How Corporate Tax Will Apply to UAE Businesses in 2024?

Although it has been more than two years since the announcement of the UAE Corporate Tax, it continues to be a puzzling concept among business owners. Given the recent implementation of CT, business owners are still grappling to understand certain concepts associated with the tax. Add to this the fact that the regulations around this tax have been constantly revised.

What businesses need to register for Corporate Tax? Will free zone companies have to pay Corporate Tax? These are some burning questions in the minds of people owning businesses in the UAE. Through this article, we will answer these questions and help ease the transition of your business into this new tax era.

Is UAE Corporate Tax Registration Mandatory?

Regardless of whether they will be required to pay the tax or not, almost all UAE businesses must register for Corporate Tax. This includes mainland businesses, free zone businesses, and freelancers as well. Even foreign companies based in the UAE must register for CT. It is crucial to note that branch companies will be treated as an extension of the parent company and need not register separately. In addition to registration, almost every business must file CT returns at the end of the tax period, again irrespective of whether it is required to pay any tax amount.

What Are the Deadlines to UAE Corporate Tax Registration?

In February 2024, the UAE Ministry of Finance announced the deadlines for Corporate Tax registration. As per this announcement, UAE businesses are allotted deadlines based on the month in which they were incorporated. Interestingly, the year of incorporation has no influence on the deadlines to be adhered to, and the month of setup is the sole determinant of these deadlines. 

Source: Federal Tax Authority

What will be the UAE Corporate Tax Rate for Businesses?

As a general rule, Corporate Tax will be applicable at a rate of 9% on taxable net profits over AED 375,000. Now, you might be wondering what would be included as part of a taxable net profit. This is simply the annual net income strictly coming from any form of licensed business activity in the UAE. Any income coming through employment, rentals, and investments will not be considered as part of the taxable net profit. The UAE Ministry of Finance has recommended adopting the IFRS standards for calculating the taxable income.

Now let’s have a look at how the payable tax is calculated. 

Consider a business generating an annual net profit of AED 500,000. Here’s how Corporate Tax will be applicable as follows:

0% for AED 0 – AED 375,000

9% for AED 375,000 – AED 500,000

Corporate Tax = AED 11,250

i.e., 9% of (AED 500,000 – AED 375,000 = AED 125,000)

How Corporate Tax Will Apply to Free Zone Businesses?

As free zones are predominantly known for their tax benefits, many still ponder over the status of these jurisdictions concerning Corporate Tax. Let’s clear this cloud of doubt. Firstly, as mentioned earlier, every free zone company must register for Corporate Tax and file an annual tax return. Now let’s explore how CT will apply to companies in free zones. We will learn this through different Corporate Tax-related terms as defined by the UAE Ministry of Finance.

1. Free Zone Person

An entity incorporated and registered in a free zone.

2. Natural Persons

A Natural Person in the context of UAE Corporate Tax refers to an individual.

3. Qualifying Activities

The activities whose income will be considered for 0% tax. 

Any of the following business activities undertaken by a company within the free zone can be considered as a Qualifying Activity. 

1. Goods processing 
2. Manufacturing
3. Holding shares and securities
4. Ownership and operation of ships
5. Logistics
6. Treasury and financing services
7. Financing and leasing of aircraft
8. Distribution of goods within or from a Designated Zone to a reseller (The goods must be imported into the UAE through a Designated Zone)
9. Headquarter services
10. Reinsurance
11. Fund management
12. Investment and wealth management
13. Any other business activity that is subordinate to the above 12 activities

(Activities 10, 11, and 12 are  subject to regulatory oversight of the relevant authority in the UAE)

4. Excluded Activities

The activities whose income will be subject to Corporate Tax at 9% if it exceeds a certain threshold (known as the De Minimis Threshold). 

1. Transactions with Natural Persons except those that come under Qualifying Activities ( ownership and operation of ships, management of funds, management of wealth and investment, aircraft financing, and leasing)
2. Banking activities
3. Finance and leasing activities (except treasury and financing services, aircraft financing and leasing)
4. Insurance activities (except reinsurance services that come under Qualifying Activities)
5. Intellectual property ownership
6. Immovable property ownership
7. Any other business activity that is subordinate to the above 6 activities

(Activities 2,3, and 4 are subject to regulatory oversight of the relevant authority in the UAE)

5. De Minimis Threshold

This threshold will be considered for income that comes from Excluded Activities or through activities with Non-Free Zone Person(s) that are not deemed as qualifying. If the revenue coming through business with a Non-Free Zone Person(s) (Non-Qualifying Revenue) crosses a certain mark in a given tax period, the Free Zone Person shall be considered as non-qualifying.

This threshold is set at:

1. 5% of the total revenue or 
2. A revenue of 5 million

6. Qualifying Income

The UAE Corporate Tax qualifying income for free zone companies is the net profit that is eligible for 0% Corporate Tax.

1. Profits generated from transactions with other Free Zone Persons (except those from Excluded Activities)
2. Profits generated from Qualifying Activities with a Non-Free Zone Person (except those from Excluded Activities)
3. Other profits generated after fulfilling the De Minimis Requirement threshold

7. Qualifying Free Zone Person (QFZP)

A free zone company eligible for 0% Corporate Tax and meets the following criteria:

1. It must be registered with a UAE free Zone authority
2. It must fulfill the transfer pricing requirements given under the UAE Corporate Tax Law (CTL)
3. It must derive its income from Qualifying Activities
4. It must maintain adequate substance in a free zone

Corporate Tax for Freelancers

Professionals practicing as freelancers are also included within the scope of Corporate Tax. All freelancers with a revenue exceeding AED 3 million and a profit exceeding AED 375,000 will have to pay Corporate Tax at a rate of 9%. It is crucial to know that the tax will be applicable only for the profits considered as taxable. 

Corporate Tax for Business Owners

As mentioned earlier, Corporate Tax will not be applicable for personal income generated from real estate rentals and salaries. However, business owners with an annual turnover of AED 1 million (generated strictly from a business activity) will be required to pay Corporate Tax at a rate of 9%.

Hope this article has given you fresh insights into the UAE’s Corporate Tax. It is crucial to adhere to all regulations laid down by the government. Whether it’s registering, maintaining record books, or filing tax returns, it’s essential to ensure timeliness and accuracy. Failure to do so can incur penalties.

InZone offers a whole suite of accounting and tax services to help you stay compliant. Reach out to us today and let our expert team of UAE Corporate Tax consultants handle it for you.