Everything you need to know about taxes in the UAE

The UAE, known for its favorable business environment, has made significant changes to its tax system.

On June 1, 2023, the law on income tax for companies came into force, which replaced the previously existing "zero" tax on income and income.

The new corporate tax is 9% on the profits of all businesses whose annual income exceeds 375,000 dirhams (about $102,000). However, businesses earning less than this amount are exempt from paying tax. The introduction of a federal corporate tax is aimed at strengthening the position of the UAE as a leading economic and investment center.

It also contributes to the implementation of strategic tasks for the development and transformation of the country's economy. In addition, the new tax helps the UAE meet international tax transparency standards.

Corporate tax applies to various categories of taxpayers.

• First of all, these are companies and other legal entities registered in the UAE or actually managed from this country.
• Also, the tax is mandatory for individuals who conduct business or entrepreneurial activities in the UAE.
• Non-resident legal entities with a permanent establishment in the UAE are also subject to corporation tax.
• However, for legal entities registered in the UAE free zones, tax incentives may be established, their taxes may be 0% for qualified income.
• Non-resident persons who do not have a permanent establishment in the UAE or receive income from the UAE that is not related to the activities of their permanent establishment in the Emirates may be exempt from paying tax.

These changes to the UAE tax system are important for businesses and investors in the region. They will help create a fairer and more transparent environment for all market participants and contribute to the further development of the UAE economy.

Under UAE law, certain companies and organizations are exempt from corporate tax. State organizations and organizations controlled by the state and specified in the decision of the Cabinet of Ministers are automatically exempted from paying income tax. In addition, there are conditions under which certain enterprises are exempt from paying tax. Extractive enterprises and non-extractive enterprises associated with the development of natural resources may be exempted from paying tax on the basis of notification from the Ministry of Finance and subject to certain conditions.

Also, certain organizations can be exempted from paying tax only after the approval of the Federal Tax Authority. This includes public and private pension and social security funds, as well as qualified investment funds. In addition, wholly owned and controlled UAE subsidiaries of qualified investment funds, public or private pension funds or social security funds may also be exempt from taxes.

The UAE Corporate Tax Law applies both on the principle of residency and on the principle of source of income. A UAE resident is taxed on income received from both domestic and foreign sources. Legal entities registered in the UAE or incorporated under the laws of the United Arab Emirates 

are automatically considered residents for corporate tax purposes. However, foreign companies and other legal entities may also be considered resident persons if they are effectively managed and controlled from the UAE.

In the UAE, the corporate tax rate is 9% and applies to taxable income in excess of AED 375,000 per year. It is important to note that income below this threshold is not subject to corporation tax.

Corporate tax in the UAE has its own characteristics and conditions, taking into account the importance and contribution of certain companies and organizations to the social structure and economy of the country. Tax exemption is granted to state organizations, certain enterprises and specific funds, subject to certain conditions. The corporate tax rate is 9% and applies to income above a certain threshold.

General tax rate

• Income up to AED 375,000 per year - 0%
• Income over AED 375,000 per year - 9%

Tax rate for free zone residents

• Qualified Income - 0%
• Unskilled income - 9%

1. Exemption of income from shareholding: Owning shares in the UAE and abroad allows you to avoid corporate tax. This means that income from shares received both in the UAE and abroad is not taxed.

2. Foreign Permanent Establishment Income Exclusion: A resident person may exclude income from a foreign permanent establishment from UAE corporation tax if certain conditions are met.

3. Freezone benefits: Qualified person, registered 

in the free zone, may benefit from the reduced 0% corporate tax rate on its qualified income only. Qualified income includes income from transactions with a person in the free zone or income from qualified activities with a person not registered in the free zone.

4. Qualifying Activities: The decision of the UAE Ministry lists the qualifying activities that are subject to the "zero" tax rate. This includes the production or processing of goods, human resources services, treasury and affiliate financing, and ownership of shares and other securities.

Real estate exclusion: Income related to free zone real estate that is not used to carry on a listed business activity is not considered to qualify and is not eligible for a reduced rate of tax.

The UAE provides a number of preferential terms for certain types of income that are exempt from corporate tax. This helps to attract investment and develop business in the country. However, when planning your financial strategy, we recommend that you contact Mercury Group's tax law experts to properly assess your obligations and opportunities in accordance with UAE law.