Taxation Features in the UAE: The New Corporate Tax

The United Arab Emirates has always been a magnet for international business, thanks to its zero corporate tax policy. However, in the context of global economic integration and efforts to combat international tax evasion, the UAE government has decided to implement a new system of this direct tax, levied on a company's net income, starting from June 1, 2023.

Now, corporate tax rates are set at 0%, 9%, and 15%. The latter applies to large multinational corporations, but we will focus only on the first two - relevant for companies in free zones. Let's examine the conditions under which free zone companies can continue to pay corporate tax at a 0% rate.

The first condition: maintaining adequate substance in the free zone.

Conducting key activities that generate the main income within the free zone; b) Owning the necessary material resources (assets) to carry out relevant operations in the free zone; c) Having the required number of professional employees for work tasks; d) Ensuring a sufficient level of operational expenses.

By the way, a company's functions can be outsourced to a third-party contractor or external agent within the free zone, provided there is proper oversight by the client over the outsourced work.

The second condition: earning qualified income. Qualified income criteria: a) Income from transactions with residents of any UAE free zones. The other participant must also be the ultimate beneficiary of the acquired goods or services, i.e., have the right to use and consume them. This rule does not apply to transactions of excluded activities (more on that below). b) Income from qualified activities regardless of the status of the second participant, whether it's a company from a free zone, mainland, or abroad.

"Qualified" activities according to Article 2 of Resolution No. 139 include:

  1. Production of goods or materials;
  2. Processing of goods or materials;
  3. Ownership of shares and other securities;
  4. Ownership and management of ships, their operation;
  5. Reinsurance services, supervised by a competent UAE authority;
  6. Fund management services, supervised by a competent UAE authority;
  7. Private capital and investment management services, supervised by a competent UAE authority;
  8. Headquarters services provided to related parties;
  9. Treasury and financial services provided to related parties;
  10. Financing and leasing of aircraft, including engines and rotating components;
  11. Distribution of goods or materials in Designated Zone (certain free zones designated for VAT purposes) or outside to a buyer who resells such goods or materials, or parts thereof, or processes or alters such goods and materials for the purpose of sale or resale;
  12. Logistics services;
  13. Support activities related to the above.

"Excluded" activities, income from which will be taxed at 9% regardless of the status of the second participant, are:

  1. All transactions with private individuals (except transactions related to certain types of specialized activities such as ownership and management of ships, funds, private capital and investments, as well as financing and leasing of aviation equipment);
  2. Banking activities under the control of an authorized UAE body;
  3. Insurance services controlled by an authorized UAE body (excluding reinsurance);
  4. Financial services and leasing under the supervision of an authorized UAE body (excluding financing of affiliates and leasing of aviation equipment);
  5. Ownership and use of real estate (excluding commercial real estate in the free zone, transactions of which are carried out between residents of that zone);
  6. Ownership and operation of intellectual property rights;
  7. Support operations related to the above points.

It's worth noting the distribution of income from ownership and operation of real estate: if a transaction is with a free zone participant for commercial property, the tax is 0%; if the property is non-commercial or with a participant not from the free zone, then the tax is 9%.

The third condition: not to opt to tax profits as a regular taxpayer in the UAE.

The fourth condition: unqualified revenue should not exceed 5 million UAE dirhams or 5% of the company's total revenue (whichever is less).

Unqualified revenue refers to incomes that do not meet the criteria of qualified income as described in Article 2 of Resolution No. 139. If a company's unqualified revenue exceeds the specified limit, it is subject to corporate tax at a rate of 9%. However, if this rule is followed, all unqualified income within this amount will be taxed at 0%.

The fifth condition: preparing audited financial statements in accordance with International Financial Reporting Standards (IFRS).

The sixth condition: complying with transfer pricing documentation requirements and adhering to the arm's length principle in transactions with related parties.

According to Article 55 of UAE tax legislation, the tax authority has the right to request information on transfer prices from companies. The arm's length principle, as stated in Article 34, requires that transactions between related companies be conducted on market terms, as if they were independent parties. This is important for preventing tax risks and ensuring compliance with local legislation, promoting transparency and fairness in business.

Given the complexity and multilevel nature of the new corporate taxation system in the UAE, only a careful and qualified approach will help businesses avoid overpaying taxes. The experts at Antwort Law can assist in analyzing your company's income, determining whether you fall under the criteria for zero taxation, and what can be done in your situation to maintain the desired rate in the future. Our team is ready to provide comprehensive support and assistance in developing a tax strategy that meets your needs and business goals. Don't miss the opportunity to optimize your tax obligations and contact Antwort Law today.

Diana Gulevskaya

Antwort Law

What is the corporate tax in the UAE?
From June 1, 2023, a new corporate tax system has been introduced in the UAE: - 0% applies to companies in free zones, provided that certain criteria are met: actively conducting the main business in the free zone, owning the necessary assets, having qualified employees, maintaining an appropriate level of operating expenses, earning qualified income and meeting certain limits on non-qualified income. - 9% applies to companies that do not meet the criteria for the 0% tax rate or carry out excluded activities. - 15% applies to large multinational corporations
What conditions must companies in UAE free zones meet to pay 0% tax?
To maintain a 0% rate, companies in free zones of the UAE must: - Actively conduct main activities in the free zone - Have the necessary resources and personnel - Maintain an appropriate level of operating expenses - Generate qualified income - Comply with unqualified income limits - Prepare audited reports and comply with transfer pricing.
What is qualified income and how does it affect taxation in the UAE?
Qualified income plays a key role in determining the tax rate for companies in the UAE. If a company earns qualified income and meets other qualifying criteria, it may be taxed at 0%. In the event that the income does not meet the criteria for qualified income or the company carries out excluded activities, it may be subject to the standard corporate tax rate of 9% or 15%, depending on the circumstances. Includes: - income from qualified activities: production, processing of goods, ownership and management of ships, provision of services for the management of funds, private capital, investments and other qualified activities listed in the relevant legislation of the UAE.
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