TIER 1
0 percent Tax Rate
Companies with annual net profits of up to AED375,000 are subject to a 0 percent tax rate.
PROFITS UP TO AED375,000 = 0 percent Tax Rate
TIER 2
9 percent Tax Rate
Companies are subject to a 9 percent tax rate on annual net profits that exceed AED375,000.
PROFITS OVER AED375,000 = 9 percent Tax Rate
TIER 3
Different Tax Rate
Large multinational companies may be subject to a higher tax rate, subject to Pillar Two of the Organisation for Economic Cooperation and Development (OECD) base erosion and profit shifting (BEPS) project. Companies with a total global revenue of over EUR 750 million (around AED 3.15 billion) will belong to this category.
PROFITS OVER
AED3.5 billion = Higher Tax Rate
Corporate tax for free zone companies
To uphold its commitment to facilitate a business-friendly environment in the free zones, the UAE government has made an exception for businesses incorporated in free zones.
IMPORTANT: A business registered in a free zone is not automatically exempt from corporate tax
A company which meets the criteria of a “Qualifying Free Zone Person” will be exempt from paying corporate tax
Qualifying free zone person
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
- Comply with the transfer pricing requirements under the Corporate Tax LawNOTE: if a business does not meet the criteria to be a qualifying free zone person, they may still qualify for other options available such as the small business relief rule.
Small Business Relief rule: Does it apply to you?
The Small Business Relief rule is designed to support start-ups, SMEs and micro businesses in the UAE by alleviating their corporate tax duties and compliance costs.
REVENUE UNDER AED3 Million = No Tax
The Small Business Relief scheme specifies that businesses earning a total revenue of below AED3 million for each tax period (relevant or previous) will not be required to pay corporate tax.
IMPORTANT: Even if a business qualifies for small business relief, they will still need to register for corporate tax, keep proper accounting records and file an annual tax submission with FTA.
How do you calculate your taxable profit?
Your taxable profit is normally your revenue less your business-related expenses. Some expenses have specific rules around them, including:
Salaries paid to owners
The law states that payments to a connected person must meet the “arms-length” principle. For business owners who are able to pay themselves a salary, this means setting the salary at a fair market rate, similar to what an unrelated employee would receive under a similar employment arrangement.
Interest
Businesses can deduct their financing and interest costs. However, the amount of interest expense that can be deducted is capped at 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA).
This cap has been put in place to prevent businesses from exploiting the different tax treatment of equity and debt, whereby a business may take on excessive levels of debt to reduce taxable income via increased interest expenses.
Entertainment
Only 50 percent of entertainment spending can be deducted. This includes costs such as meals and accommodation, where they are incurred entertaining customers, suppliers, shareholders or other similar parties.
Foreign branches
If a company has a branch in another country, they can claim a foreign tax credit for the amount of tax paid in that country in relation to that branch. Alternatively, a company may apply for an exemption of the profit made by their branches outside the UAE.
Exempt income sources
MOF has also announced that income from the following sources will be exempt under most circumstances:
- Dividends and other profit distributions received from UAE companies
- Capital gains from selling the shares of a subsidiary company under their ownership
Exempt industries
If a business or any legal entity fits any of the criteria below, then they can qualify for corporate tax exemption.
- Government or public entities
- These include both federal and regional offices, departments, divisions and all other public institutions.
- Businesses that extract or mine natural resources
- Businesses that deal with the extraction or mining of natural resources in the UAE are already subject to Emirate-level taxation, so they don’t have to file a separate tax report.
- Public or regulated private entities
- These include entities that deal with social benefit funds like pension or retirement planning.
- Real estate or regulated investment funds
- Similar to charitable organisations, such funds must apply to MOF and FTA to obtain a formal exemption approval.
- UAE Government-owned companies
- UAE companies fully owned by the UAE government and listed with a ministry-level decision will receive tax exemption.
- Charitable organisations
- Entities working for charitable and social causes must register as such with MOF. Those eligible must first apply to relevant authorities to obtain a formal clearance before applying for MOF registration.
Is corporate tax the same as VAT?
Companies will have to pay corporate tax on their annual net profits, while businesses collect VAT from customers when selling a product or service and then remit it to the government.
IMPORTANT: Businesses that have already registered for VAT will still need to register for corporate tax.
- VAT
- VAT is a consumption tax levied on the sale of goods and services. The customer pays it at the time of purchase. On the other hand, corporate tax is levied on businesses’ taxable income.
- TAX
- Corporate tax will be paid directly to the government and calculated by considering the net income of the company, not the total revenue or sales volume.
How much corporate tax will you need to pay?
To help businesses prepare for the new UAE corporate tax, we have created the Free UAE Corporate Tax Calculator. It only takes two minutes to complete and you get an instant report via email.
CALCULATE YOUR CORPORATE TAX: accounting.vz.ae/corporatetaxcalculator
UAE’s newest update on corporate tax
The Ministry of Finance has announced the administrative penalties that will py to violations of the corporate tax law, effective from 1St of August 2023.
Ranging from AED 500 to AED 20,000, the penalties will apply to taxable persons, which are defined as individuals or legal entities who have corporate tax obligations as specified by the UAE Corporate Tax Law.
Here are key corporate tax penalties you should be aware of:
| DESCRIPTION OF VIOLATION | ADMINISTRATIVE PENALTY |
|---|---|
| Failure to keep the required records and other information specified in the tax laws | One of the following penalties will apply: 1. AED 10,000 for each violation 2. AED 20,000 in each case of repeated violation within 24 months from the date of the last violation |
| Failure to submit data, records and documents related to Tax in Arabic to the Federal Tax Authority (FTA) when requested | AED5,000 |
| Failure to file a Tax Return within the specified timeframes; the penalties will be due from the Legal Representative’s own funds | 1. AED 500 for each month, or part thereof, for the first 12 months 2. AED 1,000 for each month, or part thereof, from the 13th month onwards |
| Failure to submit a Tax Return within the required timeframe | 1. AED 500 for each month, or part thereof, for the first 12 months 2. AED 1,000 for each month, or part thereof, from the 13th month onwards |
| Failure to settle the Payable Tax | A monthly penalty of %14 per year, for each month or part thereof, of the unsettled Payable Tax amount from the day following the due date of payment and on the same date monthly onwards. |
| Submitting an incorrect Tax Return | AED 500, unless the Tax Return is corrected before the deadline for submission |
Manage your corporate tax with Virtuzone
At Virtuzone, we have a team of highly qualified and experienced accountants and tax advisors who can guide you in navigating the UAE’s new corporate tax law.
Whether you are required to pay corporate tax or you qualify for exemption, we will help you establish an efficient and scalable accounting system, so you can continue running your business smoothly.
Our tax specialists will advise you on the required documents and steps to take, ensuring your business is fully tax-compliant.
Do you need more details about the UAE’s new corporate tax law?
Get in touch with our team now. Visit taxready.ae or call +971 04 457 8200
Office 404, Al Saaha Offices B, Souk Al Bahar, Buri Khalifa District, Downtown Dubai, UAE
