Understanding UAE Corporate Tax: Exemptions, Qualifying Companies and More

The United Arab Emirates (UAE) will introduce a Corporate Tax regime in June this year, in line with global trends for a minimum corporate tax rate. Before the new law commences, businesses must determine if they are subject to the tax and qualify for an exemption. The UAE declared its plans to establish a new Corporate Tax (CT) regime in January 2022. Subsequently, in December, Federal Decree-Law No. 47 was issued to provide a legislative framework for introducing the Federal Corporate Tax in the country.

The UAE will adopt the global minimum tax rate envisioned by the OECD, effective June 1, 2023, to enhance its appeal to businesses. The Corporate Tax regime will apply to all activities and interactions, except natural resource extraction, which will remain subject to Emirate-level corporation tax. The UAE’s new CT regime taxes businesses on their accounting net profit adjusted for specific items, with a 9% tax rate applied to taxable profits instead of gross revenue. Small businesses will receive a tax exemption on earnings up to AED 375,000 (approx. US$100,000).

Categorizations: Taxable, Exempt or Qualifying Free Zone Person?

Under the new system, businesses will be classified as Taxable, Exempt, or Qualifying Free Zone Persons (QFZP) and must determine their category and register accordingly. Some exempt entities may also need to apply for approval.

In the following section, we will examine the impact of the new CT regime on each of the three categories: Taxable, Exempt, and Qualifying Free Zone Persons (QFZP).

Taxable Person

For tax purposes, a person can be classified as either a resident or a non-resident taxable individual.

Resident person:

• A resident individual is a legal entity incorporated or recognized in the state, including free zone persons or foreign entities managed and controlled within the state.
• An individual who engages in a business or business activity within the state is considered a natural person for tax purposes.

Non-resident person:

• Non-resident individuals have a nexus in the state, derive income from sources, or have a permanent establishment as per Cabinet Decision
• For taxation purposes, a branch within the state will be considered a single taxable entity with its parent company

Exempt Person

Certain exemptions are granted automatically by a cabinet decision, while others require an application, as outlined below:

Automatically exempt:

• The list of government entities and government-controlled entities will be specified in a cabinet decision that has not yet been published
• Natural resource businesses are exempt from taxation by notifying UAE Ministry of Finance
• Entities may be exempt from taxation if they are included in a Cabinet Decision (which has not yet been published) as Qualifying Public Benefit organizations

Approved by the Federal Tax Authority, an entity can be exempted:

• Pension and social security funds that are either public or private
• Eligible investment funds
• UAE subsidiaries that are entirely owned and controlled by exempt entities

Qualifying free zone person (QFZP)

To be eligible for the 0% CT rate, a Qualifying Free Zone Person (QFZP) must fulfil the following requirements:

• Ensure sufficient presence in the UAE
• Calculates the qualifying income based on criteria defined in a forthcoming cabinet decision
• The individual has not chosen to be liable for a 9% CT
• Adheres to relevant transfer pricing regulations (if any)

The tax rates applicable to Qualifying Free Zone Persons meeting the specified conditions shall be as follows:

• 0% on income that Qualifies
• A tax rate of 9% applies to taxable income that falls outside the scope of the qualifying income definition