Key Features of Corporate Tax in UAE

 | Updated on: February 29, 2024

The United Arab Emirates(UAE) once earned a reputation for its tax-free policies, drawing businesses and professionals worldwide. Nonetheless, there's been a notable adjustment in its tax policy. 

Introducing the new UAE corporate tax—a development sparking interest among businesses. While not all enterprises are feeling its impact, understanding its implications is key for those navigating these changes. 

Corporate tax rate

On May 8, 2023, the UAE Cabinet of Ministers enacted Cabinet Decision No. (49), imposing a 9% corporate tax on specific businesses. This measure is perceived as a strategic initiative aimed at broadening the UAE's revenue streams beyond oil, while simultaneously upholding its position as a pivotal commercial center in the region. 

As per Ministry of Finance, CT rates are: 

• 0% for taxable income up to AED 375,000 
• 9% for taxable income above AED 375,000 

How is corporate tax calculated in UAE? 

Corporate tax UAE is calculated at 9% of the net profit shown in the company's financial statements after deducting all applicable deductions and excluding the exempted income. Any foreign taxes paid will also be allowed for reduction from the profit shown in the financial statement. 

The net profit derived after all deductions will be considered as taxable income. The 9 % corporate tax will be levied only if the taxable value exceeds AED 375,000. 

Taxable entities in the UAE 

The United Arab Emirates (UAE) tax framework identifies several categories of taxable persons, encompassing a broad spectrum of entities and individuals engaged in economic activities within its borders. Taxable entities in the UAE include: 

Resident person: 

• A juridical entity that is incorporated, established, or recognized within the UAE, including entities within free zones, or a foreign entity that is effectively managed and controlled within the UAE. 
• A natural person engaging in business or commercial activities within the UAE. 

Non-resident person: 

• An entity or individual without resident status that either has a permanent establishment in the UAE, derives income sourced within the UAE, or has a nexus in the UAE as defined by Cabinet Decision. 
• A branch of a non-resident entity in the UAE is considered the same taxable person for taxation purposes.

Exempt person and incentives 

Under UAE Corporate Tax law, certain entities are exempt from taxation, provided they meet specific conditions: 

• Government entity: Entities that are part of the government structure. 
• Government-controlled entity: Entities under significant government ownership or control. 
• Entities engaged in certain extractive businesses: Those involved in the extraction of natural resources, subject to specific criteria. 
• Entities engaged in certain non-extractive natural resource businesses: Those involved in activities related to natural resources but not directly in their extraction. 
• Certain qualifying investment funds: Investment funds that meet predefined eligibility criteria. 
• Qualifying public benefit entity: Entities that serve the public interest and comply with certain conditions. 
• Pension or social security fund: Funds established for pension or social security purposes, adhering to specific requirements. 
• Other specified persons: Additional entities or individuals as determined by a Cabinet decision. 

Small Business Relief 

Small businesses that generate revenue below a predetermined threshold are eligible for 'small business relief,' which exempts them from taxable income for the applicable tax period. This relief also allows for simplified compliance procedures. To take advantage of this relief, eligible businesses must formally elect this option with the Federal Tax Authority (FTA). 

Applicability to free zones 

The UAE Corporate Tax Law introduces a "Qualifying Free Zone Person" (QFZP), defined as a company or branch in a free zone that: 

• Maintains substantial presence in the UAE. 
• Earns income (to be specified through a Ministerial Decision). 
• Complies with transfer pricing rules. 
• Fulfills additional criteria set by Ministerial Decisions. 

A QFZP may benefit from a 0% Corporate Tax rate on qualifying income but can elect to forego this preferential regime and be subject to the standard CT rate 

Taxable income 

Taxable income under the UAE Corporate Tax Law is primarily based on the accounting income reported in a company's standalone financial statements, subject to specific adjustments: 

• Adjustments for unrealized gains or losses related to capital items. 
• Adjustments for income and expenses incurred by an exempt entity in the course of its exempt activities. 
• Inclusion of dividend income and other profit distributions received from resident entities. 
• Application of the participation exemption to dividend income and capital gains. 
• Inclusion of income from foreign permanent establishments (PE) taxed at a minimum rate of 9%. 
• Inclusion of income derived by non-residents from operating or leasing aircraft and ships in international transportation. 
• Adjustments for gains or losses from reorganizations or intragroup transfers of assets/liabilities, under certain conditions. 
• Net interest expenditure limited to 30% of EBITDA. 
• Deductibility of entertainment-related expenses up to 50% of the incurred amount. 

How TallyPrime can help: 

In the dynamic landscape of business operations, especially with the complexities of corporate tax law and VAT compliance, selecting the right business management software becomes a critical task for ensuring both compliance and operational efficiency. TallyPrime emerges as a robust solution, designed to meet the evolving needs of your business. This software is engineered to facilitate a seamless management experience across various business dimensions. 

Key Features of TallyPrime: 

• Instant business reports: Quickly generates detailed accounting, inventory, and financial reports, aiding in accurate corporate tax calculation. 
• VAT compliance: Simplifies VAT return filing and invoice generation, ensuring compliance with VAT regulations for various transactions. 
• Accurate account management: Maintains your account books with high accuracy, streamlining the accounting process. 
• Flexible transactions: Adapts to different purchase and sales workflows, offering operational flexibility. 
• Variable pricing: Supports multiple pricing levels for different customer segments, such as wholesale and retail.