Corporate Tax

The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and
Businesses (hereinafter referred to as the “Corporate Tax Law”) was issued by the
United Arab Emirates (“UAE”), on 09 December 2022.

The Corporate Tax Law provides the legislative basis for the introduction and
implementation of a Federal Corporate Tax (“Corporate Tax”) in the UAE and is
effective for financial years starting on or after 1 June 2023.

The introduction of Corporate Tax is intended to help the UAE achieve its strategic
objectives and accelerate its development and transformation. The certainty of a
competitive Corporate Tax regime that adheres to international standards, together
with the UAE’s extensive network of double tax treaties, will cement the UAE’s
position as a leading jurisdiction for business and investment.

Given the position of the UAE as an international business hub and global financial
centre, the UAE Corporate Tax regime builds from best practices globally and
incorporates principles that are internationally known and accepted. This ensures
that the UAE Corporate Tax regime will be readily understood and is clear in its
implications

Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and

Businesses

Overview
What is Corporate Tax?
Corporate Tax is a form of direct tax levied on the net income of corporations and
other businesses.

Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business

Profits Tax” in other jurisdictions.

Who is subject to Corporate Tax?

Broadly, Corporate Tax applies to the following “Taxable Persons”:

 UAE companies and other juridical persons that are incorporated or effectively
managed and controlled in the UAE;
 Natural persons (individuals) who conduct a Business or Business Activity in
the UAE as specified in a Cabinet Decision to be issued in due course; and
 Non-resident juridical persons (foreign legal entities) that have a Permanent
Establishment in the UAE (which is explained under [Section 8]).
Juridical persons established in a UAE Free Zone are also within the scope of
Corporate Tax as “Taxable Persons” and will need to comply with the requirements
set out in the Corporate Tax Law. However, a Free Zone Person that meets the
conditions to be considered a Qualifying Free Zone Person can benefit from a
Corporate Tax rate of 0% on their Qualifying Income (the conditions are included in
[Section 14]).

Non-resident persons that do not have a Permanent Establishment in the UAE or

that earn UAE sourced income that is not related to their Permanent Establishment
may be subject to Withholding Tax (at the rate of 0%). Withholding tax is a form of
Corporate Tax collected at source by the payer on behalf of the recipient of the
income. Withholding taxes exist in many tax systems and typically apply to the cross-
border payment of dividends, interest, royalties and other types of income.

Who is exempt from Corporate Tax?

Certain types of businesses or organisations are exempt from Corporate Tax given
their importance and contribution to the social fabric and economy of the UAE.
These are known as Exempt Persons and include:

Automatically ● Government Entities

exempt
● Government Controlled Entities that are specified in a
Cabinet Decision

Exempt if notified to ● Extractive Businesses

the Ministry of
Finance (and subject to ● Non-Extractive Natural Resource Businesses
meeting certain
conditions)

Exempt if listed in a ● Qualifying Public Benefit Entities

Cabinet Decision

Exempt if applied to ● Public or private pension and social security funds

and approved by the
Federal Tax ● Qualifying Investment Funds
Authority (and subjec
t to meeting certain ● Wholly-owned and controlled UAE subsidiaries of a
conditions) Government Entity, a Government Controlled Entity, a
Qualifying Investment Fund, or a public or private pension
or social security fund

In addition to not being subject to Corporate Tax, Government Entities, Government

Controlled Entities that are specified in a Cabinet Decision, Extractive Businesses
and Non-Extractive Natural Resource Businesses may also be exempted from any
registration, filing and other compliance obligations imposed by the Corporate Tax
Law, unless they engage in an activity which is within the charge of Corporate Tax.

How is a Taxable Person subject to Corporate Tax?

In line with the tax regimes of most countries, the Corporate Tax Law taxes income
on both a residence and source basis. The applicable basis of taxation depends on
the classification of the Taxable Person.

 A “Resident Person” is taxed on income derived from both domestic and

foreign sources (i.e. a residence basis).
 A “Non-Resident Person” will be taxed only on income derived from sources
within the UAE (i.e. a source basis).
Residence for Corporate Tax purposes is not determined by where a person resides
or is domiciled but instead by specific factors that are set out in the Corporate Tax
Law. If a Person does not satisfy the conditions for being either a Resident or a
Non-Resident person then they will not be a Taxable Person and will not therefore
be subject to Corporate Tax.

Who is a Resident Person?

Companies and other juridical persons that are incorporated or otherwise formed or
recognised under the laws of the UAE will automatically be considered a Resident
Person for Corporate Tax purposes. This covers juridical persons incorporated in the
UAE under either mainland legislation or applicable Free Zone regulations, and
would also include juridical persons created by a specific statute (e.g. by a special
decree).

Foreign companies and other juridical persons may also be treated as Resident
Persons for Corporate Tax purposes where they are effectively managed and
controlled in the UAE. This shall be determined with regard to the specific
circumstances of the entity and its activities, with a determining factor being where
key management and commercial decisions are in substance made.

Natural persons will be subject to Corporate Tax as a “Resident Person” on income

from both domestic and foreign sources, but only insofar as such income is derived
from a Business or Business Activity conducted by the natural person in the UAE.
Any other income earned by a natural person would not be within the scope of
Corporate Tax.

Who is a Non-Resident Person?

Non-Resident Persons are juridical persons who are not Resident Persons and:

 have a Permanent Establishment in the UAE; or

 derive State Sourced Income.
Non-Resident Persons will be subject to Corporate Tax on Taxable Income that is
attributable to their Permanent Establishment (which is explained under Section 8).
Certain UAE sourced income of a Non-Resident Person that is not attributable to a
Permanent Establishment in the UAE will be subject to Withholding Tax at the rate of
0%.

What is a Permanent Establishment?

The concept of Permanent Establishment is an important principle of international
tax law used in corporate tax regimes across the world. The main purpose of the
Permanent Establishment concept in the UAE Corporate Tax Law is to determine if
and when a foreign person has established sufficient presence in the UAE to warrant
the business profits of that foreign person to be subject to Corporate Tax.

The definition of Permanent Establishment in the Corporate Tax Law has been
designed on the basis of the definition provided in Article 5 of the OECD Model Tax
Convention on Income and Capital and the position adopted by the UAE under the
Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base
Erosion and Profit Shifting. This allows foreign persons to use the relevant
Commentary of Article 5 of the OECD Model Tax Convention when assessing
whether they have a Permanent Establishment or not in the UAE. This assessment
should consider the provisions of any bilateral tax agreement between the country of
residence of the Non-Resident Person and the UAE.

What is Corporate Tax imposed on?

Corporate Tax is imposed on Taxable Income earned by a Taxable Person in a Tax
Period.

Corporate Tax would generally be imposed annually, with the Corporate Tax liability
calculated by the Taxable Person on a self-assessment basis. This means that the
calculation and payment of Corporate Tax is done through the filing of a Corporate
Tax Return with the Federal Tax Authority by the Taxable Person.

The starting point for calculating Taxable Income is the Taxable Person’s accounting
income (i.e. net profit or loss before tax) as per their financial statements. The
Taxable Person will then need to make certain adjustments to determine their
Taxable Income for the relevant Tax Period. For example, adjustments to accounting
income may need to be made for income that is exempt from Corporate Tax and for
expenditure that is wholly or partially non-deductible for Corporate Tax purposes.

What income is exempt?

The Corporate Tax Law also exempts certain types of income from Corporate Tax.
This means that a Taxable Persons will not be subject to Corporate Tax on such
income and cannot claim a deduction for any related expenditure. Taxable Persons
who earn exempt income will remain subject to Corporate Tax on their Taxable
Income.

The main purpose of certain income being exempt from Corporate Tax is to prevent
double taxation on certain types of income. Specifically, dividends and capital gains
earned from domestic and foreign shareholdings will generally be exempt from
Corporate Tax. Furthermore, a Resident Person can elect, subject to certain
conditions, to not take into account income from a foreign Permanent Establishment
for UAE Corporate Tax purposes.

What expenses are deductible?

In principle, all legitimate business expenses incurred wholly and exclusively for the
purposes of deriving Taxable Income will be deductible, although the timing of the
deduction may vary for different types of expenses and the accounting method
applied. For capital assets, expenditure would generally be recognised by way of
depreciation or amortisation deductions over the economic life of the asset or
benefit.

Expenditure that has a dual purpose, such as expenses incurred for both personal
and business purposes, will need to be apportioned with the relevant portion of the
expenditure treated as deductible if incurred wholly and exclusively for the purpose
of the taxable person’s business.

Certain expenses which are deductible under general accounting rules may not be
fully deductible for Corporate Tax purposes. These will need to be added back to the
Accounting Income for the purposes of determining the Taxable Income. Examples
of expenditure that is or may not be deductible (partially or in full) include:

Types of Expenditures Limitation to

deductibility

 Bribes No deduction
 Fines and penalties
(other than
amounts awarded
as compensation
for damages or
breach of contract)
 Donations, grants
or gifts made to an
entity that is not a
Qualifying Public
Benefit Entity
 Dividends and
other profits
distributions
 Corporate Tax
imposed under the
Corporate Tax
Law
 Expenditure not
incurred wholly
and exclusively for
 the purposes of the
Taxable person’s
Business
 Expenditure
incurred in
deriving income
that is exempt
from Corporate
Tax

 Client Partial deduction of 50%

entertainment of the amount of the
expenditure expenditure

 Interest Deduction of net interest

expenditure expenditure exceeding a
certain de minimis
threshold

up to 30% of the amount

of earnings before the
deduction of interest, tax,
depreciation and
amortisation (except for
certain activities)

What is the Corporate Tax rate?

Corporate Tax will be levied at a headline rate of 9% on Taxable Income exceeding
AED 375,000. Taxable Income below this threshold will be subject to a 0% rate of
Corporate Tax.

Corporate Tax will be charged on Taxable Income as follows:

Resident Taxable Persons

Taxable Income not exceeding AED 0%

375,000

(this amount is to be confirmed in a

Cabinet Decision)
 Taxable Income exceeding AED 375,000 9%

Qualifying Free Zone Persons

Qualifying Income 0%

Taxable Income that does not meet the 9%

Qualifying Income definition

What is the Withholding Tax rate?

A 0% withholding tax may apply to certain types of UAE sourced income paid to non-
residents. Because of the 0% rate, in practice, no withholding tax would be due and
there will be no withholding tax related registration and filing obligations for UAE
businesses or foreign recipients of UAE sourced income.

Withholding tax does not apply to transactions between UAE resident persons.

When can a Free Zone Person be a Qualifying Free Zone Person?

A Free Zone Person that is a Qualifying Free Zone Person can benefit from a
preferential Corporate Tax rate of 0% on their “Qualifying Income” only.

In order to be considered a Qualifying Free Zone Person, the Free Zone Person
must:

 maintain adequate substance in the UAE;

 derive ‘Qualifying Income’;
 not have made an election to be subject to Corporate Tax at the standard
rates; and
 comply with the transfer pricing requirements under the Corporate Tax Law.
The Minister may prescribe additional conditions that a Qualifying Free Zone Person
must meet.

If a Qualifying Free Zone Person fails to meet any of the conditions, or makes an
election to be subject to the regular Corporate Tax regime, they will be subject to the
standard rates of Corporate Tax from the beginning of the Tax Period where they
failed to meet the conditions.

What are Tax Groups, and when can they be formed?

Two or more Taxable Persons who meet certain conditions (see below) can apply to
form a “Tax Group” and be treated as a single Taxable Person for Corporate Tax
purposes.
To form a Tax Group, both the parent company and its subsidiaries must be resident
juridical persons, have the same Financial Year and prepare their financial
statements using the same accounting standards.

Additionally, to form a Tax Group, the parent company must:

 own at least 95% of the share capital of the subsidiary;

 hold at least 95% of the voting rights in the subsidiary; and
 is entitled to at least 95% of the subsidiary’s profits and net assets.
The ownership, rights and entitlement can be held either directly or indirectly through
subsidiaries, but a Tax Group cannot include an Exempt Person or Qualifying Free
Zone Person.

How to calculate the Taxable Income of a Tax Group?

To determine the Taxable Income of a Tax Group, the parent company must prepare
consolidated financial accounts covering each subsidiary that is a member of the Tax
Group for the relevant Tax Period. Transactions between the parent company and
each group member and transactions between the group members would be
eliminated for the purposes of calculating the Taxable Income of the Tax Group.

Registering, filing and paying Corporate Tax

All Taxable Persons (including Free Zone Persons) will be required to register for
Corporate Tax and obtain a Corporate Tax Registration Number. The Federal Tax
Authority may also request certain Exempt Persons to register for Corporate Tax.

Taxable Persons are required to file a Corporate Tax return for each Tax Period
within 9 months from the end of the relevant period. The same deadline would
generally apply for the payment of any Corporate Tax due in respect of the Tax
Period for which a return is filed.

Illustrated below are examples of the registration, filing and payment deadlines
associated for Taxable Persons with a Tax Period (Financial Year) ending on 31
May or 31 December (respectively).
How to prepare for Corporate Tax?
1. Read the Corporate Tax Law and the supporting information available on the
websites of the Ministry of Finance and the Federal Tax Authority.
2. Use the available information to determine whether your business will be
subject to Corporate Tax and if so, from what date.
3. Understand the requirements for your business under the Corporate Tax Law,
including, for example:
1. Whether and by when your business needs to register for Corporate
Tax;
2. What is the accounting / Tax Period for your business;
3. By when your business would need to file a Corporate Tax return;
4. What elections or applications your business may or should make for
Corporate Tax purposes;
5. What financial information and records your business will need to keep
for Corporate Tax purposes;
4. Regularly check the websites of the Ministry of Finance and the Federal Tax
Authority for further information and guidance on the Corporate Tax regime.
Where to find more information?
Please visit the Ministry of Finance and the Federal Tax Authority websites for
FAQs here and more information