Purposes and Scope of Corporate Tax in UAE

Shahzad Masood

Corporate Tax in UAE

The “Corporate Tax Law” or Federal Decree Law no. 47 of 2022[1] was approved on October 3, 2022, and released in the Official Government Gazette of the UAE (United Arab Emirates) on October 10, 2022, under Issue #737. The UAE’s Corporate Tax Law establishes a federal tax on companies and corporate earnings, known as the “Corporate Tax”. The Corporate Tax Law consists of twenty chapters and seventy articles that address the purpose, scope, application, compliance, and management of the corporation tax regime in the UAE. Tax consultants in Dubai can help businesses comprehend different aspects of this law. This guide mainly allows you to understand the purposes of corporate tax in the UAE.

Purposes of Corporate Tax in UAE

In implementing the corporate tax, the UAE hopes to;

  1. Maintain and expand its status as a major international centre for trade and investment.
  2. Reaffirm its commitment to upholding global standards for tax transparency and avoiding unfair tax practices.
  3. Speed its growth and transformation to realize its strategic goals.

Scope of Corporate Tax in UAE

Corporate Tax in the UAE applies to;

  1. The UAE’s commercial license holders include all companies and people undertaking business activities.
  2. Businesses in free zones (The UAE Corporate Tax regime will continue to honor the Corporate Tax incentives now being provided to free zone enterprises that abide by all legal requirements and do not conduct operations established on the UAE’s mainland.)
  3. Foreign companies and individuals may only do business in the UAE if they do it regularly or on an ongoing basis.
  4. Organizations that manage, build, develop, broker, or work in the real estate industry.
  5. Banking Operations.

Ask from tax consultants in Dubai to better understand the scope of corporate tax and where your business stands.

Taxable Persons for Corporate Tax in UAE

Corporate Tax Law applies to both natural and juridical persons, with distinct regulations establishing who is liable to the tax and on what basis. In a nutshell, corporate tax law applies to;

  1. Juridical Persons (UAE): those persons who are LLC (Limited Liability Companies) or joint stock companies (public or private) that are established or otherwise incorporated and maintained under UAE legislation. This also includes free zone persons.
  2. Juridical Persons (non-UAE): Those persons who are located and established outside the UAE but are controlled and administered efficiently inside the UAE.
  3. Natural Persons (Residents): Those individuals who operate a business activity or a business inside the UAE.
  4. Natural Persons (Non-Residents): Those persons who own a PE (Permanent Establishment) in the UAE or they obtain an income from a UAE source that falls under the scope of this tax law.

Provisions of Corporate Tax Law for Taxable Persons

Corporate taxability can be better understood by carefully going through the following provisions of the Corporate Tax Explanatory Guide[2];

  1. Taxable persons explained above are all subject to pay corporate tax in the UAE.
  2. Taxable persons can further be divided into resident and non-resident persons. According to the corporate tax law, resident persons will be subject to corporate tax in the UAE.
  3. When a juridical person is established or acknowledged by UAE legislation, it is immediately regarded a Resident Person under the Corporate Tax Legis;ation. This includes juridical persons established in the UAE by free zone legislation or mainland regulations, as well as those constituted under a particular constitution. Resident juridical persons, unless exempted, are subject to the Corporate Tax Law, regardless of their business type or degree. This is due to the fact that the Corporate Tax Law applies to firms and other legal entities and considers all activities and assets as taxable.
  4. Juridical persons launched or created in a jurisdiction other than the UAE but operated and regulated inside the UAE are considered Resident Persons for the purposes of corporate tax. Businesses can select where they want to establish their legal organisations without relying just on tax factors. Choosing residence for corporation tax reasons based solely on the jurisdiction of formation can lead to alteration when deciding where earnings are taxed, without considering the location of the juridical person’s mind and administration, as well as the activities that generate income.
  5. If a natural person undertakes an activity or business in the UAE, they will be considered a Resident Person for the purposes of corporation tax based on the revenue generated from business activity or business. Corporate Tax in the UAE applies to every cent of earnings derived from a taxable activity or business carried out within the UAE, regardless of where the person is normally located for taxation reasons or where the income is sourced. This covers business activities and operations from both single proprietorships and unincorporated partnerships operating in the UAE. Other governments do not impose an individual income tax on corporate earnings, leading to similar practices.
  6. Non-resident individuals who do business through a PE (permanent establishment) in the UAE are considered as non-resident taxable persons.
  7. Individuals who are not resident persons but receive UAE-sourced earnings are considered non-residents for corporate tax reasons. This  applies the Corporate Tax Law to revenue from UAE-related activities and transactions that do not include a PE. In such a case, corporate income may be subject to a withholding tax.
  8. If a non-resident person derives income from a resident person, it will be deemed as UAE-sourced income and will be taxed accordingly.
  9. If a non-resident person derives income from some other non-resident person, it will be deemed as UAE-sourced and will be taxed accordingly only if a PE is involved.

State Sourced Income & Corporate Tax

State Sourced Income includes earnings obtained from a list of circumstances with various factors defining the source of the earnings, which includes;

  1. Insurance income
  2. Interest income
  3. Income from intangible or intellectual property
  4. Income from the use of capital rights or shares
  5. Income from immovable or moveable asset
  6. Income from an agreement
  7. Income from services
  8. Income from selling of goods

Conclusively, the scope of corporate tax in UAE is diverse and a business needs to carefully determine whether or not it falls under this scope. Assistance from expert corporate tax consultants in Dubai like Farahat and co. can make it easier for businesses to learn their liabilities. It can also save your business from making any incompliance error that can result in hefty penalties. 

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