The United Arab Emirates (UAE) is a federation of seven emirates that has been known for its attractive business environment and tax-free regime for many years. However, on 31 January 2022, the Ministry of Finance (MoF) announced that the UAE will introduce a federal Corporate Tax (CT) on business profits that will be effective for financial years starting on or after 1 June 2023. This is a significant change that will affect all businesses operating in the UAE, regardless of their legal form, ownership, or activity. Therefore, businesses need to understand the new CT system and plan accordingly to optimize their tax position and comply with the new requirements
What is Corporate Tax Planning?
Corporate tax planning is the process of analyzing and arranging the financial affairs of a business to minimize its tax liability and maximize its after-tax profits. Corporate tax planning can involve various aspects, such as:
- Choosing the optimal legal structure and jurisdiction for the business
- Allocating income and expenses among different entities and countries
- Taking advantage of tax incentives and exemptions
- Managing tax risks and disputes
- Reporting and documenting tax transactions and positions
Why is Corporate Tax Planning Important in the UAE?
Corporate tax planning is important in the UAE for several reasons, such as:
- It can help businesses optimize their tax benefits and minimize their tax liabilities within the UAE’s tax framework.
- It can help businesses comply with the legal requirements and avoid the penalties associated with non-compliance.
- It can enhance the financial performance and sustainability of businesses by improving their cash flow, profitability, and competitiveness.
What is the Corporate Tax (CT) Regime in the UAE?
The CT regime in the UAE is governed by the Federal Decree-Law No. 47 of 2022 on the taxation of corporations and businesses, and its executive regulations and related decisions. The CT law applies to:
Corporate Tax applies to Persons who are subject to it under the Corporate Tax Law. These Persons are called Taxable Persons and they can be either Resident Persons or Non-Resident Persons as per Article 11 of the Corporate Tax Law. The main categories of Taxable Persons are:
- Juridical persons (such as corporations) that are either established in the UAE or managed and controlled effectively from the UAE;
- Non-resident juridical persons that have a Permanent Establishment in the UAE;
- Non-Resident Persons who earn State Sourced Income;
- Non-resident juridical persons that have a connection with the UAE by earning income from Immovable Property in the UAE; and
- Natural persons who carry out Business or Business Activities in the UAE and have a Turnover of more than AED 1,000,000 per Gregorian calendar year from such Business or Business Activities.
The corporate tax rate in the UAE is 9% for taxable income above AED 375,000. This rate was introduced in 2022 and became effective from the financial year starting on or after June 1, 2023. On the other hand, some businesses and sectors are exempt from corporate tax or qualify for a zero percent rate.
However, certain categories of businesses or business activities may be subject to different CT rates, as specified by the Cabinet. For example, the CT rate for oil and gas exploration and production activities is 55%.
UAE Corporate Tax Registration Exemptions
The following Persons shall not register for Corporate Tax with the Authority:
- A Government Entity.
- A Government Controlled Entity.
- A Person engaged in an Extractive Business that meets the conditions of Article 7 of the Corporate Tax Law.
- A Person engaged in a Non-Extractive Natural Resource Business, that meets the conditions of Article 8 of the Corporate Tax Law.
- A Non-Resident Person that derives only State Sourced Income under Article 13 of the Corporate Tax Law and that does not have a Permanent Establishment in the State according to the provisions of the Corporate Tax Law.
The CT law also introduces various tax compliance and reporting obligations for the entities, such as:
- Obtaining a tax registration number (TRN) from the Federal Tax Authority (FTA)
- Filing an annual CT return and the remaining Corporate Tax Payable amount must be settled within nine months from the end of the relevant Tax Period.
- To provide the FTA with any information, documents or records that may be needed for applying and enforcing the Corporate Tax Law. The Taxable Person shall provide such information, documents or records either in the Tax Return or whenever the FTA asks for them.
- Cooperating and providing information to the FTA upon request
Qualifying Activities Conducted by Qualifying Free Zone
The UAE CT system applies to all businesses that carry out any qualifying activities in the UAE, as defined by Ministerial Decision No. 265 of 2023. Qualifying Free Zone Person shall be deemed to conduct Qualifying Activities if it engages in any of the following activities:
- Manufacturing of goods or materials.
- Processing of goods or materials.
- Trading of Qualifying Commodities.
- Holding of shares and other securities for investment purposes.
- Ownership, management and operation of Ships.
- Reinsurance services.
- Fund management services.
- Wealth and investment management services.
- Headquarters services to Related Parties.
- Treasury and financing services to Related Parties.
- Financing and leasing of aircraft.
- Distribution of goods or materials in or from a Designated Zone.
- Logistics services.
- Any ancillary activities (which serve no independent function) to the above activities.
The UAE CT system does not apply to any excluded activities, as defined by the Ministerial Decision No. 265 of 2023. The following activities are excluded unless otherwise specified:
- Transactions with natural persons, except for some Qualifying Activities;
- Regulated banking, insurance, finance and leasing activities;
- Ownership or exploitation of UAE immovable property, except for Commercial Property in a Free Zone with other Free Zone Persons;
- Ownership or exploitation of intellectual property assets; and
- Activities that are ancillary to the above activities.
Corporate Tax Planning Strategies
In light of the introduction of the UAE CT system, businesses should review their current tax situation and consider the following strategies to optimize their tax position:
- Assess the impact of the UAE CT system on the business’s income, expenses, and cash flow, and prepare a tax budget and forecast.
- Register with the FTA and obtain a Tax Registration Number (TRN) before the deadline.
- Review the business’s accounting policies and systems and ensure that they are compliant with the UAE CT requirements and standards.
- Identify and segregate the income and expenses related to the qualifying and excluded activities, and allocate them accordingly.
- Claim all the allowable deductions and losses, and maintain proper records and documentation to support them.
- Utilize the foreign tax credit mechanism to avoid double taxation on the same income, and obtain tax certificates from the foreign tax authorities.
- Monitor the tax compliance obligations and deadlines, and file the tax returns and pay the tax on time.
- Seek professional advice and guidance from tax experts and consultants, and keep abreast of the latest developments and updates on the UAE CT system.
Are you looking for corporate tax planning in the UAE? HHS Lawyers is a law firm that can help you with that. Our tax consultants have in-depth knowledge of the UAE tax laws and regulations, as well as international tax standards and treaties. We can help you optimize your tax liability, comply with the law, and avoid unnecessary risks. Whether you need advice on choosing the best legal structure for your business, leveraging the UAE’s double taxation avoidance agreements, complying with the transfer pricing rules, implementing effective VAT strategies, preparing and filing your tax returns, or resolving any tax audits or disputes, we are here to assist you. Contact us today and learn how we can help you achieve your business goals.