It has been a month, since the new shocking regulation came into force: UAE is no longer tax free! Now there is a corporate tax in UAE! But some companies still paying 0% tax. So it is quite confusing to many as the UAE tax system is not one of the simple once.
And knowing that UAE tax is undergoing a significant change in its corporate laws did not make the life of any entrepreneur easier as many either already having companies there or just planned a corporate structure that involves a company in Dubai, as they heard that Dubai tax is 0% or in any other freezone in the UAE. Lest dive right in and explore all you need to know!
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The talks started early 2022…
…the UAE corporate tax law will be amended and corporate tax in UAE will be introduced. But as there were no clear clarification what is happening and so many were confused, hoped that they will not be subject to tax. Actually this relaxed approach was not groundless, as when most registered a company in the UAE free zone they were directly promised a tax free zone for 50 years with no UAE tax.
However, the new UAE corporate tax law proved them wrong. Imagine registering company with the thought that Dubai tax and all the other freezone’s taxes are 0% and in a while you find out that the UAE corporate tax law is being changed. So of course most decided just to wait and see where it goes being almost sure that this new corporate UAE tax will not be applicable to them.
However in October 2022 additional clarifications came and it became clear that most companies registered in the free zones will be affected by this tax, also Dubai tax is not an exception and will be amended as well. But keep in mind, that the UAE corporate tax 2023 amendment will not be applicable to all companies, as some will still remain tax free depending on their activity. We will get down to it a bit later to examine which companies exactly will have that privilege.
For those, who are not quite familiar with the UAE tax system…
to put it simply then it has different regulations depending on the where exactly the company is registered: in the mainland or in the freezone. There are a lot of free zones, not only Dubai tax free zone. And the divisions is not always made out of the geographical reasons.
The criteria to which entrepreneurs are paying attention when choosing which free zone they want to be registered in, depends on many factors, like the amount of money they are ready to spend, the licensing criteria depending on what activity the company will be doing, substance criteria etc. But what was common for all of those zones is that it is tax free, at least with the UAE tax. But that is not the case for everyone anymore.
Why UAE did something that would cause many businesses to look for the other jurisdictions and basically take money out of the country?
UAE corporate tax law was amended for many reasons but one of it, the most significant one, is that it was definitely a pressure on the UAE from outside, from the EU, from OECD, so they will no longer be a paradise for taxes that causes a lot of money coming out of the EU, that are subject neither to the taxes within EU nor to the UAE tax.
So, what is the current regulation?
Down in the list below you see the companies, that are not effected by the UAE corporate tax law:
- The UAE Federal/Emirate Government and their department, authorities or other public institution;
- A wholly government-owned UAE company, that carries out a sovereign or mandated activity and that is listed in the Cabinet Decision;
- A business engaged in the extraction and exploitation of UAE natural resources that is subject to Emirate-level taxation;
- A charity or another public benefit organization that is listed in a Cabinet Decision;
- A public or regulated private social security or retirement pension fund;
- A regulated investment fund, that has applied for a corporate tax exemption.
If your business can be attributed to one of the categories above, than it is not subject to UAE tax.
However, if you are not on that list, than according to the new changes corporate UAE tax in free zones will be applicable at the following rates to the qualifying free zones person:
- Either 0% on qualifying income; or
- 9% on taxable income that is not qualifying income.
But, if you want to use the privilege of being taxed at the rate of 0% UAE tax, you have to be considered as the qualifying person.
Who is this qualifying person?
There are several criteria who is considered a qualifying person, but if to put it simply, that it is a legal entity that is registered in a free zone, has an adequate substance there, makes audited financial statements and derives qualified income.
More complex issue here is what is qualifying income? Because judging on this it depends whether you will pay tax or it will remain 0% according to the UAE corporate tax law.
A qualifying income is any income from the activities shown in the list below:
- Manufacturing of goods or materials;
- Processing of goods or materials;
- Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale;
- Fund management services;
- Wealth and investment management services;
- Headquarter services or treasure and financing services to related parties;
- Holding of shares and other securities;
- Reinsurance services;
- Logistic services;
- Ownership, management and operations of ships;
- Financing and leasing aircraft, including engines and rotable components;
- Any ancillary activities to the listed above (that do not have an independent function but is necessary for the performance of the main qualifying activity).
So basically if you are producing some physical products in the free zone – it is taxed 0%.
If it is services to your related company, not all but most are also taxed again at the 0% UAE tax rate.
On this list you also see the reinsurance services. Keep in mind, that reinsurance is taxed 0% but insurance is not tax free, it is 9%.
If you conduct any of those activities you see on the screen it does not matter who is your business partner. You can conduct a business transaction either with another free zone company, or mainland company or even abroad. It does not matter. As long as you can find your activity in this list, it will be taxed 0%.
What if you are conducting some other type of activity, that is not in the list I showed you?
Then the income from such transaction can be either qualifying (so you will pay 0% tax) or not qualifying (you will pay 9% tax in this case).
How to determine whether you will be taxed or not? It depends on who is the person you are having business transactions with.
If that is another legal person, that is registered in a free zone? It will be taxed 0%.
If that is someone in the UAE mainland or abroad? The income will be taxed 9%.
If that is any individual, sole establishment (self-employed)? The income again will be taxed 9% UAE tax.
So as you see, not all businesses will fall under the category that will pay 9% under the new UAE corporate tax law, some will still remain paying 0%.
But, there is a big but. If you are falling under the 9% tax, it still does not mean that UAE is no longer attractive for you. As the first 375,000 Dirham, what is approximately EUR 100,000 are not subject to corporate tax UAE introduced.
So even if your income is subject to 9% tax it depends on your income whether you should chose to stay or to register a company in the UAE or not.
If you have any additional questions whether you should chose to register your company to UAE or other jurisdiction might be more preferable, let us know and we will provide you the support of out team in this matter.
FAQ QUESTIONS
- What is the corporate tax in the United Arab Emirates?
- The corporate tax in the United Arab Emirates is a newly implemented tax regime. Previously, the United Arab Emirates was known for being tax-free, but now a corporate tax has been introduced. However, some companies still pay 0% tax. This has caused confusion as the UAE tax system is not a simple one. Furthermore, significant changes in UAE corporate laws have made life more challenging for entrepreneurs who either already have companies there or have planned corporate structures involving a company in Dubai, believing that Dubai is tax-free or that a 0% tax applies in other free zones in the UAE. Let’s dive right in and explore all you need to know!
- Why did the UAE introduce something that would cause businesses to look for other jurisdictions and potentially take money out of the country?
- The UAE corporate tax law was amended for various reasons, but one of the most significant factors was the pressure from external entities such as the EU and OECD. The UAE aimed to address concerns about being a tax haven that facilitated the outflow of funds from the EU, evading both EU and UAE taxes.
- What is the current regulation? Here is a list of companies that are not affected by the UAE corporate tax law:
- The UAE Federal/Emirate Government and their departments, authorities, or other public institutions
- Wholly government-owned UAE companies engaged in sovereign or mandated activities listed in the Cabinet Decision
- Businesses engaged in the extraction and exploitation of UAE natural resources subject to Emirate-level taxation
- Charities or other public benefit organizations listed in a Cabinet Decision
- Public or regulated private social security or retirement pension funds
- Regulated investment funds that have applied for a corporate tax exemption
- Who is considered a qualifying person?
- A qualifying person is a legal entity registered in a free zone, with adequate substance, audited financial statements, and deriving qualified income.
- What is qualifying income?
- Qualifying income includes activities such as manufacturing of goods or materials, processing of goods or materials, distribution of goods or materials within a Designated Zone, fund management services, wealth and investment management services, headquarters services or treasure and financing services to related parties, holding of shares and other securities, reinsurance services, logistic services, ownership, management, and operations of ships, and financing and leasing aircraft, among others.
- How is the tax rate determined?
- For qualifying free zone persons, the tax rate can either be 0% on qualifying income or 9% on taxable income that is not qualifying income.
- What if my activity is not listed as qualifying income?
- If your activity does not fall under the list of qualifying income, the income from such transactions can be either qualifying (0% tax) or non-qualifying (9% tax) based on the type of transaction and the counterparty involved.
