Companies from across the globe eye the UAE to establish their business in the region for one big reason: tax-friendly landscape. But how tax-friendly is the UAE really? It is a question that new business owners often look for.
Since June 2023, corporate tax has been in effect in the UAE, and we hear about paying 9% and 0% corporate tax, which creates confusion. Let’s understand UAE corporate tax thoroughly and address some common tax-related misconceptions, including small business relief.
What is a UAE Corporate Tax?
It is a direct tax levied on the net profit of a business operating in the UAE, whether it is a resident or a non-resident. The tax liability of a person is determined by how much they earn in a calendar year.
As per UAE tax rules, 0% is charged for income up to AED 375,000, supporting small and medium-sized businesses. At the same time, 9% is charged for income exceeding AED 375,00 in a financial year.
Who Pays Corporate Tax in the UAE?
| Who | When Tax Applies |
| UAE Companies | If registered under mainland or Free Zone laws |
| Foreign companies, when managed from the UAE | When key business decisions are made in the UAE |
| Freelancers &Sole proprietors | When annual business turnover exceeds AED 1,000,000 |
| Non-Resident with UAE Office | When a fixed place of business exists in the UAE |
| Non-Resident Earning UAE Income | When income is sourced from UAE sales, property, or loans |
| Foreign Digital Services Provider | When economic activity is linked to the UAE |
Are Free Zone Entities Exempted From Corporate Taxes?
It is a common misconception that a free zone tax exemption applies if a company opens a business in the UAE free zones. Zero corporate tax does apply in the free zone entities on qualifying income, and such entities must follow strict eligibility criteria to be classified as a Qualifying Free Zone Person (QFZP).
Here are the criteria that entities must follow:
- The entity must maintain a physical office space, adequate assets, and have a sufficient number of qualified employees.
- Companies should be earning from their business activities, doing business across the border or within the free zones.
- Has not opted for being subjected to corporate tax as it is revocable for the current or upcoming tax period.
- The company should comply with transfer pricing and transactions-related documentation.
- Even with 0% tax liability, the company must prepare audited financial statements.
What is Small Business Relief in the UAE?
Small Business Relief is a program run by the government of the UAE that allows resident persons, including both natural and juridical persons, to opt for exemption from the corporate tax. Here are some of the conditions they need to follow:
- Their income should not exceed AED 3 million for a particular tax period.
- The concerned person should not be a financial institution or a holding company.
Benefits of the Relief
- Do not have to pay any tax.
- Do not have to maintain transfer pricing documentation.
- Allowed to maintain a simple cash-based accounting system.
Does Small Business Relief Apply Only to the Free Zone Entities?
No, entities in both mainland and free zones can benefit from Small Business Relief. However, businesses classified as Qualifying Free Zone Person (QFZP) are not eligible as they are already benefitting from 0% corporate tax.
Conclusion
Corporate tax is a strategic decision by the UAE government to reduce its dependence on oil and create a more diversified source of income. As a business, it is very important to understand your eligibility for tax exemption, as it not only saves you a huge amount of money but also helps with your business growth.
If you’re new to the UAE tax rules and not sure about your tax liabilities, then let Ventaraa be at your service. As a UAE business setup expert, we guide both new and existing businesses across their business setup journey, so that they can run their business stress-free.
FAQs
Should I register under the UAE Corporate tax?
Registration is mandatory if the total income exceeds AED 1 million in a calendar year.
Is there a fine for not filing corporate tax in the UAE?
Yes. You will be fined AED 500 per month for the first 12 months and AED 1000 per month from the 13th month.
Who is exempted from the corporate tax?
Government entities, extraction businesses, non-extraction natural resources businesses, and qualified businesses approved by FTA, such as UAE-controlled subsidiaries.