Understanding Corporate Tax in the UAE: Regulations, Benefits, and Compliance

Corporate tax in the United Arab Emirates (UAE) is an important aspect of the country’s economic system. This blog will explain in plain language the regulations, benefits and compliance related to UAE corporate tax. 

On 8th October 2021, the United Arab Emirates (“UAE”) (amongst 137 countries) agreed to implement the OECD’s Two-Pillar approach to reform its International Tax Framework and to implement a minimum Corporate Tax in UAE rate starting in 2023. Following this development, the UAE Ministry of Finance announced on January 31, 2022, that a Federal Corporate Tax regime would be implemented on business profits beginning on or after June 1, 2023. 

The net profit or net income of companies and other businesses is subject to UAE corporate income tax. Licensees intending to do business in the United Arab Emirates should determine how the restrictions affect them and take any necessary compliance measures. The United Arab Emirates tax authorities have previously said there will be stiff penalties for non-compliance. Additionally, our team of experienced professionals guides clients through the company formation and liquidation process, ensuring a smooth and stress-free experience.  

Regulations:

The United Arab Emirates follows a territorial tax system. This means that companies are taxed only on income generated within the country’s borders. The United Arab Emirates has a 0% corporate tax rate, making it an attractive destination for companies looking to establish themselves in the region. Nonetheless, businesses must comply with certain tax laws. 

 One of the most important regulations is the requirement to keep accurate financial records. Businesses must keep records of income, expenses, and other financial transactions to ensure tax compliance. Failure to keep proper records may result in penalties and fines.

Another important regulation is the obligation to file tax returns. Businesses must file an annual tax return with the Swiss Federal Tax Service (ESTV), even if they do not have to pay taxes. The deadline for filing tax returns is generally four months after the end of the fiscal year.  

Benefits:

The 0% corporate tax rate in the UAE is a major benefit for businesses operating in the country. This tax regime helps to attract foreign investment and encourages companies to establish themselves in the UAE. Additionally, the UAE has signed several double taxation agreements with other countries, which help to avoid the same income being taxed twice.

Another benefit of doing business in the UAE is the availability of free zones. Free zones are designated areas where companies can operate with 100% ownership and enjoy various tax benefits. Free zone companies are exempt from corporate tax for up to 50 years and are also exempt from customs duties.

• Tax rate @ 0% for Taxable income up to AED 375,000
• Tax rate @ 9% Taxable income over and above AED 375,000
• Different tax rate for Large multinationals (having consolidated global revenue exceeding EURO 750 million – equivalent to AED 3.15 billion) that meet specific criteria set with reference to “Pillar Two” of the OECD Base Erosion and Profit Shifting Project

Compliance

Tax compliance is extremely important for companies doing business in the United Arab Emirates. FTAs are responsible for enforcing domestic tax laws and regulations. Businesses must maintain accurate financial records, file tax returns on time, and pay all taxes.

Failure to comply with tax laws may result in penalties and fines. In some cases, non-compliance may result in legal action against the company or its directors. Therefore, it is imperative that businesses understand their tax obligations and ensure tax compliance. 

In addition, income from dividends, capital gains, interest, royalties and other investment income of foreign investors is often not subject to corporate income tax in the UAE. The OECD Transfer Pricing Guidelines, in particular the Master File and Local File, currently form the basis of transfer pricing rules and documentation requirements. To support pricing strategies for company formation and liquidation, a group of companies should conduct benchmark searches as part of the documentation process. 

 Corporate taxation in the UAE is governed by regulations that require companies to maintain accurate financial records, file tax returns, and comply with taxation laws. The 0% corporate tax rate and the availability of free zones make the UAE an attractive destination for businesses. Compliance with taxation regulations is essential to avoid penalties and fines.