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A competitive CT regime based on international best practices is expected to cement the UAE’s position as a leading global hub for business and investment and accelerate the UAE’s development and transformation to achieve its strategic objectives.
Introducing a CT regime also reaffirms the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices.
Most countries in the world have a comprehensive CT regime, including most of the countries in the Middle East.
The UAE CT regime will become effective for financial years starting on or after 1 June 2023.
Examples:
● A business that has a financial year starting on 1 July 2023 and ending on 30 June 2024 will become subject to UAE CT from 1 July 2023 (which is the beginning of the first financial year that starts on or after 1 June 2023).
● A business that has a financial year starting on 1 January 2023 and ending on 31 December 2023 will become subject to UAE CT from 1 January 2024 (which is the beginning of the first financial year that starts on or after 1 June 2023).
UAE CT applies to juridical persons incorporated in the UAE and juridical persons effectively managed and controlled in the UAE, as well as to foreign juridical persons that have a permanent establishment (see “Foreign persons”) in the UAE (see question 20 ‘Who is considered resident for UAE CT purposes?’).
Individuals will be subject to CT only if they are engaged in a business or business activity in the UAE, either directly or through an unincorporated partnership or sole proprietorship. A Cabinet Decision will be issued in due course specifying further information on what would bring a natural person within the scope of UAE CT.
Yes – the UAE CT does not differentiate between nationality or residence. Juridical persons that are incorporated or resident in the UAE, or that have a permanent establishment in the UAE, will be subject to UAE CT. This applies irrespective of the residence and nationality of the individual founders or (ultimate) owners of the entity.
Yes. The UAE CT is a Federal tax and will therefore apply across all the Emirates.
Businesses engaged in the extraction of the UAE’s natural resources and in certain non-extractive activities that are subject to Emirate level taxation will be outside the scope of UAE CT, subject to meeting certain conditions.
Other businesses may be subject to both CT and Emirate level taxation. Emirate level taxes paid will not be able to be credited against or otherwise reduce the amount of CT payable.
No, CT and VAT are two different types of taxes. Both will continue to apply in the UAE.
If you are a registered business for VAT, you will have to pay VAT and CT separately. If your business is not VAT registered you may still have to pay CT.
No, CT and Excise Tax are two different types of taxes. Both will continue to apply in the UAE.
Yes. Applicable service fees will continue to be payable to the relevant Emirate and Federal Governments.
Business set up, license renewal and other Government fees and charges incurred wholly and exclusively in the ordinary course of business are deductible expenses for UAE CT purposes.
In-force International agreements (including international agreements for the avoidance of double taxation) to which the UAE is a party should be considered under the UAE CT regime. In case of a conflict between the Corporate Tax Law and an international agreement with respect to the right to tax a certain item of income, the relevant international agreement may limit the application of UAE CT.
The Federal Tax Authority will be responsible for the administration, collection and enforcement of UAE CT and other federal taxes. For the purpose of the administration, collection and enforcement of CT, the Federal Tax Authority will issue guides, respond to clarifications and provide awareness as required.
The Ministry of Finance will remain the ‘competent authority’ for purposes of bilateral/multilateral tax agreements and the international exchange of information for tax purposes. The Ministry of Finance also has the authority to issue further guidance and implementing regulations for UAE CT and other federal taxes.
To assess what the UAE CT regime means for your business, as a starting point, you should:
The Corporate Tax Law can be found at this link
The terms “Business” and “Business Activity” as defined in the Corporate Tax Law identify when the activities of certain persons give rise to a UAE CT liability by considering the person to be a taxable person.
“Business” means any economic activity, whether continuous or short term, conducted by any person. It is implied that a business is conducted with a profit motive, and that there is the existence of some system and organisation to the activity conducted. However, a business or business activity for UAE CT purposes does not lose its identity simply because it does not make a profit.
For the application of the Corporate Tax Law to companies and other juridical persons, all activities conducted and assets used or held will generally be considered activities conducted, and assets used or held, for the purposes of a “Business”.
Individuals can earn income from wages and salaries, investments or from practising a commercial, industrial or professional activity, either directly or as sole proprietor of a business. For natural persons, a Cabinet Decision will be issued in due course specifying further information on what
would bring a natural person within the scope of UAE CT.
The following persons are exempt from UAE CT, either automatically or by way of application:
UAE incorporated companies such as LLCs, PSCs, PJSCs, and other UAE juridical persons will be subject to CT as resident persons.
An entity that is incorporated in the UAE will automatically be considered a ‘resident’ person for UAE CT purposes. Equally, an individual who is engaged in a business or business activity in the UAE will also be considered a resident person for UAE CT purposes.
A foreign company may be treated as a resident person for UAE CT purposes if it is effectively “managed and controlled” in the UAE. All facts and circumstances must be considered in determining where a company is effectively managed and controlled, but a relevant indicator may include the place where the strategic decisions affecting the business are made.
Under the Corporate Tax Law, a juridical person is considered a non-resident if it is incorporated in a foreign country and is effectively managed and controlled outside the UAE. A natural person is considered a non-resident for UAE CT purposes if he or she is not engaged in a taxable business or business activity in the UAE.
UAE resident juridical persons will be subject to UAE CT on their income source from both the UAE and from abroad, although certain income earned through foreign subsidiaries and income of foreign branches that is subject to tax in another jurisdiction will generally be exempt from UAE CT. Further details of these exemptions are set out under questions 64 ‘Will the income of foreign branches of a UAE business be subject to UAE CT?’ and 88 ‘What is the participation exemption regime?’.
Where income earned from abroad is not exempt, relief for income taxes paid in the foreign jurisdiction can be taken as a credit against the CT payable in the UAE on the relevant income to prevent double taxation. (see below under ‘Tax Credits’).
Non-resident persons will only be subject to UAE CT on:
● income from their Permanent Establishment in the UAE; or
● income sourced in the UAE (subject to a 0% withholding tax).
The taxable income for a Tax Period will be the accounting net profit (or loss) of the business, after making adjustments for certain items specified in the Corporate Tax Law.
The accounting net profit (or loss) of a business is the amount reported in its financial statements prepared in accordance with internationally acceptable accounting standards.
Adjustments to the accounting net profit (or loss) will need to be made for the following items:
Given CT is imposed on an annual basis, it is necessary to specify the “Tax Period”. The Tax Period will normally be the Gregorian calendar year (i.e. from 1 January to 31 December), unless the business applies a different 12-month period for preparing its financial statements.
Taxpayer | Applicable CT rate |
Individuals and juridical persons | 0% for taxable income up to and including AED 375,000 (this amount is to be confirmed in a Cabinet Decision) 9% for taxable income exceeding AED 375,000 |
Qualifying Free Zone Persons (see further information below) |
0% on qualifying income 9% on taxable income that does not meet the qualifying income definition |
The CT liability will be calculated as follows:
● Taxable income of AED 375,000 (amount to be confirmed in a Cabinet Decision) subject to CT at 0%: AED 375,000 x 0% = AED 0
● Taxable income exceeding AED 375,000 (amount to be confirmed in a Cabinet Decision) subject to CT at 9%: (AED 1,000,000 – AED 375,000) = AED 625,000 x 9% = AED 56,250
The UAE CT liability for the Tax Period will be AED 0 + AED 56,250 = AED 56,250
The final amount of UAE CT payable can be reduced by available tax credits (see below under ‘Tax Credits’ section).
In addition to a 0% CT rate for taxable income up to and including AED 375,000, small businesses with revenue below a certain threshold can claim ‘small business relief’ and be treated as having no taxable income during the relevant Tax Period and may be subject to simplified compliance obligations. To claim small business relief, an election must be made to the FTA.
Any UAE resident juridical person or individual with revenues below the threshold defined by the Minister and that meets any other conditions that may be set, can claim small business relief.
Revenue is the gross amount of income derived in a tax period from sales of inventory and properties, services, royalties, interest, premiums, dividends and any other amounts, before deducting any type of costs or expenditure. In the context of income from sales or services, gross income means gross revenues from sales or services without deducting the cost of goods sold or the cost of services.
The term “Natural Person” in the Corporate Tax Law means an individual.
Only individuals who engage in a business or business activity as per a Cabinet Decision that will be issued in due course will be subject to UAE CT. Individuals engaged in other activities will generally be outside the scope of the CT regime.
For certain types of business activities, natural persons can form a sole proprietorship or civil company. For CT purposes, these entities will be treated as the natural person or persons owning them.
The taxable income of a natural person that is engaged in a business in the UAE is all the income that is derived from that business. This would include income earned from outside the UAE insofar as it relates to the business activity conducted in the UAE.
The individual will file one CT return covering all their business activities that are within the scope of UAE CT.
UAE CT will not apply to an individual’s salary and other employment income (whether received from the public or private sector). Employment may include a continuing service relationship where all or most of the income of the individual is derived from one customer, and the service income is essentially remuneration for the natural person’s labour.
Self-employed persons would only be subject to UAE CT if their activity is a taxable business or business activity as per the Cabinet Decision that will be issued in due course. Even if the self-employed person is considered to be undertaking a taxable business or business activity, no CT would be payable on the first AED 375,000 of net income / profit earned from the activity, and further relief (small business relief) may be available to the self-employed person and other individual entrepreneurs.
Interest and other personal investment and savings income earned by an individual in their personal capacity should not be subject to UAE CT.
UAE and foreign individuals will not be subject to UAE CT on dividends, capital gains and other income earned from owning shares or other securities in their personal capacity.
Income earned by an individual from the investment in UAE property in their personal capacity will generally not be subject to UAE CT.
A “juridical person” is an entity established or otherwise recognised under the laws and regulations of the UAE, or under the laws of a foreign jurisdiction, that has a legal personality separate from its founders, owners and directors. Examples of UAE domestic juridical persons include a limited liability company, a foundation, an ‘onshore’ trust, a public or private joint stock company, and other entities that have separate legal personality under the applicable UAE ‘mainland’ legislation or Free Zone regulations. UAE branches of a domestic or a foreign juridical person are regarded as an extension of their “parent” or “head office” and, therefore, are not considered separate juridical persons.
Separate legal personality means that the entity has its own rights, obligations and liabilities. As a consequence, the owners of the juridical person would typically have limited liability when it comes to the debts and obligations of the entity.
All activities undertaken by a juridical person will be deemed “business activities” and are within the scope of UAE CT, unless specifically exempted.
This will need to be assessed on a case by case basis, and may look at the location where the key decision makers, such as the directors, make the strategic decisions affecting the juridical person.
UAE holding companies would be subject to UAE CT (at a 9% CT rate or the 0% Free Zone CT rate), depending on whether the holding company is established in a Free Zone or in the mainland UAE, but dividends and capital gains earned from domestic and foreign shareholdings would generally be exempt from CT, subject to certain conditions.
No, but individuals who conduct business in the UAE through a sole proprietorship or civil company may be subject to CT where a relevant business or business activity is undertaken.
The Corporate Tax Law makes a distinction between unincorporated and incorporated partnerships.
“Unincorporated Partnerships” (as defined in the Corporate Tax Law) are essentially a contractual relationship between two or more persons, as opposed to being a distinct juridical person separate from their partners / members. Unincorporated partnerships are treated as ‘transparent’ for UAE CT purposes. This means that an unincorporated partnership is not subject to UAE CT in its own right. Instead, each partner is subject to UAE CT on their share of the income from the business conducted through the partnership.
Incorporated partnerships include limited liability partnerships, partnerships limited by shares and other types of partnerships where none of the partners have unlimited liability for the partnership’s obligations or other partners’ actions. Such partnerships are subject to CT in the same manner as a corporate entity (see Section D ‘Juridical persons’).
Natural persons that are engaged in a business or business activity through an unincorporated partnership are individually subject to UAE CT on their share of the income from the unincorporated partnership. Each partner would be required to register for UAE CT purposes, and comply with the requirements of the Corporate Tax Law.
The partners in an unincorporated partnership can make an application to the Federal Tax Authority for the unincorporated partnership to be treated as a separate and standalone taxable person for the purposes of UAE CT. If the application is approved, the unincorporated partnership will file a CT return on behalf of the partners in the partnership.
For UAE CT purposes, a foreign partnership will generally be considered as an Unincorporated Partnership subject to meeting certain conditions, including that the partnership is not subject to tax in the relevant foreign jurisdiction (see question 48 ‘How will the UAE CT regime apply to partnerships?’).
A Family Foundation (as defined in the UAE Corporate Tax Law) is a foundation, trust or similar entity used to protect and manage the assets and wealth of an individual or family.
The principal activity of a Family Foundation would generally be to receive, hold, invest, disburse, or otherwise manage funds and assets associated with savings or investment for the interest of individual beneficiaries or to achieve a charitable purpose. Such activities would typically not constitute a “business” or “business activity” for UAE CT purposes if they were undertaken directly by the founder, beneficiary or any other individual.
Foundations and certain types of trusts are independent juridical persons with separate legal personality, and would therefore prima facie be subject to UAE CT in their own right. However, these types of Family Foundations can apply to be treated as transparent “Unincorporated Partnerships” for UAE CT purposes, resulting in the founder/settlor and the beneficiaries of the trust to remain to be seen as owners of the assets held by the trust. This would generally prevent the income of the foundation or trust from attracting UAE CT.
Other types of trusts (for example, trusts established in DIFC or ADGM) are a contractual relationship between two or more persons (e.g., the beneficiary, settlor, and trustee) and do not have separate legal personality. These types of trusts will by default be treated as transparent vehicles for UAE CT purposes.
An investment fund is an entity whose principal activity is the issuing of investment interests to raise funds or pool investor funds or establish a joint investor fund with the aim of enabling the holder of such an investment interest to benefit from the profits or gains from the entity’s acquisition, holding, management or disposal of investments, in accordance with the applicable legislation.
Investment funds are commonly organised as limited partnerships (as opposed to corporate entities) to ensure tax neutrality for their investors. This tax neutrality follows from the fact that most countries treat limited partnerships as transparent (‘flow through’) for domestic and international tax purposes, which puts investors in the fund in a similar tax position as if they had invested directly in the underlying assets of the fund. Investment funds that are structured as partnerships, unit trusts and other unincorporated vehicles would generally be treated as fiscally transparent “Unincorporated Partnerships” for the purposes of UAE CT.
Investment funds that are structured as corporate entities, including Real Estate Investment Trusts, or partnership funds that apply to be treated as a “Taxable Person” for UAE CT purposes in their own right, can apply to the Federal Tax Authority to be exempt from UAE CT subject to meeting certain requirements.
A recognised stock exchange includes:
● UAE: Any stock exchange established in the UAE that is licensed and regulated by the relevant competent authority (e.g. Nasdaq Dubai, Abu Dhabi Securities Exchange, or Dubai Financial Market);
● Foreign: Any stock exchange established outside the UAE of equal standing to the stock exchange in the UAE.
Yes. If the investment fund manager is a UAE resident, or if it operates in the UAE through a permanent establishment, the investment fund manager will be subject to UAE CT on the income it earns.
For the investment fund exemption, either the investment fund or the manager of the fund is required to be subject to regulatory oversight, not both.
Under the so-called “Investment Manager Exemption”, regulated UAE investment managers can provide discretionary investment / asset management services to foreign funds and customers without creating a permanent establishment for the foreign investors or the foreign investment fund in the UAE, where certain conditions are met.
Where the conditions of the Investment Manager Exemption are met, a UAE-based investment manager should not create possible UAE residency for CT purposes for the foreign investment fund / investment vehicle it manages.
Wholly-owned UAE investment holding companies and other Special Purposes Vehicles used by an investment fund to deploy capital and hold investments can apply to the Federal Tax Authority to benefit from the UAE CT exemption granted to the investment fund.
No. UAE branches of a domestic or a foreign juridical person are an extension of their “parent” or “head office” and, therefore, are not considered separate juridical persons.
Yes. The income of UAE branches will be included in the taxable income and UAE CT return of their UAE “parent” or “head office”.
UAE branches of a UAE juridical person are not required to separately register or file for UAE CT.
The income of foreign branches or foreign permanent establishments of a UAE business will be included in the taxable income and UAE CT return of their UAE “head office”, unless the UAE business elects to claim an exemption for its foreign branch profits. This exemption is available for foreign branch profits that have already been subject to tax in the foreign jurisdiction.
Where no election is made or the income of the foreign branch or permanent establishment is not eligible for an exemption from CT, the UAE CT payable on the income of the foreign branch or permanent establishment can be reduced by the corporate tax (or similar) paid on the relevant income in the foreign jurisdiction.
A UAE branch of a foreign business would generally be subject to UAE CT, unless the activities of the branch do not give rise to a permanent establishment in the UAE for CT purposes (see Section I ‘Foreign persons’).
Preparatory or auxiliary activities are those performed in preparation or in support of more substantive business activities of the foreign entity. Examples of preparatory and auxiliary activities include storage, display or delivery of goods or merchandise belonging to the foreign entity, limited marketing and promotional activities, performing market research and attending seminars or conventions.
Where relevant, the application of an international agreement for the avoidance of double taxation should be taken into consideration when determining whether a permanent establishment exists or whether the activities performed are preparatory or auxiliary in nature.
Foreign entities that operate in the UAE through a permanent establishment or that are considered resident in the UAE for CT purposes will be subject to UAE CT. Merely earning UAE sourced income would not trigger CT payable or require the foreign entity to register and file for UAE CT.
A non-resident person will be subject to UAE CT if the non-resident person has a permanent establishment in the UAE or earns income sourced from the UAE (subject to 0% taxation).
Income will generally be considered to be sourced from the UAE where it is derived from a UAE resident, a UAE Permanent Establishment, or the income is derived from activities performed or from assets located, capital invested and rights used in the UAE.
A foreign juridical person may be treated as a UAE resident for CT purposes and subject to UAE CT on its income sourced from both the UAE and abroad if it is effectively managed and controlled in the UAE (see above).
A foreign individual will be subject to UAE CT as a “Resident Person” insofar as he or she is engaged in a business or business activity in the UAE. Being treated as a Resident Person for UAE CT purposes does not automatically mean the foreign individual will be considered resident in the UAE for all other taxes or for the application of a double tax agreement.
For individuals, a decision by the Cabinet of Ministers will be issued in due course specifying further information on what would bring a natural person within the charge to Corporate Tax.
A foreign individual that does not conduct a taxable business or business activity in the UAE (see question 71 ‘Can a foreign individual be subject to UAE CT as a resident person?’) would generally not be subject to UAE CT. Merely earning UAE sourced income would not trigger CT payable or require the foreign individual to register and file for UAE CT.
Generally, a foreign person will have a Permanent Establishment in the UAE if:
● It has a fixed or permanent place in the UAE through which the business of the foreign person is carried on; or
● There is a person who has and habitually exercises an authority to conduct business in the UAE on behalf of the foreign person.
A fixed place of business would not be considered a Permanent Establishment if it is used solely to store, display or deliver goods or merchandise belonging to the foreign person or to conduct any activities that are of a preparatory or auxiliary nature.
A Permanent Establishment would not arise if the person who has and habitually exercises an authority to conduct business in the UAE on behalf of the foreign person acts as an independent agent.
Where relevant, the application of an international agreement should be taken into consideration when determining whether a permanent establishment exists.
A foreign individual that owns property in the UAE in his or her personal capacity would generally not be subject to UAE CT and related compliance obligations.
The investment in UAE real estate by a foreign juridical person may give rise to a taxable permanent establishment where the real estate represents a fixed place of business in the UAE through which the business of the foreign person is wholly or partially carried out. For more information on what would trigger a ‘fixed or permanent place of business’ under the permanent establishment rules, see question 73 ’How do I know if I have a Permanent Establishment in the UAE?’.
Income will be considered to be sourced from the UAE, if:
● the income is derived from a UAE resident;
● the income derived is attributed to a Permanent Establishment in the UAE of a non-UAE resident; or
● the income is derived from activities performed, assets located, capital invested, rights used or services performed or benefited from in the UAE.
The Corporate Tax Law includes a non-exhaustive list of income that is considered as being sourced in the UAE.
A Cabinet Decision may be issued in due course specifying the types of UAE sourced income subject to withholding tax. The UAE withholding tax rate is set at 0%.
Income from dividends, capital gains, interest, royalties and other investment returns earned by foreign juridical persons or individuals will not be subject to UAE CT, unless such income can be attributed to a permanent establishment in the UAE of the foreign person.
The taxable income for a Tax Period is the accounting net profit (or loss) of the business, after making adjustments for certain items as defined in the Corporate Tax Law.
For UAE CT purposes, the financial statements of UAE entities and other businesses should be prepared in accordance with accounting standards accepted in the UAE. International Financial Reporting Standards (IFRS) is the most frequently used accounting standard in the UAE.
Taxpayers should prepare their financial statements, and determine their taxable income on an accruals basis, unless they are permitted to use the cash basis of accounting instead. The Minister may prescribe the instances where a taxpayer can prepare financial statements using the cash basis, which is expected to be available for certain categories of individual entrepreneurs and small businesses.
The accounting net profit (or loss) would need to be adjusted for the items prescribed in the UAE Corporate Tax Law, including:
1. Unrealised gains/losses (subject to the election made regarding the application of the realisation principle);
2. Exempt income such as dividends;
3. Intra-group transfers;
4. Deductions which are not allowable for tax purposes;
5. Adjustments for transactions with Related Parties and Connected Persons;
6. Any incentives or tax reliefs; and
7. Any other adjustment specified by the Minister.
Where a business prepares their financial statements on an accruals basis, it has the following options in respect of the UAE CT treatment of unrealised accounting gains and losses:
● Option 1: The taxpayer can elect to recognise gains and losses on a ‘realisation basis’ for UAE CT purposes for all assets and liabilities – that is, any and all unrealised gains would not be taxable (and conversely, any and all unrealised losses would not be deductible) until they are realised;
● Option 2: The taxpayer can elect to recognise gains and losses on a ‘realisation basis’ for UAE CT purposes for assets and liabilities held on capital account only – that is, only unrealised gains and losses in respect of assets and liabilities held on capital account would not be taxable or deductible, respectively, until they are realised. Unrealised gains and losses arising from assets and liabilities held on revenue account, on the other hand, would continue to be included in taxable income on a current basis.
Generally, assets and liabilities are considered to be held on capital account when they are not expected to be sold or traded with during the regular course of the business operation.
As under many other Corporate Tax systems, the UAE CT regime allows taxpayers to apply the realisation principle for determining their taxable income. This means that income will only be taxable, and a deduction would only be able to be taken, if and when a gain or loss is realised. Realisation would happen, for example, when the relevant asset is sold or terminated.
Under the realisation principle, the taxable income for each Tax Period would exclude gains and losses in respect of assets or liabilities that are subject to fair value or impairment accounting.
No distinction is made between gains arising from the sale of capital assets and those arising from the sale of non-capital (revenue) assets. Capital gains derived from the disposal of assets are included in annual taxable income in the same manner as other income from the business. Capital gains on the sale of shares may be exempt from corporate income tax, subject to meeting certain conditions (see question 87 ‘Are capital gains exempt from UAE CT?’).
The following income is exempt from UAE CT:
1. Dividends and other profit distributions received from UAE incorporated or resident legal persons;
2. Dividends and other profit distributions received from a Participating Interest in a foreign juridical person (see further information below);
3. Certain other income (e.g., capital gains, foreign exchange gains / losses and impairment gains or losses) from a Participating Interest (see further information below);
4. Income from a foreign branch or permanent establishment where an election is made to claim the “Foreign Permanent Establishment” exemption; and
5. Income earned by non-residents from the operation or leasing of aircrafts or ships in international transportation where certain conditions are met (see further information below).
Domestic dividends and other profit distributions earned from UAE juridical persons are exempt from UAE CT, irrespective of the level of ownership in the UAE juridical person paying the dividend or profit share. This exemption also applies to dividends received from a UAE juridical person that benefits from a CT exemption or whose profits are subject to the 0% Free Zone CT rate.
Subject to the participation exemption requirements, dividends and other profit distributions earned from a Participating Interest in a foreign juridical person are exempt from UAE CT. A Participating Interest is a 5% or greater ownership interest in the capital or equity of the foreign juridical person that meets the conditions of the participation exemption regime.
Under the participation exemption regime, capital gains earned from a Participating Interest are exempt from UAE CT. Also, there is relief from CT for capital gains that may arise on intra-group transfers and reorganisation and restructuring transactions.
Other capital gains would be treated as ordinary income and subject to CT.
The background to the participation exemption regime is to prevent double taxation within a group where an underlying group company (that pays the dividend or whose shares are being sold) has already been taxed on its profits.
The Corporate Tax Law fully exempts dividends derived from UAE entities, as well as dividends from foreign subsidiaries that qualify as a “Participation”. A Participation is a juridical person in which the UAE shareholder company owns a 5% or greater ownership interest (a “Participating Interest”) for at least 12 months, and that meets the conditions of the participation exemption regime.
Similarly, capital gains on the sale of shares in domestic and foreign entities would also be exempt from CT. This exemption is subject to the same minimum ownership threshold, duration and other conditions mentioned above.
There can be instances where a UAE business makes a strategic investment in another company that does not result in a 5% or greater ownership interest, or where the percentage ownership in the Participation falls below the 5% ownership threshold because of events outside of the control of the UAE shareholder company. To address such instances and reduce the administrative burden associated with monitoring the continued compliance with the minimum ownership requirement under the participation exemption regime, the Minister may prescribe a certain minimum acquisition cost / value above which the ownership interest in another juridical person is deemed to be a qualifying “Participation”, and the income from this investment can benefit from the participation exemption.
In principle, all legitimate business expenses incurred to derive taxable income will be deductible, although the timing of the deduction may vary for different types of expenses and the accounting method applied. For capital assets, expenditure would generally be recognised by way of depreciation or amortisation deductions over the economic life of the asset or benefit.
Expenditure that has a dual purpose, such as expenses incurred for both personal and business purposes, will need to be apportioned with the relevant portion of the expenditure treated as incurred wholly and exclusively for the purpose of the taxable person’s business.
Article 33 of the UAE Corporate Tax Law lists certain specific expenses for which no deduction will be allowed, such as bribes, fines and penalties, and no deduction is available for expenditure incurred in deriving income that is exempt from CT or losses that are not connected with or arising out of a taxpayer’s business. Additionally, certain restrictions may apply to the deduction of interest expenditure (see question 92, Will my interest expenditure be fully deductible?).
The Corporate Tax Law provides for certain restrictions on the deductibility of interest expenditure to discourage excessive debt financing, and to ensure that debt financing used or arising as a result of certain specific intra-group transactions will only be deductible if there is a valid commercial reason for obtaining the loan.
General interest deduction limitation rule
Businesses with net interest expenditure above a threshold to be set by the Minister will be allowed to deduct net interest expenditure up to 30% of their earnings before interest, tax, depreciation and amortisation (EBITDA), excluding any exempt income. Any net interest expenditure which exceeds this limit may be carried forward and utilised in the subsequent 10 tax periods.
Businesses with net interest expenditure below the threshold to be set by the Minister will not be subject to the general interest deduction limitation rule.
The general interest deduction limitation rule will not apply to banks and other finance institutions, insurance providers or individuals.
Specific interest deduction limitation rule
Where a loan is obtained from a Related Party and is used to finance income that is exempt from CT, the interest on the Related Party loan will not be deductible unless the taxpayer can demonstrate that the main purpose of obtaining the loan and carrying out the transaction is not to gain a CT advantage.
Dividends paid by UAE companies will not be deductible for CT purposes.
Business set up, licence renewal and other Government fees and charges incurred wholly and exclusively in the ordinary course of business are deductible for CT purposes.
Only irrecoverable input Value Added Tax may be deductible for CT purposes. Otherwise, Value Added Tax charged and Value Added Tax incurred would not impact the calculation of taxable income.
Transfer pricing rules seek to ensure that transactions between Related Parties are carried out on arm’s length terms, as if the transaction was carried out between independent parties. To prevent the manipulation of taxable income, various articles in the Corporate Tax Law require that the consideration of transactions with Related Parties and Connected Persons needs to be determined by reference to their “Market Value”.
Yes. Transfer pricing rules apply to UAE businesses that have transactions with Related Parties and Connected Persons, irrespective of whether the Related Parties or Connected Persons are located in the UAE mainland, a Free Zone or in a foreign jurisdiction.
Generally, Related Parties of an individual refer to the individual’s relatives as well as companies in which the individual, alone or together with their Related Parties, has a controlling ownership interest (typically 50% or more of shares of the company).
Similarly, Related Parties of a company refers to any other companies in which the company, alone or together with their Related Parties, has a controlling ownership interest (typically 50% or more of shares of the company), or that are under greater than 50% common ownership.
Further detail on the definition of Related Parties can be found in Article 35 of the Corporate Tax Law.
Connected Persons are different from Related Parties. A person will be considered “connected” to a business that is within the scope of UAE CT if they are:
1. The owner of the business;
2. A director or officer of the business; or
3. A Related Party of either of the above.
Generally, taxpayers are required to apply one or more of the following methodologies to determine the arm’s length values for transfer pricing purposes:
1. The comparable uncontrolled price method
2. The resale price method
3. The cost-plus method
4. The transactional net margin method
5. The transactional profit split method.
Businesses will be required to maintain information regarding their transactions with Related Parties and Connected Persons, and certain businesses will be required to submit this information along with their tax return. Businesses that claim small business relief will not have to comply with the transfer pricing documentation rules.
Certain businesses may be requested to maintain a master file and a local file.
Transactions between members of a Tax Group are eliminated in the consolidation of the Group’s financial results statements and hence do not need to comply with the transfer pricing rules, unless a member of the Tax Group needs to compute its stand-alone Taxable Income for the purposes of utilising Tax Losses incurred before joining the Tax Group or when leaving a Tax Group.
Tax losses can, subject to certain conditions, be offset against the taxable income of future periods, up to a maximum of 75% of the taxable income in each of those future periods. Any excess (unused) tax losses can be carried forward and used against taxable income of future Tax Periods indefinitely.
Example
A taxpayer has taxable income of AED 100,000 and carried forward losses of AED 125,000. It can offset (75% x AED 100,000) = AED 75,000 of its losses carried forward in the relevant Tax Period, reducing its taxable income to AED 25,000.
The amount of tax losses available for carry forward to subsequent Tax periods would reduce to AED 50,000 (AED 125,000 – AED 75,000).
Tax losses from one UAE group company may be used to offset taxable income of another UAE group company where there is 75% or more common ownership and certain other conditions are met.
No tax loss transfers will be allowed from companies that are exempt or that benefit from the 0% Free Zone CT regime.
The UAE companies must meet the following conditions to transfer an amount of tax losses from one company to another in the same Tax Period:
1. Both companies are UAE resident juridical persons;
2. Either owns 75% or more of the other, or a third party owns 75% or more of both entities and this ownership existed at the start and end of the Tax Period in which the loss was incurred;
3. Neither company is an Exempt Person;
4. Neither company is a Qualifying Free Zone business; and
5. The financial statements must be prepared using the same accounting standards, and using the same financial year.
Withholding tax is a form of Corporate Tax collected at source by the payer on behalf of the recipient of the income. Withholding taxes exist in many tax systems and typically apply to the cross-border payment of dividends, interest, royalties and other types of income.
A 0% withholding tax may apply to certain types of UAE sourced income paid to non-residents. Because of the 0% rate, in practice, no withholding tax would be due and there will be no withholding tax related registration and filing obligations for UAE businesses or foreign recipients of UAE sourced income.
Withholding tax does not apply to transactions between UAE resident persons.
Yes. Foreign tax paid on income that is also subject to UAE CT can be deducted as a foreign tax credit from the UAE CT payable. The maximum foreign tax credit is the lower of the foreign tax paid and the UAE CT payable on the relevant income. Any excess foreign tax credit cannot be carried forward or back to a different Tax Period.
Withholding tax and other forms of foreign taxes on income or profits can be offset against the UAE CT liability, subject to any conditions as may be set out in an applicable agreement or treaty made between the UAE and the foreign country or territory.
Entities established in a Free Zone that meet the conditions to benefit from the Free Zone CT regime (“Qualifying Free Zone Persons”) will be subject to UAE CT at the following rates:
● 0% on Qualifying Income
● 9% on Taxable Income that does not meet the Qualifying Income definition
A Qualifying Free Zone Person that meets the relevant conditions will be able to benefit from the 0% Free Zone CT regime automatically. However, a Qualifying Free Zone Person can elect not to apply the Free Zone CT regime, but instead be subject to the regular CT regime and rates.
To be treated as a “Qualifying Free Zone Person”, the Free Zone entity must:
1. Maintain adequate substance in the UAE;
2. Derive “Qualifying Income” as specified in a Cabinet Decision;
3. Comply with transfer pricing rules and maintain the relevant transfer pricing documentation; and
4. Not have made an election to be subject to CT in full.
Yes. All Free Zone entities will be required to register and file a CT return, irrespective of whether they are a Qualifying Free Zone Person or not.
No. The UAE CT treatment will be the same for all Free Zone entities.
Qualifying Free Zone entities that are part of a large multinational group are anticipated to be subject to a different CT rate once the Pillar Two rules are embedded into the UAE CT regime.
Businesses engaged in the extraction of the UAE’s natural resources and in the non-extractive aspects of the natural resources value chain that are subject to Emirate-level taxation will be outside the scope of the UAE CT regime, subject to certain conditions and safeguards as specified in Article 7 and Article 8 of the Corporate Tax Law, respectively.
Yes. UAE headquartered banks and UAE branches of foreign banks will be subject to UAE CT.
Yes. Businesses engaged in real estate management, construction, development, agency and brokerage activities will be subject to UAE CT.
The asset management and broader financial services sectors will be subject to UAE CT, although investment funds that meet certain conditions can apply to be exempt from UAE CT. Further, under the so-called Investment Manager Exemption, UAE based and regulated fund managers and other investment managers can perform discretionary asset / investment management services without creating a taxable presence in the UAE for their foreign clients.
Charities and other public benefit organisations will be exempt from UAE CT, subject to meeting certain conditions and being listed in a Cabinet Decision.
Income earned by foreign operators of aircrafts and ships will be exempt from UAE CT in respect of:
1. providing international transportation of passengers, livestock, mail, parcels, merchandise or goods by air or by sea;
2. leasing or chartering aircrafts or ships used in international transportation; or
3. leasing or chartering equipment which are integral to the seaworthiness of ships or the airworthiness of aircrafts used in international transportation.
This exemption would only apply where the country of the foreign airline or shipping company would grant a similar exemption to UAE operators of aircrafts and ships.
UAE companies can apply to form a Tax Group and be treated as a single taxable person if the UAE parent company (directly or indirectly) holds at least 95% of the share capital and voting rights of each of the companies.
Example: Company A owns, 20% of company B, and 100% of Company C. Company C owns 80% of the shares of Company B. Because Company A indirectly owns 100% of the shares of Company B (80% via Company C), it can form a Tax Group with both Company B and Company C.
To form a Tax Group, neither the parent company nor any of the subsidiaries can be an exempt person or a Free Zone entity benefitting from the 0% CT rate, and all companies must use the same financial year and prepare their financial statements using the same accounting standards.
Being (ultimately) owned by a foreign parent company does not preclude UAE subsidiaries from forming a Tax Group, but the UAE subsidiaries must be held by an intermediary UAE parent company that will be the “parent” of the Tax Group for UAE CT purposes.
No, unless the foreign entity is managed and controlled in the UAE and considered a UAE resident entity for UAE CT purposes. This is because only UAE resident juridical persons can form or be part of a Tax Group.
Yes. The 0% threshold of AED 375,000 (amount to be confirmed in a Cabinet Decision) will apply to the Tax Group as a single taxpayer, irrespective of the number of entities that form part of the Tax Group.
Once formed, the Tax Group is treated as a single taxable person, with the parent company responsible for the administration and payment of CT on behalf of the group.
For the period they are group members, the parent company and each subsidiary will be jointly and severally liable for the UAE CT obligations of the Tax Group. This joint and several liability can be limited to one or more named members of the Tax Group, with approval from the Federal Tax Authority.
Yes. To determine the taxable income of the Tax Group, the parent company will have to consolidate the financial accounts of each subsidiary for the relevant Tax Period, and eliminate transactions between the parent company and each subsidiary group member.
Yes. Companies that are part of a ‘Qualifying Group’ can transfer assets and liabilities between themselves at their net book value. This means that the transfer can be carried out tax neutrally (i.e. not give rise to a gain or loss for CT purposes).
A Qualifying Group exists where all of the following conditions are met:
● The members are juridical persons which are UAE residents or non-resident persons that have a permanent establishment in the UAE;
● Either owns 75% or more of the other, or a third party owns 75% or more of both entities;
● Neither member is an Exempt Person;
● Neither member is a Qualifying Free Zone Person; and
● Members prepare their financial statements using the same accounting standards, and have the same financial year.
133. Will there be any relief to facilitate mergers, spin-offs and other restructuring transactions?
Taxpayers are expected to prepare and maintain financial statements for the purposes of calculating their taxable income, and should maintain all documents and records that support the information in the CT return or in any other filing made with the Authority.
Exempt persons are required to maintain all records to support their exempt status.
Records and documents should be kept for at least seven years following the end of the relevant Tax Period.
No, unless the group only comprises UAE resident entities that have applied to form a Tax Group. Otherwise, each UAE entity that is subject to CT will need to prepare and maintain stand-alone financial statements for UAE CT purposes.
No. Only the categories of taxable persons that are listed in a decision issued by the Minister will be required to prepare and maintain audited or certified financial statements.
No. Only the categories of taxable persons that are listed in a decision issued by the Minister will be required to prepare and maintain audited or certified financial statements.
The Federal Tax Authority may request for the financial statements to be submitted alongside the CT tax return, or for the financial statements to be provided upon request.
A taxpayer’s income, deductions and credits must be measured in the national currency of the UAE (AED), and income derived and expenses incurred in a foreign currency need to be translated into AED.
In principle, taxpayers are expected to translate amounts denominated in a foreign currency on a transaction-by-transaction basis. This means that the receipt of income denominated in foreign currency should be translated into AED at the time the income is derived. Similarly, each deductible expenditure denominated in a foreign currency should be translated into AED at the time the expenditure is incurred.
For UAE CT purposes, all amounts must be converted to AED based on the applicable exchange rate set by the Central Bank of the UAE at the time the foreign currency transaction is to be translated into the national currency, unless the Federal Tax Authority allows the taxpayer to use an exchange rate that more accurately reflects the taxpayer’s income.
A self-assessment regime is one where taxpayers are responsible for calculating, reporting and paying their taxes.
All taxpayers, as prescribed by the Minister, will be required to register for UAE CT and obtain a Corporate Tax Registration Number. The Federal Tax Authority may also request certain Exempt Persons to register for UAE CT.
Taxpayers are required to register before they file their first CT return.
There is no registration threshold for UAE CT.
Taxpayers will be able to electronically register for UAE CT through the website of the Federal Tax Authority. Further guidance on this will be provided in due course.
Yes. Taxpayers will be required to register for UAE CT (and update their details, if required), even if they are already registered for VAT.
Only one UAE CT return will need to be filed per Tax Period. The CT return will generally be due within 9 months following the end of the Tax Period. No provisional or advance UAE CT filings will be required.
Taxpayers are required to file a CT return, irrespective of the level of income or the status of the company.
Taxpayers are required to file a CT return, irrespective of whether they have made a profit or not. Taxpayers with tax losses should ensure they file a CT return in order to ensure that these losses can be used to reduce taxable income of future years.
If the companies meet the requirements to form a Tax Group (see section R ‘Tax Groups’) and their application to form a Tax Group is approved, they can file a single UAE CT return covering all the members of the Tax Group.
Where companies cannot form a Tax Group, they will each be required to file a UAE CT return on a standalone basis.
UAE CT returns will need to be filed electronically. Further guidance on this will be provided in due course.
UAE CT will generally need to be paid before the end of the 9 months following the end of the relevant Tax Period.
Further guidance on the approved payment methods will be provided in due course.
No. UAE businesses will not be required to make advance UAE CT payments. The CT liability for a Tax Period will generally be due for payment by the end of the 9th month following the end of the relevant Tax Period.
Similar to other taxes in the UAE (e.g. VAT), businesses will be subject to penalties for non-compliance with the UAE CT regime.
The UAE is a member of the OECD BEPS Inclusive Framework and is committed to addressing the challenges faced by tax jurisdictions internationally. As such, the introduction of a CT regime helps to provide the UAE with a framework to adopt the Pillar Two rules.
Until such time as the Pillar Two rules are adopted by the UAE, multinationals will be subject to CT under the regular UAE CT regime.
Further information will be released in due course on the implementation of the Pillar Two rules in the UAE.
A multinational corporation is a corporation that operates in its home country, as well as in other countries through a foreign subsidiaries, branches or other entity forms of presence / registration. Merely earning foreign sourced income from outside its home country without a foreign presence or registration in a foreign country would not make a business a multinational corporation.
In the context of the global minimum effective tax rate as proposed under ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project, ”large” refers to a multinational corporation that has consolidated global revenues in excess of the UAE Dirham equivalent of EUR 750 million.
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