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The UAE is introducing a federal corporate tax on business profits, and this primer covers the rates, who they apply to, and why the regime stays among the most competitive in the world.
- UAE federal corporate tax applies to the net profits of businesses, taking effect either on 1 July 2023 or 1 January 2024 depending on the financial year a company follows.
- The rates are 0% on taxable income up to AED 375,000 and 9% above that, with a separate unspecified rate for large multinationals under OECD Pillar Two.
- It applies broadly, covering licensed businesses, qualifying free zone businesses, foreign entities trading regularly in the UAE, banking, and real estate activities.
- At 9%, the UAE stays low against peers, where rates run 10% to 35% in Saudi Arabia, Singapore, Kuwait, and Qatar and the OECD average sits at 22%.
- Losing 9% of profit is a real hit, so companies with stronger internal controls and proper forecasting will find it easier to plan around the new regime.
The UAE has been at the forefront of economic activity in recent years, FDI in the UAE has seen a 116% growth in the past decade, showing that there is immense interest in doing business in the region - a significant boost to this was the fact that the UAE was always a tax-free commerce hub.
In January 2022, the Ministry of Finance announced that it will introduce Federal Corporate tax on the net profits of businesses. The tax will become applicable either on 1 July 2023 or on 1 January 2024, depending on the financial year followed by the business.
When it comes to running a successful business, understanding corporate tax calculations is essential. But for many business owners and entrepreneurs, this can be an intimidating process.
What is the Corporate Tax Rate in UAE?
For now, we’re seeing see basic numbers - however, we anticipate that there will be more nuances in these going forward
- 0 per cent for taxable income up to AED 375,000
- 9 per cent for taxable income above AED 375,000 and
- a different tax rate (not yet specified) for large multinationals that meet specific criteria set with reference to 'Pillar two' of the OECD Base Erosion and Profit Shifting Project.
Who do these rates apply to?
For now, the Ministry of Finance has broadly bucketed the taxable entities into the following;
- All businesses and individuals conducting business activities under a commercial license in the UAE
- free zone businesses (The UAE CT regime will continue to honor the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business set up in the UAE’s mainland.)
- Foreign entities and individuals only if they conduct a trade or business in the UAE in an ongoing or regular manner
- Banking operations
- Businesses engaged in real estate management, construction, development, agency and brokerage activities.
There are detailed exceptions to the corporate tax regime - you can read more about them here
What are our initial thoughts on corporate tax?
We believe there is nothing to be alarmed about - the UAE corporate tax regime is amongst the most competitive in the world and remains low compared to other peers. The tax rates in nations such as Saudi Arabia, Singapore, Kuwait and Qatar are between 10% to 35% - the average OECD tax rate is 22%!
Additionally, we believe that the introduction of CT will help UAE build a more trade-friendly stance, and could help open up the economy even more. This move highlights the country's openness to working under globally accepted standards and solidifies its commitment as a member of the OECD to the BEPS (Base Erosion and Profit Shifting) initiative - with the ultimate goal of meeting international tax transparency standards and preventing harmful tax practices.
We feel that the UAE putting this corporate tax structure into place is an important step in line with Vision 2030, and will far benefit the nation in the long run.
How would this affect your company?
The corporate tax rate can put a dent in your balance sheet, it's not easy to just see 9% of your profits eaten away! Since the corporate tax was something that companies never had to worry about in the past, this could make financial decisions a bit more tricky and ultimately more difficult for your company to expand and invest in new opportunities.
The corporate tax rate also impacts the cost of goods and services - companies that have a higher corporate tax rate will have to pay more for the goods and services they purchase, which can make it more expensive for them to operate.
What’s next?
While the corporate tax will definitely be a bump in the road, planning and forecasting your future is key to staying one step ahead - we’ve created an interactive tax calculator here to visualize your future liabilities. Traditionally, companies that have a better internal control system have been able to keep more of their profits and use them for investments in the future, so we really hope this helps you and your company navigate through the new tax regime with ease!
