Introduction
UAE since its inception was a tax-free country until VAT was introduced in 2018. The emirates have gained attention for its attractive business landscape by offering numerous advantages to entrepreneurs and corporations such as zero tax in free trade zones, exemption from VAT & Corporate tax and low corporate tax. Let us understand the taxation on businesses in UAE.
Taxes
1) VAT: Value added tax is a type of indirect tax applied at a standard rate of 5%. However, education, healthcare services, international transportation of passengers and goods, precious metals essential for investments, are not subject to Value Added Tax (VAT). Even the businesses with an annual turnover less than AED 375,000 are exempt from paying VAT.
2) Custom Duty: The rate of customs duty is 5% of the value of goods plus cost freight Insurance on most items. It is 50% on alcohol and 100% on cigarettes.
3) Corporate Tax: Corporate income tax was introduced by The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses to come into effect from financial year starting from June 2023. Businesses in the UAE need to register themselves with the Federal Tax Authority, maintain & audit financial records for the payment of taxes as well as comply with laws to avoid any legal action against them.
Here are some important articles of the decree-law mentioned above:
Article 3 – Corporate Tax Rate – Article 3 (1) (a) & (b):
Corporations registered in mainland and have profits below AED 375,000 will be subject to 0% Corporate Tax and any profit above that limit will be taxed at flat 9% rate.
Article 3 (2) Corporate Tax Rate for a Qualifying Free Zone Person at the following rates:
0% on the qualifying income and 9% on the non-qualifying income (stated in Article 18 of this decree). Most of the income comes under qualifying income. Thus, no tax is applicable on most of the profits of businesses established in Free Zones like DMCC, JAFZA, Silicon Oasis, etc.
Article 4 – Persons Exempted from Corporate Tax:
Exempted persons Includes Government Entity, Government Controlled Entity, Person engaged in an Extractive Business, that meets the conditions of Article 7 of this Decree-Law, Person engaged in a Non-Extractive Natural Resource Business that meets the conditions of Article 8 of this Decree-Law, Qualifying Public Benefit Entity under Article 9 of this Decree-Law, Qualifying Investment Fund under Article 10 of this Decree-Law etc.
Article 11 – Taxable Person can be a resident or non-resident:
A resident shall include any juridical person with their business in UAE or in Foreign but effectively managed and controlled in UAE, any natural person conducting business activity, or any other person determined by cabinet at the suggestion of the minister from time to time.
Article 20 – General Rules for determining taxable income:
- Any unrealised gain or loss under Clause 3 of this Article.
- Exempt Income as specified in Chapter Seven of this Decree-Law.
- Reliefs as specified in Chapter Eight of this Decree-Law.
- Deductions as specified in Chapter Nine of this Decree-Law.
- Transactions with Related Parties and Connected Persons as specified in Chapter Ten of this Decree-Law.
- Tax Loss relief as specified in Chapter Eleven of this Decree-Law.
- Any incentives or special reliefs for a Qualifying Business Activity as specified in a decision issued by the Cabinet at the suggestion of the Minister.
- Any income or expenditure that has not otherwise been considered in determining the Taxable
- Income under the provisions of this Decree-Law as may be specified in a decision issued by the Cabinet at the suggestion of the Minister.
- Any other adjustments as may be specified by the Minister.
- And several other provisions.
Article 21 – Small Business Relief: A resident whose income is taxable from a business whose annual revenue is below 3 million AED will be eligible for the relief from corporate tax until June 2026.
Article 22 – Exempt Income: Dividend or profits from a juridical resident person or foreign person specified under article 23 of this decree.
Income from foreign permanent establishment under article 24 of this decree. Income derived by a Non-Resident Person from operating aircraft or ships in international transportation that meets the conditions of Article 25 of this Decree-Law.
Article 28 – Deductible Expenditure: Businesses can deduct expenses that are solely and specifically incurred for their business operations and are not related to capital investments. These deductible expenses can be claimed in the Tax Period when they are incurred, following the guidelines set in the Decree-Law.
Non-Deductible Expenditure: Certain expenses cannot be deducted when calculating Taxable Income, including
- Expenditure not related to the business operations.
- Expenses incurred in generating income that is exempt from taxation.
- Losses that aren’t connected to the business operations.
- Other specified expenditures outlined in a decision by the Cabinet based on the Minister’s recommendation.
Deductions can be claimed for the identifiable portion of the expense related to generating Taxable Income. An appropriate proportion of any unidentified part of the expense related to generating Taxable Income can be deducted based on a fair and reasonable assessment considering the specific circumstances of the business.
Taxable Income of a Tax Group: The parent company needs to compile comprehensive financial statements that encompass all subsidiaries included within the Tax Group for the applicable Tax Period. Interactions between the parent company and its associated group entities, and any transactions occurring among these group members, will be excluded in the Taxable Income for the Tax Group.
Non-payment of taxes may lead to jail up to 6 months and fine up to 100,000 AED. The information provided above is only for informational & awareness purposes.
Conclusion
Taxation on businesses in the UAE signifies a pivotal shift in the country’s economic policies. While VAT, customs duties, and corporate taxes bring new challenges, the Federal Decree-Law provides a structured framework aimed at ensuring fairness and transparency. With clear guidelines on exemptions, deductions, and compliance, businesses can navigate the evolving tax landscape responsibly. Ultimately, these changes reflect the UAE’s commitment to fiscal sustainability while maintaining its attractiveness as a global business hub.
For expert legal consultation on compliance with tax laws applicable to your specific business(es) and for saving maximum amount on your taxes, consult our legal expert for a tailored solution for your tax problem at help@daralhaqooq.com.