Corporate taxation is a crucial aspect of any country’s fiscal policy, shaping the economic landscape and ensuring sustainable development. In the United Arab Emirates (UAE), the Corporate Tax Law defines the parameters within which businesses, both domestic and foreign, are taxed. In this blog post, we will delve into the intricacies of UAE Corporate Tax, shedding light on who falls under its purview and the essential details associated with it. Additionally, we will explore the significance of Corporate Tax Consultants in UAE and the process of Corporate Tax Registration in UAE.
Understanding UAE Corporate Tax: An Overview
Corporate Tax in the UAE is applicable to a specific category of entities, referred to as Taxable Persons. These individuals or entities are subject to Corporate Tax if they fall under any of the following criteria:
- Juridical persons incorporated in the UAE or foreign juridical persons that are effectively managed and controlled in the UAE.
- Non-resident juridical persons with a Permanent Establishment in the UAE.
- Non-resident Persons deriving State Sourced Income.
- Non-resident juridical persons earning income from Immovable Property in the UAE.
- Natural persons conducting Business or Business Activities in the UAE with a turnover exceeding AED 1,000,000 per Gregorian calendar year.
Resident Taxable Persons: Who are They?
- Resident Juridical Persons: These are entities incorporated or recognized under UAE laws or foreign laws but effectively managed and controlled within the UAE. Examples include Limited Liability Companies, Joint Stock Companies, and trusts under UAE legislation.
- Effective Management and Control: Determining residence isn’t solely based on incorporation but also considers where the business is effectively managed and controlled. For instance, a company registered abroad might be considered a resident if its substantial decisions are made within the UAE.
- Resident Natural Persons: Unlike many other jurisdictions, residence for Corporate Tax purposes in the UAE isn’t determined by a person’s domicile but rather by their business connection to the UAE. This approach ensures that anyone conducting business activities in the UAE, regardless of nationality or visa status, is liable for Corporate Tax.
Non-Resident Taxable Persons: Unraveling the Criteria
- Non-Resident Persons with Permanent Establishment: A foreign entity might be subject to UAE Corporate Tax if they conduct business through a fixed place in the UAE or if another person conducts business in the UAE on their behalf.
- Preparatory and Auxiliary Activities: Not all physical presence in the UAE leads to a Permanent Establishment. Temporary and exceptional situations where a natural person is present in the UAE don’t automatically create a Permanent Establishment.
- Non-Resident Persons with State Sourced Income: Non-residents earning income from a UAE source, like a Resident Person or a Permanent Establishment, are subject to Corporate Tax. However, income solely from State Sourced activities is subject to a 0% Withholding Tax.
- Non-Resident Persons with Nexus in the UAE: Corporate Tax applies when a Non-Resident juridical person earns income from Immovable Property in the UAE. This includes various forms of income related to immovable property, ensuring comprehensive taxation.
The Role of Double Taxation Agreements and Free Zone Entities
- Double Taxation Agreements: Cross-border activities might lead to double taxation, which is mitigated by Double Taxation Agreements. These agreements, following OECD principles, allocate taxing rights between jurisdictions and prevent undue taxation.
- Free Zone Persons: Businesses operating in UAE Free Zones enjoy tax incentives. To qualify for a 0% Corporate Tax rate, entities must meet specific criteria, ensuring that income generated from certain activities is tax-exempt.
In order to be considered as a Qualifying Free Zone Person, a Free Zone Person must meet the following requirements:
- derive Qualifying Income from relevant transactions ;
- maintain adequate substance in the UAE ;
- satisfy the de minimis requirement ;
- have not elected to be subject to Corporate Tax ;
- comply with the transfer pricing rules and documentation requirements under the Corporate Tax Law; and
- prepare and maintain audited Financial Statements for the purposes of the Corporate Tax Law.
The Minister may prescribe additional conditions to be met by a Free Zone Person in order to be considered as a Qualifying Free Zone Person.
Qualifying Income is the income that can benefit from the 0% Corporate Tax rate.
Unlike ordinary Taxable Persons, Qualifying Free Zone Persons are not entitled to a 0% rate on their first AED 375,000 of Taxable Income that is not considered as Qualifying Income. Therefore, any Taxable Income that is not Qualifying Income will be taxed at the general rate of 9% Qualifying Income includes:
- Income derived from transactions with other Free Zone Persons, except for income derived from Excluded Activities;
- Income derived from transactions with any Non-Free Zone Person, domestic and foreign, only in the case of Qualifying Activities that are not Excluded Activities; and
- Any other income where the de minimis requirement is satisfied.
Decision No. 55 of 2023 on Determining Qualifying Income for the Qualifying Free
Zone Person and Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities.
Qualifying Income does not include income derived from Excluded Activities.The Excluded Activities are listed in Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities, and include:
- Transactions with natural persons, except in relation to certain Qualifying Activities;
- Banking, insurance, finance and leasing activities that are subject to the relevant regulatory oversight of the relevant competent authority in the UAE, except for certain exceptions;
- Ownership or exploitation of UAE immovable property, other than Commercial Property located in a Free Zone provided such activity in relation to Immovable Property located in a Free Zone is conducted with other Free Zone Persons;
- Ownership or exploitation of intellectual property assets; and
- Activities that are ancillary (which serve no independent function) to the above activities.
Qualifying Income includes income derived from transactions with Non-Free Zone Persons only in respect of Qualifying Activities. These activities are defined in Ministerial Decision No. 139 of 2023, and include:
- Manufacturing of goods or materials;
- Processing of goods or materials;
- Holding of shares and other securities;
- Ownership, management and operation of Ships;
- Reinsurance services subject to the regulatory oversight of the relevant competent authority in the UAE;
- Fund management services subject to regulatory oversight by the relevant competent authority in the UAE;
- Wealth and investment management services subject to regulatory oversight by the relevant competent authority in the UAE;
- Headquarter services to Related Parties;
- Treasury and financing services to Related Parties;
- Financing and leasing of Aircraft, including engines and rotatable 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; and
- Any ancillary activities (which serve no independent function) to the above activities.
Corporate Tax Consultants in UAE: Navigating the Complexity
Navigating the intricacies of UAE Corporate Tax requires expertise. Corporate Tax Consultants in UAE play a vital role in helping businesses understand their tax obligations, ensuring compliance, and optimizing tax structures for efficient financial management.
Corporate Tax Registration in UAE: A Prerequisite for Compliance
Corporate Tax Registration in UAE is a fundamental step for businesses falling under the tax ambit. Proper registration ensures that a business is aware of its tax liabilities, files returns accurately, and operates in full compliance with UAE tax laws.
Conclusion: A Complex yet Essential Aspect of Business
In summary, understanding UAE Corporate Tax is pivotal for businesses operating within the country’s borders. Whether you are a resident juridical person, a non-resident with a Permanent Establishment, or a Free Zone entity, compliance with tax laws is paramount. With the support of Corporate Tax Consultants in UAE , like Elevate ,businesses can navigate the complexities, optimize their tax liabilities, and contribute meaningfully to the UAE’s thriving economy. Corporate Tax, though complex, is a crucial aspect of sustainable business, ensuring equitable contributions to the nation’s growth and development.