(Corporate Tax Law)
Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses
The United Arab Emirates (UAE) has recently announced a new corporate tax policy that will be effective from financial year starting on or after June 01, 2023. Under this new policy, Businesses / Taxable Person operating within the UAE will be subject to a flat tax rate of 9%.
Corporate tax (CT) calculation in the UAE may vary depending on the nature of person. If a resident’s net profit is below AED 375,000, they are exempt from CT. However, for residents earning a net profit above this threshold, the CT rate is 9%. Conversely, non-residents are subject to a flat CT rate of 9% on all income earned in the UAE, irrespective of the amount.
Let’s take a closer look at how the calculation of corporate tax differs for different types of taxable persons.
The taxability will also depend vary, if the Business or Income falls under the exempt category.
“Please refer our article on exemption and applicability to get better understanding of exempt Businesses and Incomes.”
- Resident Person
Businesses incorporated in the UAE mainland are considered resident persons. For these businesses, the corporate tax rate is 9% of their taxable profits. However, if their net profit falls below AED 375,000, they are exempt from corporate tax. - Qualified Free Zone Person
Free zone businesses are also considered resident person and subject to the 9% corporate tax rate, but they may be eligible for certain exemptions or incentives, depending on certain types of qualifying income. Corporate Tax Rate on Qualifying Free Zone Person is 0%. There is an option given to Free Zone Persons that they can elect to be Subject to Corporate Tax rates specified under Clause 1 of Article 3 of Federal Decree-Law No. 47 of 2022. (Election rights conferred in Article 19 of Federal Decree-Law No. 47 of 2022) - Non-Resident Person with Permanent Establishment in the UAE
Non-resident persons with a permanent establishment in the UAE are also subject to the 9% corporate tax rate on the profits which are attributable to such PE.
Let’s Understand calculation of CT for each person mentioned above with help of illustrations:
- Note: In all the illustrations, it is assumed that income or business does not fall under exempt category unless specifically mentioned.
- Resident Person: Let’s assume Company A doing business in UAE Mainland and earning a net income of AED 500,000.
- Corporate Tax rate charged on net income up to AED 375,000 is 0%
- Corporate Tax rate charged on net income above AED 375,000 is 9%
- So, the Corporate Tax to be paid by Company A will be: 500,000 – 375,000 = 125,000 x 9% = AED 11,250
- Free Zone Person: Let’s Assume Company B is doing business under Jebel Ali Free Zone Authority (JAFZA) and earned a total net income of AED 1,000,000.
So, in this instance the final tax liability of Company B will be 1,000,000 x 0% = AED 0
- If Net income of AED 1,000,000 does not fall under the ambit of “Qualifying Income” as specified in Article 18 of Federal Decree-Law No. 47 of 2022 or a decision issued by the cabinet at the suggestion of the Minister then it will be charged at a rate of 9%.
So, in this instance the final tax liability will be 1,000,000 x 9% = AED 90,000
- If Qualified Free Zone Person elects to be Subject to Corporate Tax rates specified under Clause 1 of Article 3 of Federal Decree-Law No. 47 of 2022.
Income up to AED 375,000 will be charged at a rate of 0% and income above such threshold will be charged at 9% rate.
So, in this instance the final tax liability will be 1,000,000 – 375,000 = 625,000 x 9% = AED 56,250
- Permanent Establishment (PE): Let’s Assume Company C, which is a Non-Resident person, having a PE in the UAE and it is generating income by business activities in the UAE. Then, all the income attributable to this PE will be taxable at a rate of 9%.
Thus, if the PE earned a net income of AED 500,000 in a relevant tax period, the corporate tax liability of Company C on this income will be: 500,000 x 9% = AED 45,000
This is how the corporate tax will be calculated . To register for Corporate Tax , Click here
