Introduction to Corporate Tax in 2023
In the United Arab Emirates (UAE), the Federal Decree-Law No. 47 of 2022 regarding the Taxation of Corporations and Businesses was enacted on December 9, 2022. This legislation introduces and enforces a Federal Corporate Tax, applicable for financial years commencing on or after June 1, 2023.
Understanding Corporate Tax
Corporate Tax, often known as Corporate Income Tax or Business Profits Tax in other jurisdictions, is a direct tax levied on the net earnings of corporations and other business entities.
Who Falls Under Corporate Tax?
Corporate Tax impacts the following "Taxable Persons":
UAE-based companies and juridical entities incorporated or effectively managed in the UAE.
Individuals conducting business activities specified by a forthcoming Cabinet Decision.
Foreign legal entities with a Permanent Establishment in the UAE.
Additionally, entities established in UAE Free Zones are subject to Corporate Tax regulations, although those that meet the criteria as a Qualifying Free Zone Person can enjoy a Corporate Tax rate of 0% on their Qualifying Income.
For non-resident entities without a Permanent Establishment or those earning UAE-sourced income not tied to their Permanent Establishment, a Withholding Tax at a rate of 0% may apply.
Corporate Tax Exemptions
Government-controlled entities specified in a cabinet decision.
Exemption upon Notification to Ministry of Finance:
Non-extractive natural resources businesses.
Exemption Listed in a Cabinet Decision:
Qualifying public benefit entities.
Exemption upon FTA Application and Approval:
Public or private pension and social security funds.
Qualifying investment funds.
Wholly-owned and controlled UAE subsidiaries of government entities, government-controlled entities, qualifying investment funds, or pension or social security funds.
Deductible Expenses and Limitations
Certain expenses like bribes, fines (except damages or contract breach compensation), dividends, and corporate tax.
Expenses not incurred solely for business purposes or in deriving exempt income.
No Deductions Allowed:
Client entertainment expenses.
Partial Deduction (50%):
Deduction of Net Interest Expenditure Beyond De Minimis Threshold:
Up to 30% of earnings before interest, tax, depreciation, and amortization.
Corporate Tax Rates
Resident Taxable Persons:
Taxable income up to AED 375,000 (amount to be confirmed in a Cabinet Decision): 0%.
Taxable income exceeding AED 375,000: 9%.
Qualifying Free Zone Persons:
Qualifying income: 0%.
Non-qualifying income: 9%.
Calculation of Taxable Income for a Tax Group
For Tax Group calculation, the parent company must consolidate financial accounts of subsidiary members for the relevant Tax Period. Transactions between the parent and group members are eliminated to determine the Taxable Income of the Tax Group.