Understanding Corporate Tax Obligations in the UAE

UAE introduced Corporate Tax with effect from 01 June 2023 as a part of compliance in the country which helps to have sustainable growth in the country as well as align with global standards. In a global context, due to the implementation of Corporate Tax, the UAE is aiming to have a tax-friendly jurisdiction and on the other hand aiming to have transparency. It is very important for UAE business to understand the Law, and the intention of the government to ensure compliance and avoid penalties for the taxpayers.

Overview of Corporate Tax in the UAE

The Corporate Tax rate in the UAE is set at 9% for taxable income exceeding AED 375,000. For taxable income below AED 375,000, a 0% tax rate applies, which aims to support startups and small businesses.

Corporate Tax is a direct form of taxation that is imposed on the net income or profit of businesses in the UAE. While the Corporate Tax applies to businesses, to make the country tax-friendly, UAE has announced many reliefs, especially for small businesses and start-ups. Few are as below;

• Taxable profit up to AED 375,000/- is taxed at 0% and above is taxed at 9%
• Small Businesses that generate revenue below 3 Million in a tax year and the previous tax year can enjoy small business relief by paying no tax. This relief is announced till 31 December 2026.
• Individuals who are conducting business are subject to Corporate Tax only upon crossing the revenue threshold of AED 1 Million in a Gregorian calendar year whereas income from wages, real estate investment income and personal investment income are excluded from corporate tax.

Who Is Liable for Corporate Tax in the UAE?

Corporate Tax is applicable to businesses registered in the UAE and the income of residents is taxed on a worldwide taxation basis. Non-residents are taxed on their income generated through permanent establishment or nexus or UAE source income. Despite many tax benefits, all the resident juridical persons (companies) must register for Corporate Tax and file the Corporate Tax return annually.

(i) Mainland Companies

All mainland companies are taxable as per the general tax rules and eligible for all the general benefits and reliefs prescribed in the Corporate Tax Law.

(ii) Free Zone Companies

Free Zone (Qualifying Free Zone ) has tax holidays on their qualifying income, which means, such free zone persons are eligible for 0% Corporate Tax on their Qualifying income. While Free Zone benefits from 0% Corporate Tax, subject to conditions, such companies are not eligible for many other benefits and reliefs outlined in the UAE Corporate Tax Law. Read More on Free Zone Corporate Tax. Offshore companies do not have a different definition in the UAE Corporate Tax Law and through guides published by the Federal Tax Authority, it has been clarified that Offshore companies are coming under the definition of Free Zone person in Corporate Tax.

(iii) Foreign Businesses and Permanent Establishments (PEs)

Foreign Businesses are considered non-residents for Corporate Tax purposes where taxability for nonresidents is not the same as for residents. Residents are taxed on their worldwide income whereas the non-residents are taxed on the income attributable to permanent establishment in UAE or nexus in the UAE or any UAE source income as prescribed in the Corporate Tax Law. Read more to know.

(iv) Natural persons

Any natural person who is conducting business or business activities in the UAE and crosses a threshold of AED 1 Million in a Gregorian calendar year is required to be registered and comply with UAE Corporate Tax Law. Cabinet Decision No.49 of 2023 has clarified the Corporate Tax implication on business activities conducted by a natural person in UAE.

Key Corporate Tax Obligations for UAE-Based Businesses

Every business in the UAE needs to make sure that tax compliance as per the country’s regulations is taken care of to avoid legal complications and administrative penalties. A few key obligations are listed below.

1. Corporate Tax Registration

All resident juridical persons must register for Corporate Tax within the prescribed timeframe. The same is applicable for natural persons as well as non-residents who have the requirement of Corporate Tax registration. Federal Tax Authority has issued FTA Decision No.3 of 2024 through which the authority has well explained the deadlines for each type of business. A late penalty of AED 10,000 is imposed on the late Corporate Tax registration.

2. Tax Filing

Under Corporate Tax Law, the filing of tax returns is to be done on an annual basis. Once the tax year ends, all taxable persons must file tax returns before the due date specified in the UAE Corporate Tax Law.

• Due Date: - Typically, the deadline for filing a Corporate Tax return is within 9 months from the end of the tax year. Example: - A company that follows January to December as their financial year must file a tax return within 30 September of the subsequent year. Late filing can attract administrative penalties.
• Electronic Filing: A Corporate Tax return is required to be filed in the Emaratax portal of the Federal Tax Authority (FTA). Tax payment, if any, is required to be made before the deadline and there is no requirement for advance tax payment.

3. Record-Keeping Requirements

All businesses must maintain the relevant records pertaining to Corporate Tax returns filed which include, but are not limited to, financial statements, invoices, bills, bank statements etc. Such records must be kept for at least 7 years from the end of the tax year.

• Financial Statements: - As per UAE Corporate Tax Law, the taxable person must prepare and maintain the financial statements as per IFRS or IFRS for SMEs. The taxable person whose annual turnover is more than AED 50 Million shall comply with full IFRS whereas the lower turnover taxable person may choose IFRS for SMEs. The taxable person whose turnover is less than AED 3 Million may follow a cash basis of accounting.
• Invoices and Receipts: - All income and expense records, such as invoices, receipts, contracts, and bank statements, must be preserved to substantiate the figures reported on the tax return.

Audit: - Those taxable persons whose annual turnover is more than AED 50 Million must maintain the audited financial statement. Also, the Qualifying Free Zone person is required to maintain the audited financial statement.

4. Timely Payment of Corporate Tax

The deadline for Corporate Tax filing is within 9 months from the end of the tax year. In order to settle the tax payment, FTA has prescribed the same period. This means the deadline for filing and tax payment is 9 months from the end of the tax year.

5. Avoiding Common Corporate Tax Pitfalls

As the regulations are new in the UAE, there can be common mistakes while dealing with Corporate Tax. Despite, the authority has given many guides to follow, businesses may end up making mistakes while dealing with Corporate Tax. A few are listed below;

a) Incomplete Tax Registration

While registering for Corporate Tax, the information provided, documents given and elections made shall be with utmost care since the wrong details can end up in the rejection of the application or penalties. Example: - The Corporate Tax period for a company must be as per the financial year of the company, the activity chosen must be closer activities given on the FTA website, and Branch details must be disclosed.

b) Inaccurate Reporting

The tax calculations begin with accounting profit and many adjustments to be made to arrive at the taxable profit. This includes the removal of non-allowable expenses, adjustment of related party transactions, removal of exempt income etc. An in-depth knowledge is required while dealing with Corporate Tax returns and a small mistake may end up submitting of wrong tax report. Apart from this, many elections are required while submitting the tax return and most of the elections are irrevocable. An experienced tax agency like Flying Colour Tax Consultant can navigate you through your Corporate Tax return and provide accurate and seamless tax filings.

c) Non-compliance with Record-Keeping

The responsibility of the businesses who file and make tax payments is extended to keep all the records relating to the tax report in a systematic way which is easily retrievable. Businesses can face tax audits and failure to furnish the necessary records on time along with explanations may end up in penalties.

d) Late Filing and Payment

Meeting the deadline for filing and tax payments is very crucial. Corporate Tax Law provides ample time, 9 months after the tax period ended, and complying with the time frame is very important to avoid legal complexities.

6. Importance of Professional Tax Assistance

It is always better for a business to appoint an experienced tax agency to handle Corporate Tax matters. There can be many changes in the tax laws ongoing basis and to be updated with the latest regulations may be difficult for in-house accounting or tax persons. The role of an experienced tax agency is very high in handling Corporate Tax matters whereby the business owners can avoid much confusion, time wasted in figuring out the tax matters etc.

7. Penalties for Non-Compliance

Non-compliance with UAE Corporate Tax regulations can result in various penalties, including:

• Late Filing Penalty: - Businesses that miss the filing deadline can incur administrative penalties for late Corporate Tax return filing
• Late Payment Penalty: - Not settling the Corporate Tax due before the deadline can attract administrative penalties as well as interest on the outstanding tax payment.
• Incorrect Filing Penalty: - It is very serious to submit an incorrect Corporate Tax return and the impact can be greater if the incorrect tax filing has an effect of underreporting of tax.

Conclusion

As a business owner in the UAE tax regime, it is essential for you to understand the importance of tax compliance and obligations. This starts from registering the company on time and obtaining the tax registration number, filing the tax return on time, making the tax payment on time, keeping the records relating to the tax period as prescribed by the authority etc. In this changing phase, handling these matters without care may end up in big trouble for businesses for tax non-compliance.

For reliable support in managing your Corporate Tax obligations, Flying Colour Tax Consultant LLC provides expert guidance and comprehensive tax services tailored to the needs of UAE businesses. Contact us today to ensure full compliance and optimize your Corporate Tax management.

To learn more about Understanding Corporate Tax Obligations in the UAE: What Every Business Needs to Know, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.