Who Is Subject to Corporate Tax in the UAE?
UAE Corporate Tax, introduced under Federal Decree-Law No. 47 of 2022, applies to financial years beginning on or after 1 June 2023. The law establishes which businesses and individuals fall within its scope, and understanding this scope is the starting point before looking at rates, reliefs, or free zone treatment.
Corporate Tax applies to businesses incorporated in the UAE, to individuals conducting business or commercial activity in the UAE regardless of residency status, and to foreign legal entities that are effectively managed and controlled from within the UAE or that maintain a permanent establishment here. A foreign person with no permanent establishment and no effective management presence in the UAE generally does not incur Corporate Tax liability on UAE-sourced dividends, interest, royalties, capital gains, or service fees.
What Is the Difference Between a Resident and Non-Resident Person for Corporate Tax?
Corporate Tax residency is a defined legal concept under UAE law and is not the same as where an individual physically lives. A Resident Person is a legal entity incorporated or established under UAE law, including free zone entities, along with any individual conducting business in the UAE and any foreign legal entity that is effectively managed and controlled from the UAE.
A Non-Resident Person is an entity or individual that is not a UAE resident but maintains a permanent establishment in the UAE, or that earns certain categories of UAE-sourced income. Distinguishing between resident and non-resident status matters because it determines the scope of income that falls within the UAE Corporate Tax net for that person.
Also Read: Corporate Tax filing Services
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What Corporate Tax Rate Applies?
The standard Corporate Tax rate is 0% on taxable income up to AED 375,000, and 9% on taxable income above that threshold. This threshold was set specifically to support startups and small and medium-sized businesses, and it applies to realized profit, not to total revenue. Personal employment income and wages are not subject to Corporate Tax, and personal income earned by individuals from bank deposits, savings plans, or personal real estate investment is also outside the scope of the tax.
Which Types of Income Are Not Considered Taxable Income?
Certain categories of income are excluded from the calculation of Taxable Income entirely, meaning both the income and any related expenditure are left out of the tax base. This includes dividends and other profit distributions received from a UAE resident juridical person, dividends and profit distributions received from a qualifying Participating Interest in a foreign entity, other income connected to a qualifying Participating Interest, income of a qualifying foreign permanent establishment, and income earned by a non-resident person from operating aircraft or ships in international transportation, where the relevant conditions under the law are met.
These exclusions exist primarily to avoid double taxation. Dividends and capital gains connected to both domestic and international shareholdings are generally kept outside the Corporate Tax base for this reason, and a Resident Person may in certain circumstances elect to exclude income from a foreign permanent establishment from its UAE taxable income.
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Which Persons Are Exempt From Corporate Tax?
UAE Corporate Tax Law designates certain categories of entities as Exempt Persons, in recognition of their role in the UAE’s public sector and social infrastructure. These include government entities and government-controlled organizations, public and private pension and social security funds meeting the relevant conditions, qualifying investment funds, and organizations that qualify for public benefit status.
Businesses engaged in the extraction of the UAE’s natural resources, and businesses operating in the non-extractive portions of the natural resource value chain, are exempt from federal Corporate Tax where they are already subject to Emirate-level taxation on that activity. A wholly owned subsidiary of an Exempt Person, such as a holding company used by a qualifying investment fund to hold an asset, may also apply to the Federal Tax Authority for exempt status under specific conditions.
Are Free Zone Businesses Automatically Exempt From Corporate Tax?
Free zone entities remain within the scope of UAE Corporate Tax and are subject to the same registration and compliance requirements as mainland businesses. A free zone entity that meets the conditions to be recognized as a Qualifying Free Zone Person can access a 0% rate on its Qualifying Income, while any non-qualifying income is taxed at the standard 9% rate. Meeting Qualifying Free Zone Person status depends on several conditions relating to substance, income type, and compliance, which involve enough detail to warrant separate, dedicated coverage.
What Tax Relief Options Exist Under Corporate Tax Law?
UAE Corporate Tax Law provides several relief mechanisms for taxpayers who meet the relevant conditions. Tax Loss Relief allows a tax loss to be carried forward and offset against taxable income in future tax periods, subject to a cap of 75% of that period’s taxable income, or another percentage set by Cabinet resolution. Business Restructuring Relief allows profit or loss arising from qualifying mergers, business combinations, or divisions to be excluded from Taxable Income under specified conditions.
Small Business Relief is available to UAE resident taxpayers whose revenue falls below a threshold set by Ministerial Decision, currently AED 3 million, for both the current and prior tax periods, subject to election. Businesses considering Small Business Relief or Qualifying Free Zone Person status should treat these as distinct, detailed topics in their own right, since eligibility and compliance requirements for each involve conditions beyond the scope of a general Corporate Tax applicability overview.
Frequently Asked Questions (FAQs)
Who is required to register for Corporate Tax in the UAE?
Is personal income subject to UAE Corporate Tax?
What is the difference between a resident and non-resident person under Corporate Tax law?
Are free zone companies subject to Corporate Tax?
Which organizations are exempt from UAE Corporate Tax?
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
How Farahat & Co. Can Help
Farahat & Co. advises UAE businesses and individuals on Corporate Tax scope, residency status, and registration obligations under Federal Decree-Law No. 47 of 2022.
Contact Farahat & Co. today to discuss your UAE Corporate Tax requirements.
