Understanding the UAE Corporate Tax Law
Corporate Tax in UAE has been rapidly evolving ever since it was implemented with effect from June 01, 2023 . This evolution lays the foundation for aligning with Global tax standards, reducing secrecy and increasing transparency. The basic framework of UAE Corporate Tax as as follows:
- Corporate tax @ 9% will be imposed in UAE if taxable income of businesses exceed AED 375,000 in a financial year.
- Businesses with revenue below AED 3 million are eligible for small business relief until December 31, 2026, subject to meeting relevant conditions.
- Free Zones are granted their tax free status by being eligible for 0% UAE Corporate Tax, subject to numerous conditions.
- UAE Corporate Tax will follow a self-declaration mechanism and submission of returns will be online rendering the entire compliance process seamless.
- UAE has proposed new incentives and reliefs which will be introduced in the coming years to promote startups, technological research and advances and retaining high value talents in the Country.
This blog discusses how the corporate tax in Dubai impacts MNEs, particularly those with consolidated revenues of EUR 750 million or more, who are now facing a 15% global minimum tax rate under the OECD’s Pillar Two framework.
Key Features of the Corporate Tax Rate in Dubai
Tax Rates and Scope
The corporate tax rate is at 9% for businesses registered, managed or operating in the UAE and the income subject to tax determine by the residency status of the business. International tax rules require a higher Corporate tax rate of 15% to be imposed on multinational enterprises with consolidated group turnover of EUR 750 million or more.
Exemptions and Special Provisions
Some entities benefit from the exemptions under corporate tax in Dubai, such as:
- Government entities and government controlled entities
- Persons engaged in extractive and non-extractive natural resource business, subject to conditions
- Qualifying public entities, Qualifying investment fund, public pension or social security fund, or a private pension or social security fund, subject to conditions
- Any such other person determined by the Minister.
There are exemptions provided under Corporate Tax in UAE to certain types of income such as:
- Dividends and profit distributions from resident juridical persons and foreign juridical persons, subject to conditions.
- Participating interest exemption, subject to conditions.
What about businesses in a Free Zone?
Businesses in a UAE Free Zone does not have exemptions from UAE Corporate tax, instead, they are eligible for 0% Corporate in UAE subject to meeting several conditions such as:
- Maintains adequate substance in the UAE.
- Derives Qualifying Income as specified.
- Prepares audited financial statements.
- Complies with Transfer Pricing regulations.
- Satisfy any other conditions as specified by the Minister.
These exemptions ensures that industries that are invaluable to the development of the UAE Economy are nurtured and fosters further growth. This also provides sectoral benefits and incentives that make UAE Free Zones attractive to businesses thereby inviting foreign investments into the country.
Conformity with International Tax Initiatives
The Pillar Two framework of the OECD mandates a minimum tax rate of 15% to be imposed on MNEs with annual consolidated revenue of € 750 million or more.
In compliance with the above global tax requirement, the UAE has now introduced Domestic Minimum Top-Up Tax (DMTT) for such MNE’s operating in UAE which would bring Dubai’s corporate tax structure in line with OECD tax regulations closing any compliance gaps for large multinational enterprises (MNEs).
The highlights of DMTT are:
- DMTT rate of UAE Corporate Tax is 15%.
- It is applicable MNE’s base in UAE with global turnover of € 750 million or more.
- DMTT is applicable for MNE’s with the above turnover in at least two of the last four years.
- DMTT will be effective from January 01, 2025 i.e. financial years starting on or after January 01, 2025.
Implications for Multinational Enterprises
Tax Residence and Permanent Establishments
Entities possessing a Place of Effective Management (PoEM)—which signifies the location where key management decisions are made—or those operating through a permanent establishment (PE)—such as a fixed place of business—may be liable for corporate income tax in Dubai. This requires MNE’s to evaluate its exposure to Corporate Tax in UAE.
Transfer Pricing and Compliance
With the introduction of Transfer Pricing (TP) regulations, MNEs must:
- Identify the nature of transactions with its related parties.
- Ensure compliance with Arm’s Length Principle (ALP_ as per Corporate Tax Law in UAE.
- Conduct Transfer Pricing studies to evidence compliance with ALP.
- Maintain sufficient records such as Master and Local File.
Strict adherence to corporate tax laws in Dubai is essential to avoid penalties.
Administrative and compliance burdens.
The introduction of the corporate tax system in Dubai increases compliance costs for MNEs. Companies are obliged to look at their structures and transactions in order to eliminate potential liabilities under the new regime.
Challenges Faced under Corporate Tax in Dubai
● Legal and regulatory uncertainty
Because of its evolving nature, the Dubai corporate tax law may expose companies to potential litigation resulting from inadequate guidance. Companies should remain abreast of corporate tax rules in Dubai.
● Double Taxation and Profit Attribution
Businesses will suffer double taxation unless tax treaties are used appropriately. Further, attribution of profit to a PE in Dubai must be evidence to avail benefit of the low tax regime.
Strategic Recommendations for Enterprises
Tax Planning and Professional Guidance
- Companies must have strategies for navigating the complexities of business tax in Dubai.
- Formulate strategic initiatives for tax planning.
Engage tax professionals with experience in corporate tax training and compliance services in Dubai, including the JAXA Auditors.
Monitoring Regulatory Changes
Regular updates regarding corporate tax laws in Dubai are essential for maintaining compliance. The expertise of JAXA Auditors in monitoring legislative developments guarantees that businesses stay ahead.
Structuring for Compliance
Adopting efficient structures aligned with the Dubai corporate tax laws can help mitigate liabilities while ensuring adherence to international standards.
JAXA Auditors is one of the most reputed consultancy firms, which provides customized solutions in corporate tax filing in Dubai. Being aware of the corporate tax framework of Dubai, businesses run their activities very efficiently and are compliant.
Whether it is the registration of corporate taxes in Dubai or strategies on how to minimize your corporate tax within Dubai’s free zones, JAXA Auditors stands as your dependable partner.
Conclusion
The introduction of the corporate income tax rate in the United Arab Emirates represents a significant change for international businesses operating in Dubai. As the Dubai corporate tax rate becomes consistent with global standards, multinational enterprises encounter new compliance obligations and higher rate of 15% tax for those generating substantial global revenues.
JAXA Auditors is dedicated to assisting businesses in adapting to these changes by providing professional guidance and effective tax solutions.
Are you prepared to optimize your tax strategy? Reach out to JAXA Auditors today for thorough support in corporate tax compliance.
