Income tax in the UAE

business
taxes
In this article:
Free Zone
Mainland
01
Who pays income tax?
Currently, there is no general federal income tax in the UAE. The regulation of this issue is at the level of individual emirates. A number of emirates have an income tax which is levied on oil and gas production and processing companies and branches of foreign banks.

The UAE will implement a federal income tax from 1 June 2023 (for the financial year 2023). Its payers will be:
  • Mainland companies.
  • Freezone companies that operate within the mainland (i.e. in the UAE but outside the Freezone). Such as, for example, through their representative offices in the mainland.
The tax would apply to Freezone companies that operate within the free zones or in foreign markets. However, Freezone tax incentives (in particular, corporate tax exemption) will take precedence over federal regulation. Accordingly, such companies will not actually be subject to the new tax. However, they will have to register with the tax authority and file accounts
02
Tax base
What is the tax rate?
The new corporate tax rate depends on the company's annual profits:
  • 0% if profit is up to AED 375,000 or up to $102,000 per annum
  • 9% if profit is more than AED 375,000 or $102,000 or more per annum
There are no preferential tax regimes.
How is the tax base determined?
Income tax is payable on the accounting net profit, based on financial statements prepared in accordance with acceptable international accounting standards, after making the necessary adjustments for tax purposes.

The following sources of income are exempt from tax:
  1. Dividends from subsidiaries;
  2. Capital gains from the sale of shares or interests in companies.

The exemption requires that the taxpayer’s (parent company) shareholding in the other company meets the minimum threshold for qualifying participation. The size of this threshold has not yet been determined, but it is assumed to be from 10%.

As a general rule, income will be allowed to be deducted by expenses incurred in the ordinary course of business. However, it is forbidden to deduct personal expenses. There are also restrictions on bad debts, donations, fines, penalties, tax expenses, dividends, interest, etc.

A company that has suffered a loss in one tax period is entitled to carry it forward to the following year to reduce the tax base. In addition, in the case of groups of companies, the loss of one legal entity may be used to reduce the taxable profit of another entity.
03
The start period for calculating the tax? Several options are possible:
1
Fiscal year starts on 1 January 2023
The first tax period if the fiscal year of a company starts on 1 January 2023 is from 1 January 2024 to 31 December 2024.

Such companies will not have to accrue and pay income tax in 2023.
2
The fiscal year begins after 1 June 2023
The first tax year starts on 1 July 2023.
What’s the procedure for submitting reports and paying tax?
Companies (including those from freezones) will have to register with the tax authority and submit regular returns. One report must be prepared and submitted for the whole tax period (usually 1 year). The tax is also paid once (there are no advance payments).
More detailed explanations regarding the preparation and submission of returns have not yet been published.
04
Are there any benefits?
  • Dividends and capital gains from the sale of shares or interests are exempt from taxation (as stated above).
  • There is no withholding tax on non-resident income;
  • Should the taxpayer have paid tax in other jurisdictions, in the UAE he will be able to offset it against the corporate tax payable (tax credit). This does not depend on the existence of a bilateral tax treaty;
  • Companies that engage in mining activities will be exempt from paying the new tax. Emirates specific tax regulations will still apply to them.
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