December 18, 2023

UAE Corporation Tax - Changes to be Aware of in 2024

The UAE introduced a corporate tax regime on June 1st, 2023, with a standard tax rate of 9%. This tax applies to taxable income generated by UAE-resident entities, regardless of whether they are incorporated in the UAE or not. However this significant shift in the UAE's fiscal landscape has sparked questions about exemptions, free zones, and the overall impact on businesses. We are going to try and breakdown the rules of the new CT regime here, to make it easier to understand whether you and your business will be impacted, as if you are it may be time to start preparing soon, with deadlines for paperwork coming around the end of Q1 2024!

At the heart of the CT regime lies a standard tax rate of 9%, applied to the taxable income of UAE-resident entities, encompassing both domestic and foreign companies with a permanent establishment (PE) in the country. This tax applies to both tangible and intangible income sources, including profits from sales, services, investments, and intellectual property. Notably, a zero-tax rate is in effect for taxable income up to AED 375,000, providing a welcome relief for smaller businesses.

Who is Subject to the 9% CT Regime, and who is exempt?

The CT regime applies to all taxable persons in the UAE, which includes:

  • UAE-resident companies: This includes companies incorporated in the UAE, as well as foreign companies with a permanent establishment (PE) in the UAE.
  • Foreign companies without a PE in the UAE: These companies are only subject to the CT regime if they have significant UAE business activity.

Free Zones: A Special Consideration

Free zones, designated economic zones within the UAE, have traditionally offered attractive tax benefits to businesses operating within their boundaries. Recognising the importance of free zones, the CT regime retains the tax exemptions for existing free zone businesses and entities for the first five years of operation. This exemption provides stability and continuity for businesses already established in free zones. However, some free zones have introduced their own corporate tax regimes or amended their regulations to align with the national CT framework, so it's worth checking rules of your specific freezone if you operate within one.

Other Exemptions and Exclusions

The CT regime carefully considers the unique needs of certain entities, offering exemptions and exclusions to alleviate their tax burden. These exemptions include:

  1. Government Entities: Governmental bodies, including ministries, departments, and local municipalities, are exempt from the CT regime.
  2. Charitable Organisations and Non-Profit Organisations: Non-profit organisations dedicated to social causes or scientific research are exempt from the CT regime.
  3. Certain Foreign Companies: Foreign companies without a PE in the UAE are only subject to the CT regime if they engage in significant business activities in the country.

Taxable Income Calculation

The CT regime employs a straightforward calculation for determining taxable income. It involves subtracting allowable deductions and exemptions from the total revenue of a taxable entity. Allowable deductions encompass expenses incurred in generating income, depreciation on assets, and provisions for losses. Exemptions include certain types of income, such as interest income from government bonds and dividends received from certain entities.

Impact on Businesses: A Diversified Landscape

The introduction of the CT regime inevitably impacts businesses operating in the UAE. While the 9% tax rate is relatively low compared to other nations in the region, it still represents an additional cost for businesses. The overall impact will vary depending on the type of business, its size, and its specific operations.

Smaller businesses with annual taxable income below AED 375,000 will benefit from the zero-tax rate, shielding them from the initial tax burden. For larger businesses, the 9% tax rate may represent a significant expense, requiring careful tax planning and management strategies to optimise their tax liability.

Tax Compliance Requirements: A Mandate for Businesses

To remain compliant with the CT regime, businesses are subject to a set of obligations, including:

  1. Registration: Registering with the tax authority, the Federal Tax Authority (FTA), is mandatory for all taxable persons.
  2. Accounting Records: Businesses must maintain accurate and comprehensive accounting records to support their tax filings.
  3. Annual Tax Returns: Filing annual tax returns is an essential requirement for businesses.
  4. Tax Payments: Taxes must be paid on time to avoid penalties and interest charges.

How the UAE CT Compares to the CT rates in Other Countries

CountryStandard Corporation Tax Rate
UAE9%
United States21%
United Kingdom19%
China25%
Japan23.2%
Germany30%
France33.3%
Italy29.7%
Spain25%
Brazil34%
Standard Corporation Tax Rates In Various Other Countries - 2023/2024

As we can see here, the UAE's new 9% corporate tax rate is significantly lower than the standard tax rates of many other developed countries. This hopefully means the UAE's status as an attractive destination for businesses won't be impacted, and that those looking to minimise their tax liability will still see benefits by doing business in the UAE.

Overall Impact: A Balancing Act

The introduction of the CT regime marks a significant step for the UAE's fiscal framework, generating revenue for government initiatives and potentially enhancing competitiveness. However, the impact on businesses needs to be carefully considered. The zero-tax rate for smaller businesses provides a cushion, while the exemption for free zones ensures continuity for established businesses. As businesses gain familiarity with the CT regime, they can develop strategies to mitigate its impact. The UAE's strong economy and diversified business landscape position it to navigate the transition smoothly. We believe this new CT regime has been setup and is being implemented in a way that shows the UAE is still strongly committed to supporting it's resident businesses.

In conclusion, the UAE's CT regime presents both opportunities and challenges for businesses. While the standard tax rate is relatively low, businesses need to adapt their operations and tax planning to effectively manage the new tax landscape. The government's efforts to mitigate the impact through exemptions and a zero-tax rate for smaller businesses are commendable, and businesses can leverage these provisions to their advantage. As the UAE continues to evolve its fiscal policies, businesses need to stay informed and proactive to maintain their competitive edge.

We hope this overview of the new CT tax scheme helps you understand the new obligations, however if anything it still unclear or you require help with your businesses preparation for it;s tax obligations, please get in touch with the Prism 7 Corporate team. We have in house tax experts ready to help you with guidance, advice and filing assistance.

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