UAE Corporate Tax 2024: A comprehensive guide For businesses

In recent years, the taxation landscape in the United Arab Emirates has undergone a significant transformation. About five years ago, the introduction of VAT on commercial activities marked a pivotal change, requiring many businesses to adjust their accounting practices. Now, with Corporate Tax coming into effect this year, companies will have to realign to accommodate the changes in the regulatory requirements of the UAE tax regime.

The Ministry of Finance announced the Federal Corporate Tax (CT) in January 2022 with the aim of helping the country accelerate its development and transformation. This new taxation is applicable from the start of the first financial year after June 1, 2023. However, for companies whose financial year starts in January, the UAE Corporate Tax came into effect from January 1, 2024.

To effectively plan and prepare for the coming fiscal year and be tax compliant, businesses must understand the implications of the new Corporate Tax. That’s why we have prepared a comprehensive guide on the UAE Corporate Tax that will give you a brief overview of how the Corporate Tax works and help you understand the key criteria you should consider to prepare ahead. Read along!

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Who is subjected to corporate tax in the UAE?

Corporate Tax (Corporate Income Tax) is a form of direct tax applied to the net income or net profit of corporations. Before we cover who is subjected to Corporate Tax in UAE, here are the key features of the new UAE CT rule: 

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As per the UAE CT law, you will be subjected to corporate tax rules if you fall into any of the following buckets: 

• Business activities under a commercial license in the UAE: This includes both local and foreign entities, regardless of their size or industry. If you are conducting business activities under a commercial license in the mainland UAE, you should be ready for the corporate tax.
• Free zone businesses: If you run a free zone business that is not a QFZP (Qualified Free Zone Person) and does not meet the qualifying income criteria, you will be subject to the free zone corporate tax. 
• Foreign entities and individuals: If you are a foreign entity or a foreign individual, then you will be subject to the corporate tax only if you conduct a trade or business in the UAE in an ongoing manner. The corporate tax law covers enterprises that have a physical presence in the UAE, such as a branch or office.
• Banking operations: Banks and other financial institutions will also be subject to corporate tax. This includes both local and foreign banks operating in the UAE.
• Real estate and construction businesses: The new corporate Tax will also cover businesses engaged in real estate management, construction, and development, or brokerage activities.

In addition, non-resident persons will be applicable for UAE Corporate Tax if they:

• Have a permanent establishment in the UAE: Non-resident businesses that have a fixed place of business in the UAE in the form of an office, branch, warehouse, or factory will be covered under the corporate tax. Only the income earned through UAE operations will be subjected to CT, not global income.
• Generate UAE source income: Non-resident businesses that earn income from selling goods, providing services, or other business activities in the UAE will be subject to corporate tax. 
• Have a nexus in the UAE (decision awaiting): This refers to the connection or link that a non-resident business has with the UAE. The specific criteria for what constitutes a nexus (significant presence) for a juridical person are still under consideration by the UAE authorities. 

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How much is the corporate tax rate in the UAE?

The UAE Corporate Tax rate is charged on taxable income as follows: 

A 15% CT rate applies to multinational corporations subject to OECD Base Erosion and Profit-Sharing laws that belong within Pillar 2 of the BEPS 2.0 framework. It applies to corporations with combined worldwide revenues above AED 3.15 billion.

Based on which bracket your business falls under, you can be charged a 0%, 9%, or 15% corporate tax rate on taxable income. Calculating taxable income and the applicable Corporate Tax (CT) rates is essential for understanding the practical effects of the new CT regime. The taxable income is calculated by deducting allowable deductions and exemptions from all revenues generated by an enterprise within the UAE for the fiscal year. 

Apart from taxable income, the nature of the business and location also affect how much amount they would have to pay for the upcoming tax period. 

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Who is exempt from UAE corporate tax?

The new corporate tax law in the UAE also offers certain exemptions that you should be aware of. Let's have a look at these provisions: 

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Exempt businesses

• Entities engaged in natural resource extraction are subject to corporate taxes as determined by the respective Emirates.
• If certain conditions are met, transactions and reorganizations within the same corporate group.
• Corporate dividends and capital gains from eligible shareholdings within the UAE if they meet the participation exemption rules.
• Interest income earned from saving schemes or bank deposits.
• Income derived from salaries and similar compensation received from either a public or private sector entity.
• Income from dividends, capital gains, interest, royalties, and other investment returns earned by a foreign investor.

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Small business tax relief

Small businesses play a crucial role in the UAE's economy, and the CT framework offers 'small business tax relief' to support their growth. This relief allows small businesses to qualify for a 0% tax rate, subject to meeting specific revenue limits and other conditions. The application process involves registering with the tax authorities and meeting the prescribed conditions. 

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Free Zone businesses qualifying for 0% CT

A 0% corporate tax applies to the qualifying income of a Qualifying Free Zone Person (QFZP). To qualify, these businesses must have an adequate presence in the UAE, meet the qualifying income threshold, and comply with all regulations. 

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Key priorities for you to prepare for the UAE Corporate Tax

As the corporate tax in UAE has taken effect, it is crucial to prioritize certain areas to ensure that your business is prepared for the upcoming tax cycle. Here are some steps you should consider:

• Ensure QFZP Compliance: As a business, you must meet all conditions for the Qualified Free Zone Person (QFZP) status. Pay close attention to guidelines related to qualifying income, substance requirements, de-minimis thresholds, and other criteria.
• Review Accounting Policies: It is important to review your accounting policies thoroughly. Pay special attention to policies that could have a significant impact on your tax liabilities, such as those related to depreciation, provisioning, and amortization. This review will help ensure compliance with the new UAE corporate tax law.
• Consider Deferred Tax: For the financial year 2023, consider whether you need to provide for deferred tax in your financial statements. This step is important, especially if you have made significant capital investments this year. Accounting for depreciation over the coming years is necessary.
• Check Tax Deduction Requirements: Take time to review your major expense categories. Ensure that they meet the requirements for the tax deduction, especially categories like exempt income, interest, etc., which are directly covered under corporate tax legislation.
• Plan Transfer Pricing Profile: With the new tax law in place, you must factor in the new transfer pricing rules. This profile will have a direct impact on your company's effective UAE corporate tax rate. On-time planning will help ensure that your business complies with the new regulations and avoids potential penalties.

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How the UAE Corporate tax impacts businesses

With the new UAE CT regime in place, your business is now required to register and submit corporate tax return annually. This requirement not only adds to your administrative duties but also emphasizes the importance of maintaining accurate accounting records to comply with tax laws. Any failure to follow these rules can lead to penalties and fines.

But that's not all; with the 9% corporate tax, your business might start feeling the extra financial burden. Therefore, you must take every step to prevent unnecessary cash leakages.

One effective way to manage your business expenses is by automating expense management with a robust spend management solution like Alaan. With Alaan, you can:

• Identify tax-deductible expenses while managing cash flow in real-time. This helps you optimize tax savings and improve your cash flow management.
• Save time and money while reducing potential errors in your tax filing. Automated systems help eliminate manual errors and streamline the tax filing process.
• Get valuable insights into where your company spends its money. Alaan will help you identify unnecessary spending and then assist with the implementation of strategic cost-saving measures.

Remember, preparing for the UAE corporate tax is not just about compliance; it is also about optimizing your business operations for maximum efficiency and profitability.

Get started with Alaan today and take control of your business expenses!