Introduction
The United Arab Emirates (UAE) is renowned for its favorable tax environment, making it an attractive destination for investors and businesses worldwide. This article unpacks the recent changes in the UAE's tax regime, specifically the introduction of corporate tax, and its implications for investors and businesses operating in the country.
Key Takeaways
- The UAE has a 9% corporate tax rate, which applies to all companies with a significant presence or earnings above $102,000, aligning the UAE with international tax standards and enhancing compliance with global economic regulations.
- The UAE continues to offer a tax-free regime on personal income, including earnings from salaries, investments, and capital gains.
- Investors in UAE real estate benefit from no taxes on rental income or capital gains.
- The UAE Golden Visa offers long-term residency and significant tax planning advantages, including the ability to change tax domicile to the UAE and benefit from its tax-free regime.
Tax-Free Status in the UAE
The UAE is globally recognized for its tax-free status on personal income, a key attraction for expatriates and investors. Historically, individuals residing in the UAE did not pay taxes on their earnings, whether from salaries, investments, or other income sources. This tax-free environment extended to inheritance and capital gains, providing a significant financial advantage for residents.
However, in December 2022, the UAE Ministry of Finance announced its first-ever corporate tax regime with a corporate tax rate of 9%. This new corporate tax came into effect for businesses with a fiscal year starting on or after 1st June 2023 and applies consistently across all Emirates.
The corporate tax covers all companies incorporated in the UAE and individuals involved in business activities. Foreign companies are also subject to corporate tax if they have a significant physical presence in the country or earn more than $102,000.00 from their activities or assets. If your taxable income is less than the defined threshold, your business will be subject to a 0% tax rate.
The introduction of corporate tax aims to align the country with international tax standards and coincides with a new global minimum corporate tax from the Organisation for Economic Cooperation and Development (OECD), which was signed by 136 signatories (including the UAE) to ensure big companies pay a minimum 15% and make tax avoidance harder.
Regardless of whether you need to pay taxes, have no tax liability, or are exempt from them, you must register for corporate tax with the UAE Federal Tax Authority (FTA) and get your Corporate Tax Registration number. The administrative penalty for non-registration is around $2,700.00. If you partner with an agency, like Mirabello Consultancy, experienced professionals can help you apply for and submit taxes efficiently.
UAE Corporate Tax
This corporate tax law has had an immense impact on the UAE, with specific implications for different entities depending on whether they are individual residents or non-residents, the type of company, or exemptions. You can use an advisor like Mirabello Consultancy to help you determine which category you fit into.
Residents
An entity incorporated in the UAE is automatically considered a resident individual. This means their global income will be subject to UAE Corporate Tax. Tax treatment for resident individuals depends on the nature of your activities. Investment income from real estate, for example, is exempt from corporate tax if it is not derived from a licensed business activity. However, if you generate income from licensed activities and their turnover exceeds $272,257.00, you will be subject to corporate tax.
If your income is between $272,257.00 and $816,771.00, you are liable for registration and filing returns, but can claim exemption until the end of 2026. If your income is more than this, you will be liable for registration, filing returns and paying corporate tax.
Companies established in the UAE free zones are also subject to a 0% tax rate as long as they meet the relevant criteria.
Non-Residents
A company incorporated outside the UAE is generally considered a non-resident individual. According to the Federal Tax Authority (FTA) a non-resident is subject to corporate tax in specific cases. The first case is when you have a permanent establishment in the UAE with a turnover that exceeds $272,258.50 during a given calendar year. The second case is where you derive state-sourced income.
Exemptions
Some entities are exempt from paying the UAE corporate tax, including UAE government entities and specific government-controlled entities, qualifying public benefit entities dedicated to social welfare, and qualifying investment funds (such as social security). Businesses engaged in extracting natural resources (like oil, gas and minerals) have separate tax regulations established through concession agreements or fiscal letters.
Other taxes
In addition to corporate tax, the UAE also levies Value Added Tax (VAT) and excise taxes on certain goods and services. VAT is set at a standard rate of 5% for most goods and services, (with a few exceptions such as healthcare and education,) regardless of whether you are in the mainland or a free zone area. The Jabel Ali free zone, which primarily features companies in the import and export sector, also enjoys 0% VAT.
The mandatory VAT registration threshold in the UAE is $102,000.00 and the voluntary registration threshold is $51,000.00.
Excise tax targets specific products that are harmful to human health or the environment, such as tobacco and sugar. These rates can vary between 50% and 100%, depending on the product category.
Additionally, small businesses with revenue below a certain threshold can claim “small business relief” and could qualify as having no taxable income. To claim this relief, you have to submit an election to the FTA and may be subject to some compliance obligations.
Regardless of whether you need to pay taxes, have no tax liability, or are exempt from them, you have to register for corporate tax with the FTA and get your Corporate Tax Registration number. Experts like Mirabello Consultancy can advise you through the process to ensure you do not have to pay the non-registration fee of $2,722.57.
Taxation in Free Zones
On 20 May 2024, the FTA published more corporate tax guidance for companies located in a UAE free zone. It stated that you do not have to pay tax if you meet the criteria to be classified as a Qualifying Free Zone Person (QFZP), which includes:
- Significant operations within a free zone.
- Qualifying income (primarily from qualifying activities).
- Following strict transfer pricing rules for transactions between related companies.
- Detailed records and financial statements.
There are over 45 free zones in the UAE, usually sector-specific. There are three kinds of free zone companies to choose from:
- Free Zone Establishment (FZE): a company with only one shareholder.
- Free Zone Company (FZ Co)/Free Zone LLC: a company with two or more shareholders (individuals or legal entities).
- Branch Office: foreign companies or companies operating in the UAE mainland.
While free zones offer substantial tax benefits, it is important to understand the differences between free zones and mainland tax regimes. Mainland companies are subject to the UAE’s corporate tax, VAT, and other regulatory requirements, whereas free zone companies can enjoy extended tax holidays and reduced regulatory burdens. However, free zone companies are generally restricted from conducting business directly with the UAE mainland without a local distributor or agent, whereas mainland companies can operate anywhere in the UAE and internationally.
Tax Treaties and International Agreements
The UAE has an extensive network of tax treaties with over 100 countries. These treaties ensure that income earned in one country is not taxed again in another country, or if it is, the tax paid in the source country can be credited against the tax payable in the residence country.
Tax treaties often reduce or eliminate withholding taxes on dividends paid to foreign shareholders. This can be beneficial for investors seeking to repatriate profits. By reducing tax barriers, these treaties make it more attractive for foreign businesses to invest in the UAE and for UAE-based companies to expand abroad. This encourages the free flow of capital, technology and expertise.
It’s important to note that each treaty has specific provisions that may apply differently depending on the nature of the income and the countries involved. You can rely on experienced and trained professionals, like Mirabello Consultancy, to help you understand international tax treaties.
Real Estate Taxes for Investors
Investing in real estate in the UAE also comes with tax advantages. Property owners do not pay taxes on rental income or capital gains. However, there may be some fees associated with property transactions, such as the Dubai Land Department (DLD) fee (typically 4% of the property’s purchase price). There could also be other charges related to property maintenance and community service fees.
One of the most attractive aspects of investing in UAE real estate is that rental income is not subject to income tax. This means that you can retain all the income generated from renting out your properties without the burden of income tax.
Similarly, there is no capital gains tax in the UAE. When investors sell their property for a profit, they do not have to pay tax on the capital gains. This can significantly enhance the returns on real estate investments.
Tax Planning and Compliance for Investors
Investors should work with experienced tax consultants and legal advisors to navigate the UAE’s tax landscape, ensure compliance with local regulations, and optimize their tax liabilities. Businesses subject to corporate tax (CT) in the UAE have specific responsibilities to ensure compliance with regulations. This includes registering for corporate tax with the FTA, maintaining proper records reflecting income and expenses, as well as supporting documents for tax purposes.
You have to accurately file tax returns within the specified deadlines, which may include corporate tax returns and transfer pricing documents. Effective tax planning and compliance are essential for investors to maximize their benefits and avoid potential penalties.
Businesses operating in the UAE are required to submit their corporate tax returns no later than 9 months after their fiscal year ends, unless a different timeline is specified. For the financial year July 2023 to June 2024, you need to file your corporate tax return by 31 March 2025. If your financial year is from January 2024 to December 2024, you need to submit your return by 30 September 2025
Benefits of the UAE Golden Visa in Tax Planning
The UAE Golden Visa program offers long-term residency to investors, entrepreneurs, exceptional talents, and other eligible individuals. The Golden Visa opens doors to numerous investment opportunities in the UAE, from real estate to various sectors within its dynamic economy.
One of the significant benefits of the Golden Visa is its role in tax planning. By obtaining the UAE Golden Visa and becoming a resident, individuals can change their tax domicile to the UAE, you can benefit from its tax-free regime.
The Golden Visa also facilitates effective estate planning, making it easier for you to transfer wealth to future generations without the complications and financial burden associated with inheritance taxes in other jurisdictions.
Conclusion
The UAE's tax regime, historically known for its tax-free status, has undergone significant changes with the introduction of corporate tax. This new landscape presents both challenges and opportunities for investors and businesses operating in the country. While the corporate tax introduces a new layer of compliance and financial planning, the UAE remains an attractive destination due to its favorable tax policies, robust legal framework, and strategic business environment. Investors and businesses can still enjoy numerous benefits, including tax-free personal income, advantageous real estate tax policies, and comprehensive tax treaties, with guidance from experts like Mirabello Consultancy.
FAQ
What is the corporate tax rate in the UAE?
The UAE has a 9% corporate tax rate. This applies to all companies with a significant presence or earnings above $102,000, aligning the UAE with international tax standards and enhancing compliance with global economic regulations.
Are free zone companies exempt from corporate tax?
Free zone companies in the UAE can benefit from a 0% corporate tax rate if they meet specific criteria as outlined by the Federal Tax Authority (FTA). These criteria typically include substantial operations within the free zone, qualifying income from permissible activities, and adherence to stringent transfer pricing regulations.
Do individuals have to pay income tax in the UAE?
Individuals residing in the UAE enjoy a tax-free status on personal income, including earnings from salaries, dividends, investments, and capital gains.
How does excise tax apply in the UAE?
Excise tax in the UAE targets specific goods deemed harmful to human health or the environment, such as tobacco and sugary beverages. Tax rates can range from 50% to 100%, depending on the product category.
