When you do business in the United Arab Emirates (UAE), it is important to know about taxes. One important thing to understand is corporate tax. If you’re a business owner or an entrepreneur, it is essential to be well-informed about corporate tax. It is a significant aspect that you should pay attention to while doing business in the UAE. So, let’s explore corporate tax in the UAE.  You’ll find out what it is, and how it works, and check out the corporate tax rates in Dubai and the UAE.

What is Corporate Tax in the UAE?

Corporate tax in UAE is a type of tax imposed on the profits earned by companies or businesses operating in a specific country or jurisdiction. The tax is usually based on the net income of the company after deducting all expenses and tax reliefs. Corporate tax is an important source of revenue for governments and plays an important role in funding public services and infrastructure development.

Key Benefits of UAE’s Corporate Tax System

The UAE’s corporate tax system offers several key benefits, including:

Tax-Free Profits: The absence of corporate tax allows companies to retain their earnings. Which helps them grow their businesses and reinvest.

Investment Attraction: The lack of corporate tax and capital gains tax enhances the country’s attraction as an investment destination, attracting both local and foreign investors.

Economic Diversification: Corporate tax in UAE helps to diversify the country’s revenue sources, reducing dependency on oil income and fostering economic stability.

Business-Friendly Environment: The tax system contributes to a business-friendly environment, promotes entrepreneurship, and fosters a flourishing private sector.

Stimulating Growth: With no capital gains tax, businesses have the incentive to invest and expand, driving economic growth and job creation.

Free Zones: The presence of free zones with tax exemptions provides additional incentives for businesses to establish their operations in the UAE.

Global Competitiveness: The UAE’s tax system enhances its global competitiveness, positioning the country as a hub for international trade and commerce.

Overall, the UAE’s corporate tax system plays a significant role in promoting economic development and establishing a favorable environment for businesses to flourish as an attractive investment destination.

Why Does the UAE Impose Corporate Tax?

The UAE has gained a reputation as a business-friendly and tax-efficient place. Still, it does have a corporate tax for a specific reason. One primary reason is to diversify the country’s revenue sources and decrease reliance on oil income. Moreover, corporate tax in UAE plays a vital role in supporting the nation’s growth and development by funding various projects and initiatives.

Corporate Tax Rates in UAE 

On December 9, 2022, the UAE published the much-awaited Corporate Tax Law through Federal Decree-Law No. 47 of 2022. This law sets the stage for implementing a 9% Federal Corporate Tax rate in UAE, starting from the financial years that begin on or after June 1, 2023. One significant change, in line with the public consultation document, is the new conditions that UAE free zone entities must meet to qualify for a 0% corporate tax rate.

Under this law, businesses will pay a 9% tax on their taxable profits exceeding AED 375,000. However, any profits below this limit will be exempt from tax, which is good news for small businesses and startups, offering them some relief.

Corporate Tax Rates in Dubai

In Dubai, companies have to pay taxes on their earnings, but not all companies are taxed the same way. Starting from the beginning of 2023, a new tax law was introduced, setting a 9% corporate tax rate in Dubai for companies making profits above AED 375,000 (about USD 100,000).

Oil companies in Dubai have different tax rates. They pay a maximum of 55% corporate income tax on their income sourced from the UAE. For branches of foreign banks in Dubai, they are required to pay a 20% tax rate on their income generated in Dubai.

The method for calculating taxable income varies for these two types of businesses. Banks’ tax is based on their audited financial statements, while for oil companies, it is determined by their concession agreements. Oil companies may also have to pay other types of taxes in Dubai, like royalties.

It’s important to note that the mentioned companies are not subjected to withholding taxes on dividends and interests sent abroad. For more detailed information about tax calculation methods, you can seek assistance from Dubai corporate tax firms.

Taxation of Companies in UAE

Onshore and free zone businesses are two distinct types of entities that companies can establish in certain regions, such as the United Arab Emirates (UAE), including Dubai.

1. Onshore businesses

Onshore businesses are companies registered and operating within the mainland of the country, subject to local laws and regulations. These companies have the flexibility to conduct business both within the local market and internationally. However, onshore businesses typically require a local UAE sponsor or partner, who holds at least 51% ownership in the company. This arrangement allows foreign investors to operate in the UAE market while partnering with a local entity.

Taxation of Onshore businesses

The taxation of onshore companies differs depending on their nature of business. Specifically, corporate tax is imposed on branches of foreign banks and companies operating in the oil sector.

2. Free Zone Businesses

Free zone businesses are established in designated areas known as free zones. These zones are specially designed to attract foreign investment by offering various benefits. One of the primary advantages of free zones is that companies can have 100% foreign ownership, meaning investors can retain full control of their businesses without requiring a local sponsor. Free zones also provide tax exemptions, including corporate income tax and import/export duties, making them an attractive option for businesses focused on international trade and export-oriented activities. Additionally, free zones offer streamlined business setup processes and a range of business support services to facilitate companies’ operations.

How to Determine Tax Liability in UAE?

The determination of tax liability in the UAE depends on various factors, including the type of business, its location, and the nature of activities conducted. As mentioned earlier, companies operating in free zones often enjoy full tax exemptions, while those operating in mainland UAE may have different tax obligations.

To ascertain tax liability, companies must maintain accurate financial records, adhere to the accounting standards set by the UAE, and file tax returns with the relevant authorities.

Conclusion

Understanding corporate tax in the UAE is important for businesses and individuals. It plays a vital role in the nation’s economic development and provides funding for various public services. The UAE’s business-friendly environment, with its low tax rates, continues to attract entrepreneurs and investors from around the globe.