Understanding Corporate Tax Its Key Points and Implications in the UAE

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The corporation is also known as corporate tax. Another name for it is company tax. It is a kind of tax levied on the profits or income of businesses, companies, enterprises, or corporations. Nevertheless, it is imposed by the official governments of the country. It is rather imposed on the basis of the financial gains earned by companies and corporations. Typically a specified percentage of their taxable income is charged. 

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Corporate Tax has been always important source of revenue. It rather makes a major contribution to the funds utilized by the government. The way of calculating corporate tax differs from country to country. Its application also varies among differ nations. Every country and nation is free to set tax laws as per its specifications and requirements. Similarly, the UAE has its own set of tax rules for the companies and individuals. 

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In the UAE, there are different rates for different types of businesses or income levels. Globally in some places, corporate tax rates can be fixed. On the other hand, progress based on the level of profits is also charged. Corporate tax is distinct from personal income tax altogether. Income tax is levied on the income earned by individual persons and has different ways of treating it. Whereas, corporate tax focuses specifically on the financial performance of companies.

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It is particularly designed to ensure that corporations contribute a portion of their earnings toward the upkeep of public services and government infrastructure. In addition to standard corporate tax, there can also be specialized taxes targeting specific industries, transactions, or types of income. These variations in tax laws and regulations are present in the United Arab Emirates. This makes corporate tax an intricate aspect of business finance and taxation in the region.

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To comprehend and have a better understanding of the tax treatment in the UAE you need to learn some definitions. It includes terms concerning free zone companies. This is essential to grasp the entire concept of corporate tax applicable in United Arab Emirates. There is a special definition to determine qualifying Income and non-qualifying Income. Moreover, certain conditions need to be understood.

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Federal Decree-Law No. 47 of 2022 emphasizes the taxation. The tax law applied in UAE is called Corporate Tax Law (CTL). It was effective for financial years starting in 2023.

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In United Arab Emirates, the CT or Corporate Tax, is introduced through a proper Law, called as Corporate Tax Law or CTL. It is introduced for Qualifying Free Zone Persons (QFZPs) in the country. There are two different kinds of tax rates;

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0% on Qualifying Income (QI)
9% on income that is not Qualifying Income (non-QI)

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To qualify as a Qualified Free Zone Person (QFZP) there are specific criteria during each taxable period. These conditions may include deriving Qualified Income and meeting the minimum specifications.  

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Moreover, maintaining adequate substance in the UAE, not electing ordinary taxation, complying with transfer pricing principles, and having audited financial statements are also some of the conditions. To determine Qualifying Income QI involves considering the parties the company deals with. Furthermore, the nature of the activities of the company is also accounted for. Income from 

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Qualified Activities (QA) that are not Excluded Activities (EA) is considered QI. All the income is considered qualifying income for transactions with other free zone companies. Otherwise, it will be explicitly listed as Excluded Activities (EA). Income from Immovable Properties is treated differently. Income earned by a free zone company from immovable properties situated in a free zone is taxable at 9%. 

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There is an exception for commercial properties involving transactions with other free zone companies. Such types of revenues are not included while computing as per the de minimis.
The De Minimis Ratio is an added condition applied in the UAE. For QFZP eligibility is the De Minimis ratio. It establishes a limit on Non-Qualifying Revenues. The revenues cannot exceed a minimum limit of 5% of total revenues or 5 million AED. There is a significant impact on Specific Business Activities of it. Different types of businesses have varied implications under the new tax framework in the UAE.

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It is likely subject to 9% Corporation Tax. For the Holding companies in the UAE, there is Potential for zero-rate taxation if qualified as QFZP. Still, there is a need for caution required to meet the minimum specifications. Trading companies of the UAE are involved in the Distribution of goods, products, and other commodities in/from a Designated Zone is categorized as Qualified Activity. Still, there exist complexities for non-DZ-free zones.

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Qualifying as a QFZP involves a greater degree of requirements and conditions applied. Besides, it is important to assess the nature of activities and parties involved in transactions. In case of a failure to meet any of the requirements will lead to a disqualification. This has some serious repercussions for the company and its activities. It will result in disqualifying of the company or business for the next five tax periods.

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There is official guidance expected from the concerned authorities of UAE. This is because it will lead to lower tax rates imposed on them. This will help taxpayers, tax specialists, tax consultants, and companies to interpret and understand.

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NOTE: Please consult the UAE Advocates and Legal Consultants if the reader/readers have plan to move ahead. We will not own any responsibility or liability. Information can be outdated or OLD as well. So please grab the knowledge but consult the Emirati Advocates.

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