Businesses operating in the UAE are facing a new reality: a requirement to comply with a federal corporate tax framework. This mandated obligation applies for accounting periods commencing on or after June 1, 2023, which for most businesses, who align with a traditional year-end cycle, means a requirement to comply with effect from January 1, 2024, onwards.
As part of complying with the corporate tax regime, every UAE business must register with the UAE Federal Tax Authority (FTA). Failure to comply with the registration deadlines specified by the FTA, outlined in their recent announcement, can result in a fine of AED 10,000 per entity. These deadlines are primarily tied to the issuance date of the business’ trade license, which may not align with the business’ financial year-end. Non-resident entities operating in the UAE through branches are subject to separate registration timelines based on their branch’s financial year-end. It is imperative for all businesses operating in the UAE, regardless of their residency status, to promptly register with the FTA for corporate tax, if they have not already done so.
Aside from registering requirements, each business operating in the UAE needs to understand how the UAE corporate tax legislation applies to their operations. Businesses that are incorporated (or established) in a UAE free zone could be eligible for a 0% corporate tax rate on their income streams subject to satisfying certain conditions. Businesses that are incorporated in the UAE mainland will be subject to tax at 9% on their profits that exceed AED 375,000 (with the first AED 375,000 of profits being eligible for a 0% corporate tax rate).
UAE free zones
Historically, businesses operating within UAE free zones have been offered tax exemption, often spanning up to 50 years, bestowed upon them by the respective UAE free zone authorities. However, the introduction of the corporate tax regime has brought about a significant change, leading to the elimination of this exemption.
As a result, businesses that operate in a UAE free zone are subject to the UAE corporate tax regime but they are eligible for a 0% corporate tax rate if they are viewed as a “Qualifying Free Zone Person”. Several conditions are applicable for the 0% corporate tax to apply, with the main focus being on the income streams that are received (referred to as “Qualifying Income”) by the UAE free zone business.
The focus on understanding the revenue streams received by the UAE free zone business places a significant obligation upon each free zone business to assess if their income streams satisfy the Qualifying Free Zone Person classification. There are strict de minimis conditions which means that any income generated outside of the Qualifying Income definition can have significant consequences, potentially resulting in the UAE free zone business not being eligible for the 0% corporate tax rate (and would instead be taxed at 9% for the current year and the next four tax years).
UAE free zones should assess their income streams to determine if they are eligible for the 0% tax rate, and will need to continually monitor their income streams to ensure that they continue to be viewed as a Qualifying Free Zone Person.
As part of being eligible for the 0% corporate tax rate, UAE free zone businesses are also facing an additional requirement of preparing audited financial statements. This will be a new requirement for many businesses in the UAE and will impose an additional financial, and time cost, for the businesses to ensure that they are compliant with the corporate tax regime.
UAE mainland
UAE mainland businesses face a more straightforward tax regime in that the net profit of the business is taxable at 9%, unless such income streams are exempted.
For traditional operating businesses (rather than investment/holding companies as an example), these exemptions would not be relevant. Therefore, the main focus for these businesses would be on identifying if there is any non-deductible expenditure (such as client entertaining and fines/penalties) and then ensuring supporting documentation and businesses processes are in place to support the final tax position.
Throughout compliance with the corporate tax regime, taxpayers will need to comply with the transfer pricing requirements in the UAE. This entails ensuring that all transactions between related parties are priced comparably to those involving third-parties. This requirement is of significant importance to group transactions, as well as for family-owned businesses that may have transactions with the ultimate shareholders. Consequently, there may be a need to review historically established transactions to align with the UAE transfer pricing regulations and ensure compliance.
In conclusion, businesses operating in the UAE do have sufficient legislation to understand how corporate tax applies to their business and where there may be material tax issues that should be analysed. Where businesses haven’t done so already, they should commence the process of registering for UAE corporate tax by the applicable deadline imposed by the FTA.
By Ben Philips, a senior associate in Baker McKenzie’s Dubai office, advising on international tax, mergers and acquisitions, and corporate tax legislation across the Middle East and North Africa.
