A Simplified Breakdown of the UAE’s New Corporate Income Tax System

The UAE's recent tax reforms, including the introduction of Corporate Income Tax (CIT), are reshaping the business landscape and aligning the country with global tax standards. Here's a clear and simplified guide to help you understand these changes and how they may impact your business.

Why Did the UAE Introduce Corporate Income Tax (CIT)?

The UAE launched CIT to:

• Diversify its economy and reduce reliance on oil revenues.
• Align with international tax standards, such as those set by the OECD.
• Ensure transparency and fairness in business taxation.
• Combat tax avoidance by multinational corporations (MNCs) using global frameworks like BEPS (Base Erosion and Profit Shifting).

For example, a multinational corporation operating in the UAE but shifting profits to a low-tax jurisdiction will now face stricter controls, ensuring more fairness in the tax system.

Who Needs to Pay Corporate Income Tax?

1. Resident Businesses: Companies and individuals conducting regular business in the UAE, including those with operations abroad, must pay tax on global income.
2. Non-Resident Businesses: Foreign entities earning UAE-sourced income, such as from property rentals or branches, will be taxed.
3. Free Zone Businesses: Companies in designated free zones benefit from tax incentives, such as a 0% tax rate on qualifying income. However, income derived from mainland operations may be taxed at 9%.

Tax Rates Explained

• 0% tax on profits up to AED 375,000 (ideal for small businesses and startups).
• 9% tax on profits exceeding AED 375,000.
• 15% tax for large multinational enterprises (MNEs) with global revenues exceeding €750 million, as part of the OECD's Global Anti-Base Erosion Rules (GLoBE).

For instance, a small business with earnings of AED 300,000 won’t pay any tax. However, a manufacturing firm making AED 1 million will pay 9% tax on profits above AED 375,000.

Key Exemptions and Reliefs

The UAE offers several exemptions and relief programs to support businesses:

• Small Business Relief: Companies with revenues below AED 3 million can benefit from simplified compliance and reduced administrative burdens.
• Free Zone Relief: Entities in qualifying free zones can enjoy a 0% tax rate on qualifying income, making it an attractive option for many businesses.
• Dividend and Capital Gains Exemption: Investments that generate dividends or capital gains are exempt from tax.
• Group Relief: Losses from one company can be transferred within the corporate group to offset profits in another company, reducing the overall tax burden.

New OECD Compliance: What You Need to Know

The UAE’s CIT reform is part of the global push led by the OECD's GLoBE framework to prevent tax avoidance by MNCs.

The Direct Minimum Top-up Tax (DMTT) ensures that large companies with global revenues of €750 million or more pay a minimum tax rate of 15% in every country they operate in.

The UAE has committed to this by imposing a top-up tax where needed to meet the 15% minimum global tax rate.

Additional Incentives for Innovation and Growth

To support business growth and innovation, the UAE plans to introduce tax incentives. Starting in 2026, businesses that invest in research and development (R&D) may qualify for tax credits ranging from 30% to 50%, with refunds depending on revenue and employee numbers.

Additionally, a refundable tax credit may be offered to companies driving innovation and enhancing the UAE's global competitiveness. However, these incentives are still subject to legislative approval.

The Big Picture

These tax reforms mark a significant shift for the UAE, making it more in line with global tax standards, while still offering competitive rates for businesses.

Whether you’re a small startup, an established company, or a large multinational, the UAE’s Corporate Income Tax system presents opportunities for growth while ensuring fairness and transparency.

What do you think about these changes? How will they affect your business? Let us know!

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