As per our Article published regarding Corporate Tax in the UAE and our Interview on Corporate tax which is available at the following: What will Corporate Tax look like for companies, we stated corporate tax was coming and can now confirm with absolute certainty, will be effective from 1 June 2023.
Federal Decree-Law No.47 of 2022 (the Law) has very recently been published and this is a short article to confirm three of the main points people undoubtedly want to know.
1) What is the rate?
2) What is the amount specified after which tax will become applicable?
3) Who is liable to pay tax?
This is set by Article 3 of the Law
All income subject to tax is known as taxable income (Taxable Income).
Taxable Income is generally the net profit of businesses with some exceptions and nuances.
As previously advised by the Federal Tax Authority (FTA), the Corporate Tax rate will be:
" 0% or on Taxable Income not
exceeding an amount specified in a decision by Cabinet
(Specified Amount); and
" 9% for any amount of Taxable Income over this Specified Amount
Further Corporate tax will be imposed at the following
rates for a Qualifying Freezone Person (discussed below) at
" 0% on Qualifying Income
" 9% on Taxable Income that is not included as Qualifying Income or otherwise specified by the Minister.
What is the Specified Amount?
Whilst the Law itself does not clarify what the Specified Amount is, the current indication is that it will be an annual amount of AED375,000.
Accordingly, should a business Taxable Income exceed the amount of AED375,000 annually, they will be liable to pay 9% Corporate Tax on the portion of the amount that exceeds AED375,000.
Should a person's Taxable Income amount to AED675,000 over 12 months.
They will pay 0% on the first AED375000, and 9% on the
remaining AED300,000 therefore paying a total tax of
Who is liable to pay Corporate Tax?
Both Companies and Natural Persons (individuals) who run businesses will be liable to pay Corporate Tax.
There are some exemptions and in fact it is easier and more efficient to consider who is not liable to pay Corporate Tax first, as most businesses will be liable.
There are exemptions but they are few in number and these are governed by Article 4 of the Law, as expanded upon by Articles 5-10 of the Law.
1) Government entities.
2) Government Controlled entities.
3) Businesses engaged in the extraction and exploitation of UAE natural resources that meet the conditions of Article 7 of the Law.
4) Persons engaged in a Non-Extractive Natural Resources Business that meets the conditions of Article 8 of the Law.
5) A qualifying Public Benefit Entity (Charities) under Article 9 of the Law
6) A qualifying Investment Fund under Article 10 of the Law.
7) A public pension or social security fund, or a private pension or social security fund that is subject to regulatory oversight of the competent authority in the State and that meets any other conditions that may be prescribed by the Minister.
8) A juridical person incorporated in the State that is wholly owned and controlled by an Exempt Person that meet the required conditions specified under paragraphs (a), (b), (f) and (g) of Clause 1 of Article 4 of the Law and conducts any of the following:
i. Undertakes part or whole of the activity of the Exempt Person.
ii. Is engaged exclusively in holding assets or investing funds for the benefit of the Exempt Person.
iii. Only carries out activities that are ancillary to those carried out by the Exempt Person.
9) Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.
Qualifying Income and Qualifying Freezone Persons
As mentioned above and as determined by Article 18 of the Law, in some cases Freezone Persons may benefit from the 0% rate on Qualifying Income only.
Qualifying Income as defined by the Law is:
"Any income derived by a Qualifying Free Zone Person that is subject to Corporate Tax at the rate specified in paragraph (a) of Clause 2 of Article 3 of this Decree-Law. "
We have highlighted Clause 2 of Article 3 of the Law
above, under Tax Rate.
So, what is a Qualifying Freezone Person?
As stated by Article 18 of the Law, a Qualifying Freezone Person is a Freezone Person that meets all the following requirements.
1) They maintain adequate substance
within the State.
2) They derive Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister.
3) They have not elected to be subject to Corporate Tax under Article 19 of the Law.
4) They comply with the Arm's Length principle as stipulated by Article 34 of the Law and Transfer Pricing as stipulated by Article 55 of the Law.
5) They meet any further conditions as may be prescribed by the Minister.
This is governed by Article 11 of the Law.
As shown above, there are few exemptions, so in short, most businesses who trade within the UAE will be required to register for Corporate Tax and pay the required tax on their Taxable Income.
This will include:
1. UAE companies incorporated or
managed/controlled within the UAE including Freezones.
2. Non-resident companies (foreign companies) that have a permanent establishment within the UAE or that are managed/controlled from within the UAE.
3. Any Natural Persons (individuals) who conduct a Business or Business Activity in the State.
4. Any other person that may be determined by the Minister.
As mentioned at the outset, this article is very limited in its scope and is intended to answer the three main questions that people will have. We shall follow with a more detailed article considering the finer points of the Law shortly but as one can see, Corporate Tax is coming and casts a very wide net over those who are required to pay it.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.