Simple Guide to Corporate Tax in the UAE

In January 2022, the UAE Ministry of Finance shared that Corporate Tax would start across the UAE. This tax rule would start from June 1, 2023. The tax applies based on the business’s financial year starting after June 1, 2023. Corporate Income Tax is a direct tax charged on the money a company earns. Many countries like the US, India, France, and other Gulf countries like Oman, Kuwait, and Qatar already have this tax. The UAE has the lowest tax rate of 9% compared to these countries. In 2021, the Gulf countries agreed to have a minimum corporate tax of 15% at the G7 meeting.

The Federal Tax Authority will handle the tax collection and rules, while the Ministry of Finance will manage international tax agreements and information sharing.

Having Corporate Tax helps countries keep their economy strong. The UAE wants to use this tax to make businesses follow good rules and help the country grow. This tax system helps the UAE reach its big goals for the economy.

By adding Corporate Tax, the UAE wants to become one of the top places in the world for businesses and investments. It also helps the UAE follow global rules about tax fairness and stop bad tax practices.

Which Businesses or Incomes Don’t Pay Corporate Tax?

If a business makes more than 375,000 AED in profit, it has to pay corporate tax. But some businesses or incomes don’t need to pay this tax.

Here are the ones that don’t have to pay corporate tax:

• People who earn money from jobs, real estate, or shares that are not part of a UAE business.
• Foreign investors who don’t run a business in the UAE.
• Free zone businesses that follow the rules keep their tax benefits.
• Capital gains and dividends from qualifying shares are tax-free.
• Some group transactions and company changes that meet certain rules.

Who Needs to Pay Corporate Tax in the UAE?

Businesses with net profits over 375,000 AED have to pay corporate tax. This includes UAE companies, companies run in the UAE, and some free zone businesses. Small businesses and startups with profits under 375,000 AED pay 0% tax.

The ones that don’t need to pay tax include:

• Companies that extract natural resources (they follow Emirate-level tax rules).
• UAE companies earning dividends or capital gains from qualifying shares.
• Group transactions and reorganizations that meet the rules.
• Salary or job income from public or private sectors.
• Interest and income from personal bank accounts.
• Foreign investors’ earnings like dividends, interest, or royalties.
• People who invest in real estate or stocks on their own.

Expenses That Can Be Deducted in Corporate Tax

Some business costs can be taken off when calculating corporate tax, but some can’t. Costs that can’t be deducted are added back to calculate the taxable income.

Expenses that can be deducted:

• Depreciation or amortization of assets.
• Business setup, license renewal fees, and government charges.
• Non-recoverable VAT.
• 50% of client entertainment costs.
• Interest on debt funding up to 30%.
• Loans to related parties if for real business purposes.
• Payments to mainland branches of free zone entities.

Expenses That Can’t Be Deducted in Corporate Tax

Some expenses can’t be deducted to stop companies from taking too many deductions. Only costs needed to make taxable income are allowed.

Expenses that can’t be deducted:

• Costs not linked to the business.
• Costs related to making exempt income.
• Losses not connected to the business.
• Extra costs listed by the Cabinet.

Corporate Tax Rates in the UAE

• 0% for income up to AED 375,000.
• 9% for income over AED 375,000.
• Extra tax for big multinational companies (yet to be announced).

CT Registration and Filing Returns: How to Calculate and File

Corporate tax is paid every year, and businesses must file a tax return with the Federal Tax Authority.

The taxable income starts with the net profit shown in the financial statements. Businesses then adjust for income that is tax-free and expenses that can’t be deducted.

For example, if a business earns 575,000 AED, the tax would be 18,000 AED ((575,000 – 375,000) * 9%).

Filing a tax return means calculating the right tax and keeping good records.

Documents Needed for CT Registration and Filing Returns

Businesses must keep good records for tax purposes. These records help the Federal Tax Authority check the tax returns.

Needed documents:

• Trade license copies.
• Passport copies of owners or partners.
• Emirates ID copies of owners or partners.
• Power of Attorney or Memorandum of Association.
• Contact details (phone and email).
• Company address and P.O. Box.
• Annual financial audit report.

Tax Groups and Foreign Investors

Companies can form a tax group and file one tax return if they meet the rules. Foreign investors can use foreign tax paid as credit against UAE tax.

Annual Filing and Loss Carryforward

Tax returns are filed yearly, with no need for advance payments. Extra tax losses can be carried forward to reduce future taxable income if certain rules are met. This applies to both individual companies and tax groups.

Free Zone Companies and Corporate Tax

Mainland businesses must follow corporate tax rules. Free zone businesses must register and file tax returns but may get tax benefits. Qualified Free Zone Persons (QFZP) follow special rules and might pay 0% tax on some income.

Ways to Reduce Tax Burdens

Companies can take steps to lower tax costs, such as:

• Speeding up asset depreciation.
• Investing in tax-efficient assets like corporate bonds.
• Using tax-efficient mutual funds.
• Investing in long-term assets.
• Claiming all eligible expenses.
• Offering employee benefits like stock options.

Things to Check Before Filing Taxes

• Give correct information in tax returns.
• Stay updated on tax rules.
• Plan taxes based on business goals and future changes.
• Do proper tax planning to avoid overpaying.

Free Zones and Taxes

A “Qualifying Free Zone Person” (QFZP) is a free zone company or branch that:

• Has enough presence in the UAE.
• Earns qualifying income.
• Follows transfer pricing rules.
• Meets other ministerial conditions.

QFZPs may pay 0% tax on qualifying income but can choose to pay the normal rate.

How Businesses File Taxes in the UAE

UAE companies must keep transfer pricing documents and share them with the FTA within 30 days if asked. They also need to submit a transfer pricing disclosure form with the tax return.

Impact of Corporate Tax on Investments

The Gulf Cooperation Council (GCC) is still a great place for foreign investors due to low taxes and good locations. Before corporate tax, GCC countries used other fees for revenue.

Even with corporate tax, the UAE remains attractive because of its low tax rate, modern infrastructure, and high living standards.

Corporate tax in the UAE applies to profits over 375,000 AED and started in June 2023.

How Mubarak Al Katbi Can Help

Mubarak Al Katbi is a well-known audit firm in Dubai. They offer services like accounting, auditing, VAT, business advice, payroll, and more. Mubarak Al Katbi helps clients meet financial rules, do audits, and keep records. Contact Mubarak Al Katbi for more help.