Corporate Tax
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10
 min read
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June 20, 2024

UAE Corporate Tax Glossary: Essential Terms for Businesses

Get to know all about the frequently used terms in Corporate Tax

1. Adequate Substance: A set of criteria used to determine whether a company operating in a Free Zone genuinely conducts business activities there and not simply uses the Free Zone for tax benefits. 

For tax-related purposes, a Qualifying Free Zone Person must have and be able to demonstrate adequate substance in a Free Zone relative to the nature and level of its activities and the Qualifying Income it earns.

2. Business: Business refers to any ongoing or temporary economic activity undertaken by a person. This includes activities with the intention of making a profit, even if they haven't achieved profitability yet. The key is that the activity is conducted in a structured and organised manner.

3. Corporate Tax (CT): A direct tax levied on the net income of corporations and other businesses in the UAE. It is also referred to as Corporate Income Tax or Business Profit Tax.

4. Corporate Tax Rate: The percentage of Taxable Income subject to Corporate Tax. The UAE has a two-tiered rate system: some text

a. 0% for Taxable Income below AED 375,000

b. 9% for Taxable Income exceeding AED 375,000

5. Excluded Activities: These specific activities, regardless of location, will prevent Qualifying Free Zone Persons from benefiting from the 0% tax rate on any income they generate.

6. Federal Tax Authority (FTA): The government entity responsible for administering and collecting Corporate Tax in the UAE.

7. Free Zone: A designated geographical area within the UAE offering tax benefits and other incentives to attract businesses. Qualifying Free Zone Persons may have a different tax treatment.

8. Free Zone Corporate Tax regime: A form of tax relief which enables Free Zone companies and branches that meet certain conditions to benefit from a preferential 0% Corporate Tax rate on income from qualifying activities and transactions.

Confused as to what counts as Free Zone tax? See our blog to find the answers. 

9. Free Zone person: According to the Ministry of Finance, a legal entity that is incorporated or established under the rules and regulations of a Free Zone or a branch of a mainland UAE or foreign legal entity that is registered in a Free Zone. A foreign company that transfers its place of incorporation to a Free Zone in the UAE would also be considered a Free Zone Person.

The Free Zone Corporate Tax regime is available only to Free Zone Persons, and this term is also used to determine what income can benefit from the regime by treating income from transactions with other Free Zone Persons as Qualifying Income.

10. Juridical Person: A juridical person, also referred to as a legal person, artificial person, or corporate person, is a non-human entity recognised by law as having some of the same rights and responsibilities as a natural person (human being).

The Ministry of Finance defines Juridical person as follows:

A “juridical person” is an entity established or otherwise recognised under the laws and regulations of the UAE, or under the laws of a foreign jurisdiction, that has a legal personality separate from its founders, owners and directors. Examples of UAE domestic juridical persons include a limited liability company, a foundation, an ‘onshore’ trust, a public or private joint stock company, and other entities that have separate legal personality under the applicable UAE ‘mainland’ legislation or Free Zone regulations.

UAE branches of a domestic or a foreign juridical person are regarded as an extension of their “parent” or “head office” and, therefore, are not considered separate juridical persons.

11. Multinational Enterprise Groups: Groups of companies that operate in more than one country and have a total consolidated group revenue of more than AED 3.15 billion. 

In the UAE, members of Multinational Enterprise Groups cannot apply for Small Business Relief.

12. Non-Resident Person (under UAE Corporate Tax): According to the Ministry of Finance, the following are considered Non-Resident Persons for UAE Corporate Tax purposes. 

Non-Resident Persons are juridical persons who are not Resident Persons and:

  • have a Permanent Establishment in the UAE; or
  • derive State Sourced Income.

Non-Resident Persons will be subject to Corporate Tax on Taxable Income that is attributable to their Permanent Establishment (which is explained under Section 8).Certain UAE sourced income of a Non-Resident Person that is not attributable to a Permanent Establishment in the UAE will be subject to Withholding Tax at the rate of 0%.

13. Personal Investment Income: As per the Ministry of Finance in the UAE, personal investment income is the income earned by a natural person from investment activities conducted in their personal capacity, including interest or dividends. It excludes income from a commercial business or from activity conducted, or required to be conducted through a Licence from a Licensing Authority in the UAE. 

14. Private Pension Fund: A fund created to manage pension contributions and provide payments to retired natural persons above a defined retirement age. It is exempt from Corporate Tax once an application has been made to and approved by the Federal Tax Authority.

15. Private Social Security Fund: A fund created by a private employer to provide statutory end-of-service gratuity payments to employees. It is exempt from Corporate Tax once an application has been made to and approved by the Federal Tax Authority.

16. Qualifying Activities: A list of approved business activities that enjoy the 0% tax rate on income. 

17. Qualifying Income: The income that can benefit from the 0% Corporate Tax rate under the Free Zone Corporate Tax regime.

  • Qualifying Income includes the income derived from transactions with other Free Zone Persons as well as domestic and foreign-sourced income from any of the ‘Qualifying Activities’ specified in Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities.
  • Qualifying Income does not include income derived from performing any of the ‘Excluded Activities’ that are also specified in the above-mentioned Ministerial Decision.

18. Qualifying Free Zone Person: According to the Ministry of Finance, a Qualifying Free Zone Person is a Free Zone person that meets all the conditions of the Free Zone Corporate Tax regime and hence benefits from that regime. 

The conditions of the Free Zone Corporate Tax Regime require a Qualifying Free Zone Person to:

  • maintain adequate substance in a Free Zone;
  • derive Qualifying Income;
  • not have made an election to be subject to the regular UAE Corporate Tax regime;
  • comply with arm’s length principle and transfer pricing rules and documentation requirements;
  • prepare and maintain audited financial statements

Failure to meet any of the conditions results in a Qualifying Free Zone Person losing its qualifying status and not being able to benefit from the Free Zone Corporate Tax regime for five Tax Periods.

The Free Zone Corporate Tax regime is available only to Free Zone Persons, and this term is also used to determine what income can benefit from the regime by treating income from transactions with other Free Zone Persons as Qualifying Income.

To know the A-Z of Qualifying Free Zone Person in the UAE, read our detailed blog here

19. Real Estate Investment Income: As per the Ministry of Finance in the UAE, Real Estate Investment income is income earned by a natural person from an investment activity related directly or indirectly to land or real estate property in the UAE, which is not conducted, or required to be conducted, through a Licence issued by a Licensing Authority in the UAE.

20. Resident Person (under UAE Corporate Tax): According to the Ministry of Finance, the following are considered Resident Persons for UAE Corporate Tax purposes. 

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. This covers juridical persons incorporated in the UAE under either mainland legislation or applicable Free Zone regulations, and would also include juridical persons created by a specific statute (e.g. by a special decree).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, with a determining factor being where key management and commercial decisions are in substance made.

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.

21. Revenue: It refers to the total income a business generates from its ordinary course of business activities. 

According to the Ministry of Finance in the UAE, “Revenue is the gross amount of income derived in a Tax Period from sales of inventory and properties, services, royalties, interest, premiums, dividends and any other amounts, before deducting any type of costs or expenditure. In the context of income from sales of goods or services, gross income means gross revenues from sales or services without deducting the cost of goods sold or the cost of services.” 

22. Separate Legal Personality: It refers to the idea that a company (or other legal entity) is a distinct legal entity from its owners (shareholders) and managers. This means the company:

  • Exists independently: It's separate from the people who own or run it.
  • Has its own rights and obligations: It can own property, enter contracts, sue and be sued in its own name.
  • Limited liability: The owners' personal assets are generally protected from the company's debts.

23. Small Business Relief: A program designed to ease the tax burden on qualifying small businesses. 

In the UAE, certain businesses are released from the obligation to calculate and pay Corporate Tax and from having to comply with the regular Corporate Tax reporting requirements.

As per the Ministry of Finance, an eligible Taxable Person with Revenue of AED 3 million or below in the relevant Tax Period that ends on or before 31 December 2026 and prior Tax Periods can elect to be treated as having no Taxable Income in that Tax Period and will not have to calculate its Taxable Income or file a full Corporate Tax Return.

To know everything about Small Business Relief in the UAE, read our comprehensive blog here

24. Tax Group: A Tax Group allows two or more eligible businesses to be treated as a single taxpayer for Corporate Tax purposes. This essentially allows them to combine their taxable income and file a single tax return. As per the Ministry of Finance in the UAE

To form a Tax Group, both the parent company and its subsidiaries must be resident juridical persons, have the same Financial Year and prepare their financial statements using the same accounting standards. Additionally, the parent company must:

  • own at least 95% of the share capital of the subsidiary;
  • hold at least 95% of the voting rights in the subsidiary; and
  • is entitled to at least 95% of the subsidiary’s profits and net assets.

The ownership, rights and entitlement can be held either directly or indirectly through subsidiaries, but a Tax Group cannot include an Exempt Person or Qualifying Free Zone Person.

25. Taxable Income: The net profit (or loss) of a business after deducting allowable expenses from gross revenue.

26. Tax Period: The timeframe for filing a tax return. In the UAE, tax period is the financial year used to prepare financial statements.

27. Taxable Person: Any entity subject to Corporate Tax, including companies, partnerships, and branches of foreign companies.

28. Tax Return: A document filed with the FTA detailing a business's Taxable Income and applicable taxes.

29. Taxable Threshold: The income below which no Corporate Tax is levied. Currently, the threshold is AED 375,000.

30. Withholding Tax: A tax deducted at source on certain types of income, such as dividends and royalties. According to the Ministry of Finance in the UAE, 

A 0% withholding tax may apply to certain types of UAE sourced income paid to non-residents. Because of the 0% rate, in practice, no withholding tax would be due and there will be no withholding tax related registration and filing obligations for UAE businesses or foreign recipients of UAE sourced income.

Withholding tax does not apply to transactions between UAE resident persons.

Have questions on Corporate Tax? Read our blog to find answers to commonly-asked questions on Corporate Tax in the UAE. 

Disclaimer: The above information is a simplified version of tax-related terms. To read and understand the terms better, please use the information provided by the Ministry of Finance.

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