Understanding Corporate Tax in the UAE: A Comprehensive Legal Guide to Compliance

Introduction

The introduction of Corporate Tax in the UAE marks a pivotal development in the country’s economic and fiscal framework. The implementation of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses came into effect on June 1, 2023, signifying the UAE’s commitment to aligning with global tax standards and addressing international tax reforms. This guide provides a detailed overview of corporate tax in the UAE, including its scope, compliance deadlines, and implications for businesses.

When Did Corporate Tax Come into Force?

Corporate tax in the UAE was officially introduced under Federal Decree-Law No. 47 of 2022, which governs the taxation of businesses and corporations. The law was published in December 2022, and it came into effect on June 1, 2023. This decree establishes the legal foundation for the corporate tax regime and provides comprehensive guidance on the responsibilities of businesses operating within the UAE. The implementation of corporate tax aligns the UAE with the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, ensuring compliance with international tax standards.

Scope of Corporate Tax in the UAE

Corporate tax applies to most business activities conducted by legal entities in the UAE, whether incorporated in the mainland or within free zones. However, certain exceptions and exemptions are specified under Article 4 of the decree. These include: 

Government Entities: Exempt under Article 4.1 as they are engaged in activities of a sovereign nature.

Investment Funds: Exempt under Article 4.2, provided they meet certain qualifying conditions.

Free Zone Businesses: Under Article 18, qualifying free zone businesses can benefit from a 0% tax rate on income earned from qualifying activities, provided they adhere to the regulatory requirements.

Additionally, the decree clarifies that natural persons (i.e., individuals) are not subject to corporate tax unless they are engaged in business activities that require a commercial license. This distinction protects income earned by individuals from employment, real estate investments, and other personal activities.

Who is Subject to Corporate Tax?

Under Article 11, the decree outlines which entities and individuals are subject to corporate tax:

UAE-incorporated companies: All entities established in the UAE that conduct business, including those registered in free zones, are subject to corporate tax.

Foreign legal entities: Foreign businesses with a “permanent establishment” in the UAE are also required to register and pay corporate tax. The definition of a permanent establishment, as per Article 14, follows international standards, ensuring that foreign companies conducting ongoing business in the UAE are taxed on their UAE-sourced income.

Natural persons conducting business: Sole proprietorships and individual businesses with a commercial license are subject to corporate tax under the decree.

The law does not apply to “individuals' employment income”, “capital gains” from real estate investments (unless conducted through a business entity), or other passive income streams, providing clarity on the scope of taxable entities.

Corporate Tax Rates

The UAE’s Corporate Tax regime is designed to remain competitive, ensuring that businesses of all sizes can thrive. The rates outlined in Article 7 are as follows:

0% tax on taxable income up to AED 375,000. This threshold is intended to support small and medium-sized enterprises (SMEs) and startups, providing them with a tax-free environment for growth.

9% tax on taxable income exceeding AED 375,000. This rate is applicable to larger companies and businesses with substantial income.

Different rates apply to “large multinational corporations” that meet the criteria under the “OECD BEPS 2.0 framework”, primarily targeting firms with significant global profits and ensuring that they pay a fair share of tax in the jurisdictions where they operate.

The introduction of a 9% corporate tax rate remains one of the lowest in the world, reinforcing the UAE’s reputation as a business-friendly environment while maintaining its global competitiveness.

Deadlines for Registration and Filing

Compliance with the Corporate Tax law requires businesses to register with the Federal Tax Authority (FTA) and file their tax returns within specified deadlines. The deadlines, as per Ministerial Decision No. 97 of 2023, are as follows:

Registration Deadline: Businesses are required to register for corporate tax before the start of their first tax year. For most businesses, this deadline will fall between “June 1, 2023”, and the “end of 2023”.

Filing Deadline: The first corporate tax returns will need to be filed in 2024, covering the financial year that began on or after June 1, 2023. Businesses will have “nine months” from the end of their financial year to file their corporate tax returns. For example, if a company’s financial year ends on “December 31, 2023”, it must file its return by “September 30, 2024”.

Non-compliance with the registration or filing deadlines could lead to penalties as per the Corporate Tax Law and Federal Law No. 7 of 2017 on Tax Procedures. Penalties include late registration fines and additional penalties for underreporting or failure to file returns.

Tax Exemptions and Incentives

The law provides for several exemptions and incentives aimed at fostering business growth and innovation. Some key exemptions include:

Free Zone Businesses: Qualifying businesses in free zones can continue to benefit from 0% tax on income derived from transactions within the free zone or with foreign parties, provided they comply with regulatory requirements.

Small Businesses Relief: The government has introduced a “Small Business Relief” program under Cabinet Decision No. 73 of 2023, allowing businesses with revenues below a specified threshold to be exempt from corporate tax.

Charitable and Public Benefit Organizations: Under Article 9, entities registered as charities or public benefit organizations are exempt from corporate tax, provided they adhere to the relevant regulatory conditions.

Preparing for Corporate Tax Compliance

Businesses operating in the UAE must take several steps to ensure compliance with the new corporate tax law:

Registration: All businesses subject to corporate tax must register with the FTA before the deadlines. Failure to do so can result in penalties.

Financial Record-Keeping: Companies must maintain accurate and detailed financial records, as required under Federal Law No. 7 of 2017, to ensure accurate reporting of taxable income.

Tax Return Filing: Businesses should prepare for the first filing of corporate tax returns in 2024. Ensuring that tax returns are filed within the stipulated deadline is critical to avoiding penalties.

Conclusion

The introduction of corporate tax in the UAE represents a significant step toward integrating with global financial and tax standards while maintaining a business-friendly environment. By understanding the scope, requirements, and deadlines outlined in Federal Decree-Law No. 47 of 2022, businesses can ensure full compliance and avoid potential penalties. It is essential for companies to act promptly, register with the Federal Tax Authority, and prepare for their first tax filings in 2024. With proper planning and professional advice, businesses can navigate the new corporate tax regime effectively, minimizing their tax liabilities while staying compliant with the law.

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