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UAE Corporate Tax

Historically, the United Arab Emirates (UAE) has been one of the most talked about jurisdictions globally when it comes to no taxes. The favorable tax environment of UAE has been a major factor in attracting entrepreneurs to expand their business and invest in UAE. Over the past few years, the tax landscape in the UAE has undergone significant changes. The introduction of Value Added Tax (VAT) in 2018 was followed by the implementation of Economic Substance Rules (ESR) and Country-by-Country Reporting (CbCR) regulations and now the new Corporate Tax in the UAE is introduced.

One of the major sources of income for the government is tax and UAE has also stepped into the realm of taxation for increasing its revenue and for promoting equal distribution of income in its territory. Out of the several tax regimes in the UAE, this write up is intended to share a brief on the new Corporate Tax in the region.

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Corporate Tax:

The introduction of Corporate Tax is a significant shift in the UAE's economy. The Ministry of Finance (MoF), on 31st January 2022, announced a new federal corporate tax which was effective from 1st June 2023. The corporate tax law introduced by the UAE MoF are among the lowest compared to other countries where companies are taxed on their profits i.e; 9% tax rate.

The CT law provides two specific tax rates for businesses. Entities with a taxable income of less than or equal to AED 375,000, or as well as *Qualifying Income of a Qualifying Free Zone person, shall be taxable at the rate of 0%. Whereas the entities with a taxable income of more than AED 375,000 subject to a tax rate of 9%.

The UAE corporate tax is in alignment of the best practices followed worldwide. In one of the clarifications through the FAQs released by the UAE Tax Authorities is that until the implementation of Pillar Two in UAE, the companies and other entities shall be chargeable to tax as specified in the corporate tax law (CT law).

This corporate tax is applicable to all businesses operating within all seven Emirates. However, following businesses or business activated are exempt from the scope of corporate tax in UAE:

  • Government Entity.
  • Any person is engaged in extracting/non-extracting business including, exploring, extracting, removing or exploiting the UAE’s natural resources subject to meeting the specified conditions.
  • Qualifying Public Benefit Entity. The purpose of such public benefit entity can be religious, charitable, artistic, educational, etc.
  • Qualified Institutional Funds, on fulfilment of specified conditions.
  • Public pension or social security fund, any entity which is wholly owned by exempt person.

Transfer Pricing Rules:

Under Corporate Tax law, the OECD’s transfer pricing rules shall also be applicable to related entities. The transfer pricing rules mandates every transaction to be conducted on arm’s length price between related parties and such transactions should be supported by proper documentation. These rules also increased compliance burden on the related parties.

Taxable Person and Tax Base:

For the purpose of taxability of income of persons engaged in business activity, the tax base is determined on the basis of their residential status.

  • Resident Person: It includes an entity that is incorporated in UAE (including a Free Zone entity), any foreign entity which is effectively managed and controlled in UAE, or any person or an individual who conducts any business or business activity in UAE.
  • Non-Resident Person: An entity having Permanent Establishment (PE) in UAE, any person who derives any income sourced from UAE, or any person having Nexus in UAE by virtue of having immovable property situated in the UAE.

Permanent Establishment (“PE”):

The Corporate Tax law of UAE defines PE in alignment of the definition given in the OECD Model Tax Convention. OECD’s commentary on the Model Tax Convention can be helpful to determine whether an entity have PE in India or not.

Generally, an entity is considered to have a Permanent Establishment (PE) in the UAE if it maintains a fixed or permanent place of business, provided that such fixed or permanent place is not exclusively used for preparatory or auxiliary activities. A PE exposure in the UAE can lead to a taxation of all the income attributable to the operations conducted in the UAE at the rate of 9% in excess of the taxable income of AED 375,000 ~ USD 100,000 (approx).

How can AKM Global support here?

  • Eligibility and Compliance assessment:It is important to determine the business’s eligibility and obligation under UAE Corporate Tax law after assessing the business activities, structures and revenue streams to ensure accurate compliance. We can help you with the detailed impact assessment covering every division of your business with the qualitative and quantitative report.
  • Document Preparation:We will assist you to prepare all necessary documents required for corporate tax registration in alignment with the requirements of Federal Tax Authority.
  • Transfer Pricing Compliances: We can undertake detailed transfer pricing benchmarking for all the international transactions between the associated enterprises in the group.
  • Post-registration support: After registration process is completed, we will provide you post-registration services such as tax advisories, PE risk assessment, corporate restructuring and other tax filings relate to your business.