Taxation in United Arab Emirates (UAE)

Corporate tax is a direct tax imposed on the net income of companies and other businesses. In some other states, corporate tax is referred to as 'business profit tax' or 'corporate income tax'.

Generally speaking, corporate tax applies to the following "taxable" persons:

• UAE companies and other judicial persons that are incorporated or effectively managed and controlled in the UAE;
• Natural persons (individuals) who conduct a business or any business activity in the UAE as specified in a decision to be issued by the Council of Ministers in due course;
• Non-resident judicial persons (foreign legal entities) that have a Permanent Establishment in the UAE

Juridical persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons” and will need to comply with the requirements set out in the Corporate Tax Law.However, a Free Zone Person that meets the conditions to be considered a Qualifying Free Zone Person can benefit from a Corporate Tax rate of 0% on their Qualifying Income.

Non-resident persons that do not have a Permanent Establishment in the UAE or that earn UAE sourced income that is not related to their Permanent Establishment may be subject to Withholding Tax (at the rate of 0%). Withholding tax is a form of Corporate Tax collected at source by the payer on behalf of the recipient of the income. Withholding taxes exist in many tax systems and typically apply to the cross-border payment of dividends, interest, royalties and other types of income.

According to the tax regimes of most countries, the Corporate Tax is imposed based on both residence and source basis. The applicable basis of taxation depends on the classification of the taxable person.

• A “Resident Person” is taxed on income derived from both domestic and foreign sources (i.e., a residence basis).
• A “Non-Resident Person” will be taxed only on income derived from sources within the UAE (i.e., a source basis).

Residence for Corporate Tax purposes is not determined by where a person resides or is domiciled but by specific factors that are set out in the Corporate Tax Law.If a Person does not satisfy the conditions for being either a Resident or a Non-Resident person then they will not be a Taxable Person; therefore, they will not be subject to Corporate Tax.

Companies and other juridical persons that are incorporated or otherwise formed or recognised under the laws of the UAE will automatically be considered a Resident Person for Corporate Tax purposes.

Foreign companies and other juridical persons may also be treated as Resident Persons for Corporate Tax purposes where they are effectively managed and controlled in the UAE. This shall be determined with regard to the specific circumstances of the entity and its activities.

Natural persons will be subject to Corporate Tax as a “Resident Person” on income from both domestic and foreign sources, but only insofar as such income is derived from a Business or Business Activity conducted by the natural person in the UAE. Any other income earned by a natural person would not be within the scope of Corporate Tax.

Corporate Tax is imposed on Taxable Income earned by a Taxable Person in a Tax Period. Corporate Tax would generally be imposed annually, with the Corporate Tax liability calculated by the Taxable Person on a self-assessment basis.

This means that the calculation and payment of Corporate Tax is done through the filing of a Corporate Tax Return with the Federal Tax Authority by the Taxable Person.

The starting point for calculating Taxable Income is the Taxable Person’s accounting income (i.e., net profit or loss before tax) as per their financial statements.The Taxable Person will then need to make certain adjustments to determine their Taxable Income for the relevant Tax Period.

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