How to Avoid a Fine of 10,000 AED: Corporate Tax in the UAE

12:10 am  |  15.03.2024

Many entrepreneurs consider the UAE an ideal location for business development due to its favorable tax policies. However, significant changes in standard tax procedures have occurred since the beginning of last year.

Until recently, corporate tax was not mandatory in the United Arab Emirates. However, as of June last year, all companies must register with the tax office. In this article, we will examine these innovations in tax legislation in more detail and analyze the profitability of doing business in the UAE.

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Penalty for Late Filing of Corporate Income Tax (CIT): 10,000 AED

What is Corporate Tax (CT)?

Corporate tax is now levied on the net profits of companies under Federal Decree-Law No. 60 of 2023, which amended Federal Law No. 47 of 2022 on corporate taxation. Previously, this 20% tax was only applied to branches of foreign banks, and this rate remains unchanged. Additionally, a progressive tax rate of up to 55% was introduced for companies operating in the oil and gas sector, as well as in the extraction of natural resources.

Purposes of Introducing Corporate Tax

From 1 June 2023, medium and large businesses (and for some from 1 January 2024) were required to pay corporate tax at 9% of profits. This decision was taken by the UAE government to achieve several key goals:

  1. Strengthening the UAE’s position as a leading global center for business and investment;
  2. Stimulating economic growth and successfully implementing strategic plans;
  3. Demonstrating commitment to the principles of transparency in tax policy.
The obligation to register with the tax service applies to all entrepreneurs, regardless of whether they operate on the mainland of the country or in free economic zones.

Who is Required to Pay Corporate Tax?

Dubai has a zero corporate tax rate for companies with profits up to 375,000 dirhams, while income above this threshold is taxed at 9%. Despite some dissatisfaction among entrepreneurs, the tax regime in the Emirates remains one of the most attractive in the world.

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Corporate tax is levied on:

  • Companies and individual entrepreneurs operating based on a license;
  • Companies from free economic zones while maintaining their tax benefits;
  • Foreign entrepreneurs who regularly or permanently carry out business in the country;
  • Financial institutions carrying out banking and other financial transactions;
  • Organizations working in the field of real estate, construction, development, and agency services.

Traditionally, free zones are renowned for their zero-taxation policies, which attract international businesses. The changes in tax laws reflect a balance between maintaining the attractiveness of free zones and upholding the UAE’s reputation for transparent financial practices.

Qualified Free Zone Person (QFZP) Status

Companies qualifying as Qualified Free Zone Persons (QFZPs) will continue to benefit from a zero tax rate, provided their income meets specific qualifications. Income failing to meet these conditions is subject to taxation at the standard rate of 9%.

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To attain QFZP status, a company must meet the following criteria:

  • The majority of profits must originate from qualifying activities.
  • Availability of adequate assets to conduct operations.
  • Employment of a sufficient number of employees.
  • Maintaining a suitable level of operational expenses.
  • Revenue derived from qualified sources of activity.
  • External income not exceeding 5% of the total or AED 5 million per year.
  • Compliance with transfer pricing regulations.
  • Submission of reports to tax authorities.

Failure to meet at least one of these criteria requires a company in a free zone to pay taxes as prescribed by law.

Exceptions from Corporate Tax (CT)

Starting from 2023, the introduction of corporate tax in the UAE does not entail automatic taxation of all profits received by enterprises. Several exceptions allow businesses and individuals to receive tax relief under specific circumstances:

  • Activities related to natural resource extraction are subject to corporate taxation at the Emirate level, bypassing federal tax.
  • Income derived from ownership of qualified shares.
  • Income arising from intra-group transactions and reorganizations, provided they adhere to established rules.

Additionally, corporate tax does not apply to the following types of income:

  • Interest earned on bank deposits and savings accounts.
  • Salaries of individual entrepreneurs.
  • Income received by foreign investors.
  • Personal income of individuals from real estate investments.
  • Income of individuals from owning shares.

These exemptions offer significant tax advantages for certain types of activities and investments in the UAE, showcasing the flexibility and attractiveness of the country’s tax system for business and investment.

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