For those conducting business in the United Arab Emirates, it is well known that for a long time, the country had almost no taxes to speak of. But in a bid to move away from their reliance on income generated from oil exports, the UAE has taken two main steps.
The first step has been to style itself as a major business hub and a tourist destination of the world, particularly Asia. The next step has been to levy taxes on businesses operating in the UAE in the form of Corporate Tax and Value Added Tax on goods and services.
But there is no need to worry as both these taxes are very low when compared to other countries and secondly, these taxes are only applicable if you have qualified income. This is a master stroke by the UAE government, not only does it generate revenue from taxes, but companies still want to do business in UAE.
If you are one of these companies that want to do business in UAE, by reading this guide you will learn how Corporate Tax works in the UAE and how it is more beneficial for you to conduct your business here than in some other country.
What is Corporate Tax?
Corporate Tax is the tax that is levied against the profits of a company. It is deducted from their gross income after expenses, basically meaning that the company has to pay a percentage of its profits to the government in the form of a tax.
The average corporate tax in the world was around 23.6% in 2023 according to the Tax Foundation, with first-world countries like Japanese companies paying as much as 30% corporate tax and on the low end, you had companies in Ireland paying 12.5% corporate tax.
How Does Corporate Tax Work in UAE?
As mentioned before, the UAE has a very friendly tax history, and before the implementation of this current corporate tax law. The government only used to levy corporate taxes on oil and gas sectors as well as branches of foreign banks and even then, it was negotiated with each company individually
It was on January 31, 2022, when UAE first announced the new corporate Tax law and it came into effect on June 01, 2023, with the start of the new fiscal year. The tax is set at a standard rate of 9% with businesses that earn over AED 375,000 in profits annually and are located on the mainland UAE.
Below this threshold, the tax is 0% for all businesses. Already this is quite low when compared with the world average and even in this threshold you won’t have to pay the corporate tax if you have qualified income.
What is Qualified Income?
In the context of the UAE, qualified income means that businesses earning this kind of income do not have to pay any corporate tax. It essentially means two things which are as follows
- Qualifying Free Zone Person: Any business operating in a free zone that qualifies as a Qualifying Free Zone Person (QFZP) has to pay 0% corporate tax.
- Qualified Activity: Any business that is earning revenue through what are deemed Qualified activities has to pay 0% corporate tax.
Both of these are discussed below in detail.
What are Free zones?
Free Zones are special economic zones that are created by the UAE and they enjoy special economic incentives in the form of low to no taxes, low fees, customs benefits, etc. Their purpose is to attract foreign investment in UAE and you read more about them here.
What makes a business Qualifying Free Zone Person (QFZP)?
In order to qualify as a Free Zone Person, the business has to meet the following criteria.
- Have a Substantial Presence in UAE: The company should have a proper physical presence in UAE in the form of offices and qualified employees engaged in business activities.
- Income Being Generated is Qualified: This means that the company’s primary source of income is in the Freezone or with international clients.
- De Minimis Rule is Being Followed: This means that the non-qualifying source of income for the company should be lower than 5% of the total income or AED 5 million, whichever comes first.
- Maintain Financial Records in line with IFRS: This means that the company should not only maintain accurate financial records but also have them audited as per the International Financial Reporting Standards.
What are the Qualified Activities?
According to the UAE’s Ministry of Finance’s Decision no 265 following activities are deemed as Qualified Activities.
- Manufacturing of goods or materials.
- Processing of goods or materials.
- Trading of Qualifying Commodities.
- Holding of shares and other securities for investment purposes.
- Ownership, management, and operation of Ships.
- Reinsurance services.
- Fund management services.
- Wealth and investment management services.
- Headquarters services to Related Parties.
- Treasury and financing services to Related Parties.
- Financing and leasing of Aircrafts.
- Distribution of goods or materials in or from a Designated Zone.
- Logistics services.
- Any activities that are ancillary to the Qualifying Activities.
In addition to the qualifying activities, there are excluded, and other activities as well that have been in Decision number 265 that you might want to look at if you are interested.
Benefits of Operating a Small Business in UAE in terms of Taxes
There are many reasons that make the UAE a great place for small businesses to operate, both for tax reasons and otherwise. Starting with its geographical location, connecting the greater Asian continent with Europe and Africa is ideal for both manufacturing businesses and imports and exports.
Secondly to attract foreign investments UAE has created many free zones that have zero corporate and value-added taxes for the most part and allow for 100% foreign ownership of the business. Not to mention the many other incentives provided by the UAE government.
Even in the mainland, the taxes levied on business are only 9% for corporate tax and 5% VAT, and that too only if you have an annual income of over AED 375,000, which means that most small businesses do not have to worry about any taxes.
