and a stable economy.
Penalties
Businesses can face various tax penalties depending on the type of violation. Some are a percentage of a certain amount, while others are lump-sum fines.
Corporate Tax Registration: Failure to submit a registration application on time results in a penalty of AED 10,000.
Non-cooperation with Tax Auditor: If a taxable person or legal representative fails to cooperate, the penalty is AED 20,000.
Improper Record Keeping: Failure to maintain proper records leads to a penalty of AED 10,000. A repeat offence within 24 months incurs a penalty of AED 20,000.
Late Tax Payments: A delay in tax payment triggers a 14% annual penalty, calculated monthly from the day after the due date.
Other Penalties: Delays in tax return submission, incorrect returns, and delays in deregistration can all result in penalties.
Businesses should comply with tax laws to avoid fines. A knowledgeable tax consultant is advisable to help maintain compliance and prevent these penalties.
Deadlines
Corporate Tax Registration
1. Timeline for Corporate Tax Registration of Resident Juridical Persons
Resident Juridical Persons incorporated, established, or recognized before March 1, 2024 must submit their Tax Registration Application within the following time limits:
Note: If a Juridical person has more than 1 license, the license with the earliest issuance date shall be used
Resident Juridical Persons that are incorporated, established, or recognized on or after March 1, 2024 submit a Tax Registration Application according to the following timelines:
2. Timeline for Corporate Tax Registration of Non-Resident Persons
A juridical person, that is a Non-Resident Person prior to the effective date of this Decision, shall submit a Tax Registration application in accordance with the following table:
A juridical person, that is a Non-Resident Person after the effective date of this Decision, shall submit a Tax Registration application in accordance with the following table:
3. Timeline for the Corporate Tax Registration for Natural Persons
A natural person conducting a Business or Business Activity in the State shall submit Tax Registration application in accordance with the following table:
Corporate Tax Return
The deadline to submit the Corporate Tax Return and pay the tax liability is within 9 months following the end of the financial year.
Revenue Generation
Governments are focusing on diversifying revenue sources to strengthen economic stability and improve public services. Corporate taxes play a key role in this, providing funds for healthcare, education, infrastructure, and social welfare, which are vital to regional economies. With the global decline in traditional energy sources, countries like Saudi Arabia are shifting to broader economic models. The UAE is following suit with initiatives like the Dubai Industrial Strategy 2030 and the UAE Vision 2030, which align with the United Nations’ Agenda 2030. These efforts show the UAE’s commitment to using tax revenue to drive economic growth and ensure lasting prosperity.
International Cooperation
Corporate tax might seem like a local undertaking, but it plays a key role in promoting international cooperation among countries. This collaboration helps prevent tax evasion, profit shifting, and base erosion by multinational corporations. Tax treaties, global tax standards, and exchange agreements contribute to a more transparent and honest global tax system. The UAE is geographically central, linking the Western world with eastern and Far Eastern countries. This position offers companies operating in the UAE a strategic advantage with greater business opportunities, as the UAE maintains strong relations with many countries worldwide.
CONCLUSION
In summary, the key aspects of UAE corporate tax indicate a significant shift from its tax-free “haven” status to a tax-friendly economy. Despite this change, the UAE remains attractive to businesses thanks to its low tax rates, diversified economy, strategic location, and stable politics. The availability of tax reliefs and incentives makes the business environment even more appealing. While corporate tax brings compliance requirements, it encourages a culture of accountability and contributes to public funding for essential services and economic diversification projects. It also strengthens international cooperation and drives up the demand for tax consultants. Overall, this move reflects the UAE’s commitment to responsible fiscal policy and sustainable economic growth.
