The UAE’s Corporate tax law: a game-changer for businesses

The UAE has long been known for being one of the few countries with no tax on corporate income, attracting businesses from all around the world to its shores. However, a groundbreaking shift was introduced in December when the UAE Ministry of Finance issued The Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses on December 9, 2023, coming into effect for financial years starting on or after June 1, 2023. This new law entails a Federal Corporate Tax (CT) of 9% which will affect every company in the UAE and foreign businesses established within the territory, including freezones. Although this marks a significant shift in the UAE’s tax landscape, the nation remains the GCC country with the lowest tax rate in the region. Here is everything you need to know about the long-awaited law:

Under the new Corporate Tax Law, businesses will fall under one of three categories: Taxable Person, Exempt Person, or Qualifying Free Zone Persons (QFZP).

What is a Taxable Person?

A Taxable Person is either a Resident Person or a Non-Resident Person.

Resident Person:

• A Resident Person is a juridical person incorporated/established/recognized in the state, including a free zone person, or of a foreign jurisdiction that is effectively managed and controlled in UAE.
• A natural person who conducts a business or business activity in the

Non-Resident Person:

• A Non-Resident Person that either has a permanent establishment in UAE, derives UAE- sourced income³ or has a nexus in UAE as per Cabinet Decision.

A branch in UAE of a Person shall be treated as one and the same taxable person.

Who is an Exempt Person?

The following Persons shall be exempt from the CT:

• A person engaged in the exploitation of UAE natural resources (both extractive and non- extractive)
• A Government and Government Controlled Entities
• Qualifying public benefit entities
• Charities and public benefit organizations
• Pension or social security funds
• Qualifying investment funds

The exemption may extend to an entity incorporated in the UAE that is wholly owned and controlled by an exempt person, if it:

• Undertakes part or whole of the activity of the Exempt Person
• Holds assets or invests funds for the benefit of the Exempt Person
• Carries on activities ancillary to those of the Exempt Person

Certain exemptions (including for qualifying investment funds) will be subject to an application process to the Federal Tax Authority (FTA)

What is a Qualifying Free Zone Person?

The Corporate Tax Law introduces a “Qualifying Free Zone Person” (QFZP).

A QFZP is a company or branch registered in a free zone that maintains adequate substance in the UAE, which is broadly defined as a company or branch registered in a free zone that:

• Maintains adequate substance in the
• Derives qualifying income
• Complies with Articles 34 and Article 55 of this of the Corporate Tax Law
• Meets any other conditions to be prescribed through a Ministerial Decision
• A QFZP will still be subject to CT but may benefit from a 0% rate on its qualifying income

What is Taxable Income for UAE CT?

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

• Unrealised gains and losses (subject to the election made regarding the application of the realisation principle);
• Exempt income such as qualifying dividends and capital gains;
• Income arising on intra-group transfers;
• Deductions which are not allowable for tax purposes;
• Transactions with Related Parties and Connected Persons;
• Transfers of tax losses within the group where relevant;
• Incentives or tax reliefs; and
• Any other adjustments as specified by the

What is the Tax Period?

The Financial Year of a Taxable Person shall be the Gregorian calendar year, or the (12) twelve- month period for which the Taxable Person prepares financial statements.

What is Qualifying Income?

Any income derived by a Qualifying Free Zone Person that is subject to CT. CT shall be imposed on a Qualifying Free Zone Person at the following rates:

• 0% (zero percent) on Qualifying Income
• 9% (nine percent) on Taxable Income that is not Qualifying Income under Article 18 of the Corporate Tax Law and any decision issued by the Cabinet at the suggestion of the Minister

What are the Corporate Tax Rates?

CT will be charged on the annual taxable income of a business as follows:

• All annual taxable profits that fall under AED 375,000 shall be subject to zero
• All annual taxable profits above AED 375,000¹⁵ shall be subject to 9%

What Standards Must Be Used to Prepare Financial Statements?

The UAE’s corporate tax system requires UAE entities and other businesses to prepare their financial statements using accounting standards that are accepted in the country. The most commonly used accounting standard in the UAE for this purpose is the International Financial Reporting Standards (IFRS).

What Income is Exempt from CT

The following income is exempt from UAE CT:

• Dividends and other profit distributions received from UAE incorporated or resident legal persons;
• Dividends and other profit distributions received from a Participating Interest in a foreign juridical person;
• Certain other income (e.g., capital gains, foreign exchange gains / losses and impairment gains or losses) from a Participating Interest;
• Income from a foreign branch or permanent establishment where an election is made to claim the “Foreign Permanent Establishment” exemption; and
• Income earned by non-residents from the operation or leasing of aircrafts or ships in international transportation where certain conditions are met;

Can Capital Gains Be Subject To Taxation Under the UAE CT System?

The UAE’s corporate tax system has a participation exemption regime that exempts capital gains earned from a Participating Interest from being subject to taxation. Additionally, there are provisions for tax relief on capital gains that may arise from intra-group transfers, reorganization, and restructuring transactions.

However, any other capital gains that do not fall under these exemptions would be considered ordinary income and would be subject to corporate taxation in the UAE.

What is the Participation Exemption Regime?

The participation exemption regime in the UAE’s Corporate Tax Law aims to prevent double taxation within a group by exempting dividends and capital gains that have already been taxed at the underlying group company level.

Under this regime, dividends received from UAE entities and foreign subsidiaries that qualify as a “Participation” are fully exempt from taxation, provided that the UAE shareholder company owns a 5% or greater ownership interest (i.e., a “Participating Interest”) for at least 12 months and meets the participation exemption regime’s conditions.

Likewise, capital gains on the sale of shares in domestic and foreign entities are also exempt from corporate taxation if they meet the same minimum ownership threshold, duration, and other conditions mentioned above.

Tax Losses and Utilizing Prior Year Tax Losses to Reduce Taxable Income Under UAE CT Regime

A Tax Loss occurs when a business’s total deductions are more than its total taxable income, resulting in negative taxable income. Such losses can be used to reduce the taxable income of future periods, up to a limit of 75% of the taxable income in each future period. Any unused losses can be carried forward and used to offset future taxable income indefinitely.

For instance, suppose a company has taxable income of AED 50,000 and tax losses carried forward from previous years of AED 70,000. It can utilize 75% of its losses carried forward, which is AED 52,500, to lower its taxable income to AED 22,500 in the current Tax Period. As a result, the company’s unused tax losses will decrease to AED 17,500 (AED 70,000 – AED 52,500), which it can carry forward to offset taxable income in future Tax Periods.

Are There Consequences for Non-Compliance Under the UAE CT Regime?

Similar to other taxes in the UAE (e.g. VAT), businesses will be subject to penalties for non- compliance with the UAE CT regime.

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