UAE Tax Consulting

A changing landscape – Tax in the UAE

The United Arab Emirates have been known as a country without taxes, except from excise taxes on alcohol, tobacco products and on profit from oil businesses.
While personal income of residents remains tax-free, business profits of both mainland companies and free zone companies may now be subject to corporate tax. The general corporate tax rate is 9% on the taxable income. A 0% (zero percent) tax rate applies to certain businesses, provided that the companies complies with certain conditions.
A company’s annual income up to AED 375,000 (EUR 93,516 or USD 102,180) is always exempted from corporate tax. Furthermore, for a transitional period until 31/12/2026, business profits from revenues not exceeding AED 3,000,000 (EUR 748,130 or USD 817,439) per tax period are subject to a 0% (zero percent) corporate tax rate.

Value added tax, V.A.T., at a rate of 5% applies to all products and services supplied or provided from within the UAE to individuals and companies within the UAE, whether mainland or free zone company.

Personal income tax in the United Arab Emirates

UAE Personal Income Tax in Brief:

There is no personal income tax in the United Arab Emirates. Consequently, there are no individual tax registration or reporting obligations.

Salaries, remunerations, bonuses, income from dividends and interest, capital gains are not taxable on a personal level.

However, if a natural person conducts business in the UAE, income from such business activities will be subject to 9% Corporate Tax if the annual turnover of those business activities exceeds AED 1 million (EUR 249,377 or USD 272,480).

When calculating the annual turnover of a natural person resident of the UAE, the following types of income are not included in such calculation:

salaries, remunerations, bonuses;
income from dividends and interest;
income from personal investments;
income from real estate investment (unless it is operated as a business, e.g. like Airbnb).

Important note:

Currently (October 2023), the UAE Ministry of Finance and related bodies are discussing the option to director remunerations with Corporate Tax at a rate of 9%. The reasoning is that director remunerations received may be seen as the provision of services to the company where the natural person has been appointed as director.

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Corporate Tax in the United Arab Emirates

UAE Corporate Tax in Brief:

With the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (‘UAE CT Law’) signed on 3 October 2022, the United Arab Emirates introduced Corporate Tax for all companies in the UAE, including free zone companies.

The general flat rate of corporate tax is 9%. Profit from some businesses may benefit from a corporate tax rate 0f 0%, subject to conditions.

When will the UAE start to apply corporate tax?

Profit of companies is subject to corporate tax from;

1 June 2023 – for companies whose financial year starts on 1 June; and
1 January 2024 – for companies whose financial year starts on 1 January;

General exemptions from corporate tax in the UAE

To support small businesses, the legislation provides for the following general exemption, that applies to all companies of whatever size, without the necessity to comply with the below-mentioned conditions ‘qualifying free zone person’, ‘qualifying income’, and ‘qualifying activities’, and that is applicable without time limitation:

A company’s annual income up to AED 375,000 (EUR 93,516 or USD 102,180) is always exempted from corporate tax.

To ease the new tax burden, the legislation does also provide for a transitional exemption:

Furthermore, for a transitional period until 31/12/2026, business profits from revenues not exceeding AED 3,000,000 (EUR 748,130 or USD 817,439) per tax period are subject to a 0% (zero percent) corporate tax rate.

In which cases does 0% corporate tax apply to UAE free zone companies, and what are the conditions?

The corporate tax rate applied to the profit of a Free Zone Company is 0%, if:

A Qualifying Free Zone Person (‘Company’)…
… derives Qualifying Income…
… from Qualifying Activities…
… except Excluded Activities.

UAE Corporate Tax: Qualifying Free Zone Person

Art. 18.1 defines ‘Qualifying Free Zone Person’ (QFZP) for the purpose of the Corporate Tax rate at 0%.

A Qualifying Free Zone Person (‘QFZP’) must;

maintain adequate substance in the UAE;
derive ‘Qualifying Income’ as specified in a decision issued by the Cabinet at the suggestion of the Minister (see Cabinet Decision 55/2023 Art. 3, 4, and 7, and Ministerial Decision 139/2023) Art. 1, 3, 4, and 5);
not have elected to be subject to Corporate Tax under Article 19 of the Decree-Law No. 47 of 2022; and
comply with Articles 34 (‘Arm-Length Principle’) and 55 (‘Transfer Pricing Documentation’) of this Decree-Law.

UAE Corporate Tax: Qualifying Income of a Qualifying Free Zone Person

Article 3 of Cabinet Decision No. 55 of 2023 defines Qualifying Income as following:

Income derived from transactions with other Free Zone Persons, except for income derived from Excluded Activities;
Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities, and if the receiving Free Zone Person is the Beneficial Recipient of the relevant services or Goods;
but only in respect of Qualifying Activities that are not Excluded Activities;
Any other income provided that the Qualifying Free Zone Person satisfies the de minimis requirements under Article (4) of the Decision No. 55.

Art. 7 of Cabinet Decision No. 55 of 2023 provides for the obligation of “Maintaining Adequate Substance in a Free Zone and Outsourcing Options”:

A Qualifying Free Zone Person shall undertake its core income-generating activities in a Free Zone and, having regard to the level of the activities carried out, have adequate assets, an adequate number of qualified employees, and incur an adequate amount of operating expenditures.
Activities can be outsourced to a Related Party in a Free Zone or a third party in a Free Zone, provided the Qualifying Free Zone Person has adequate supervision of the outsourced activity.

UAE Corporate Tax: Qualifying Activities

Art. 2 of the Ministerial Decision No. 139 of 2023 lists the Qualifying Activities that benefit from the 0% tax rate, providing that the above conditions are complied with.

In this sense, Qualifying Activities are:

Manufacturing of goods or materials
Processing of goods or materials;
Holding of shares and other securities;
Ownership, management and operation of Ships;
Reinsurance services that are subject to the regulatory oversight of the competent authority in the State;
Fund management services that are subject to the regulatory oversight of the competent authority in the State;
Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the State;
Headquarter services to Related Parties;
Treasury and financing services to Related Parties;
Financing and leasing of Aircraft, including engines and routable components;
Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale;
Logistics services;
Any activities that are ancillary to the activities listed in paragraphs (a) to (l) of this Clause.

UAE Corporate Tax: Excluded Activities

Art. 3 of the Ministerial Decision No. 139 of 2023 defines Excluded Activities as following:

Any transactions with natural persons, except transactions in relation to the Qualifying Activities specified under paragraphs (d), (f), (g) and (j) of Clause (1) of Article (2) of the Decision.
Banking activities that are subject to the regulatory oversight of the competent authority in the State.
Insurance activities that are subject to the regulatory oversight of the competent authority in the State, other than the activity specified under paragraph (e) of Clause (1) of Article (2) of the Decision.
Finance and leasing activities that are subject to the regulatory oversight of the competent authority in the State, other than those specified under paragraphs (i) and (j) of Clause (1) of Article (2) of the Decision.
Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons.
Ownership or exploitation of intellectual property assets.
Any activities that are ancillary to above activities.

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VAT in the United Arab Emirates

Value-Added Tax in the UAE:

Value-added tax is applied on the sale of goods and services within the UAE since 1 January 2018, both in UAE mainland and in UAE free zones.

The general VAT rate is 5%.

On some goods and services a reduced VAT rate of 0% applies, such as international transportation, the supply of crude oil/natural gas, the first supply of residential real estate, and some health care and education goods and services.

In case of export of goods and services to other countries (but except the GCC states that do apply VAT), the 0% VAT tax rate applies.

Some other goods and services may be exempted from VAT in the UAE, under certain conditions, for example certain financial services, subsequent supply of residential real estate, certain investment grade precious metals (e.g. gold, silver, of 99% purity), or local passenger transports.

The threshold for mandatory VAT registration is AED 375,000 of sales. Companies which wish to register for VAT voluntarily can do so once a sales threshold of AED 187,500 has been reached.

VAT returns must be submitted quarterly of monthly, based on the allocation of the Federal Tax Authority of the United Arab Emirates.

Excess input VAT can be claimed back from the FTA, subject to a specific (and complicated) procedures. A better alternatively is generally to carry forward VAT credits may be carried forward and then deducted from future output VAT.

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