With the introduction of corporate income tax in the UAE in June 2023, many local and multinational companies located in the UAE become taxable entities.
Since the introduction of corporate tax, many companies have been taking a measure from necessity, but they are also sometimes faced with the difficulties of the new tax regime, where the measures and tax rates differ depending on the area to which the corporation belongs.
In this article, I will explain the outline of UAE corporate tax and how to prepare for it in each area (Mainland / Free zone).

After reading this article…

• Understand the UAE corporate tax overview
• Understand the differences in tax regime by area (Mainland or Free Zone)
• Understand how to respond to locally located subsidiaries, branches, and representative offices

Chapter 1: Effective date of UAE Corporate Tax

Corporate tax in the UAE was applied from June 1 2023. It will start from June 2023, but it will be applied from fiscal years starting after June, so there will be no need to suddenly file a tax return.
For example, if the fiscal year ends in December, the first tax period will be “January 2024 – December 2024”, and if the fiscal year ends in March, the first tax period will be “April 2024 – March 2025”.
In addition, the deadline for corporate tax registration and first year’s tax return is 9 months after the end of the target year. Please refer to the following chart.

Chapter 2: Taxable & Exempted Persons

In the UAE, both residents and non-residents can be taxable persons, and the details are defined as below.
Note: Please consider that, in principle, most corporations and self-employments will be taxable persons, with the exception of specific industries.

Chapter 3: Tax Rate

For taxable persons, either 0% or 9% applies, depending on the annual income and the area where the corporation is located. The tax rate applicable to each condition is as follows.

Chapter 4: Mainland & Free Zone

Mainland companies are recognized as taxable persons unless they are in a specific industry, and their corporate tax rate is determined by their annual taxable income. The thleshold is 375,000(AED), and the applicable tax rate will change depending on whether the taxable income exceeds the threshold or not.

Freezone Company
Free zone companies have different exemption rules based on following two conditions.These are quite complex conditions, so we recommend that you use our assessment.

In particular, it is necessary to keep in mind that [qualified free zone company], [qualified income], and [qualified activity] are different concepts.

Condition① Certification as a Qualified Free Zone Person

[Qualified Free Zone Person] does not mean that all companies belonging to free zones are certified, but refers to companies that meet all of the following requirements. Additionally, if you are certified as a [Qualified Free Zone Person], you will be entitled to the applicable tax rate of 0% (please note that this does not necessarily mean 0%).

【Requirements】

1. Maintain adequate substance;
2. Derives Qualifying Income (to be specified in a Cabinet decision);
3. Not elected to be subject to CT;
4. Complies with Transfer Pricing rules and maintains relevant Transfer Pricing Documentation; and
5. Meets any other conditions as prescribed by the Minister

If the above requirements are not met, the company will be treated the same as a mainland company and the applicable tax rate will be determined based on its annual taxable income.

If you meet the above requirements, you will be certified as a Qualified Free Zone Company, but from here on, you will need to classify each taxable income as non-taxable income (qualified income) or taxable income (non-qualified income) based on the nature of the transaction. there is.

Condition ② Recognition of Qualifying Income

0% corporate tax rate applies to transactions carried out by qualified free zones that are recognized as qualifying income.

Qualifying Income

1. Income arising from transactions with other free zone companies
   Transactions between free zones are generally recognized as qualifying income.
2. Income arising from Qualifying Activities in transactions with non-free zone companies
   If a transaction with a non-free zone entity is recognized as a qualifying activity, the income generated from that activity will be recognized as qualifying income. On the other hand, if an activity is recognized as an exempt activity, the income generated from that activity becomes non-qualified income and is subject to a 9% tax

   Qualifying Activities
   -Manufacturing of goods or materials
   -Processing of goods or materials.
   -Holding of shares and other securities.
   -Ownership, management and operation of Ships
   -Reinsurance services that are subject to the regulatory oversight of the competent authority in the State.
   -Fund management services that are subject to the regulatory oversight of the competent authority in the State
   -Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the State.
   -Headquarter services to Related Parties.
   -Treasury and financing services to Related Parties.
   -Financing and leasing of Aircraft, including engines and rotable components.
   -Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale
   -Logistics services.
   -Any activities that are ancillary to the activities listed in paragraphs (a) to (l) of this Clause.
   
   Excluded Activities
   -Any transactions with natural persons
   -Banking activities that are subject to the regulatory oversight of the competent authority in the State
   -Insurance activities that are subject to the regulatory oversight of the competent authority in the State
   -Finance and leasing activities that are subject to the regulatory oversight of the competent authority in the State
   -Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons
   -Ownership or exploitation of intellectual property assets
   -Any activities that are ancillary to the activities listed above

3. De Minimis requirements
   Non-qualifying Revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed 5% (five percent) of the total Revenue of the Qualifying Free Zone Person in that Tax Period or AED 5,000,000 (five million dirhams), whichever is lower.

If your company successfully clear the above two conditions, you can receive preferential treatment in a free zone of 0% corporate tax.

Chapter 5: Summary

As mentioned above, the conditions for obtaining preferential tax rates in free zones are quite complex and difficult to deal with, but if you deal with them correctly in the first year (unless you make a major change to your business form), the tax risk can be greatly reduced.

However, if you make a mistake in your response in the first year, there is a high possibility that you will be subject to appropriate penalties and fines in the national tax investigation that will begin several years later.

Therefore, we recommend that you use a third-party company such as our company to file your first year’s tax return.

In the next article, Permanent Establishments (PE) and Transfer Pricing Taxation, which global companies should be particularly careful about will be explained.

Thank you!