Tax Exemptions UAE: Guide to Corporate Tax Exemptions and Registration in the United Emirates

Tax Exemptions UAE with the incentives and conditions is crucial for all businesses that are subject to taxes. The United Arab Emirates attracts businesses from all over the world because of its excellent infrastructure, strategic position, and business-friendly legislation, all of which contribute to its status as a global hub for trade and innovation in the Middle East. The UAE government has taken several steps over the years to improve the country’s business environment following worldwide best practices.

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Tax Exemptions UAE

Introducing a new Corporate Tax (CT) regime is one step toward reforming the UAE economy. It is a direct tax designed to lessen the UAE’s reliance on energy revenue while also ensuring transparency in the taxation regime. This law levies a 9% tax on corporations’ taxable profits above AED375,000, whereas corporate profits below this amount are exempt.

It is important to note that not every firm is liable for this tax. Several entities are free from corporate tax, including investment funds, public benefit entities, private pensions, public pension and social security funds, and other Tax Exemptions UAE.

If your company fits the legal requirements, it may be eligible for a UAE corporate tax exemption. Understanding these rules is critical because they can have a direct impact on your organization’s financial planning and decision-making processes.

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Entities with Qualify for Corporate Tax Exemption UAE

Before learning about the entities that are eligible for UAE corporate tax exemption, it is necessary to review Articles 4 and 51 of the Corporate Tax Law. While Article 4 specifies who is free from corporation tax in the country, Article 51 requires every taxable person to register with the Federal Tax Authority (with some exclusions).

The Ministry of Finance defined the exceptions to Article 51 in its Ministerial Decision No. 43 of 2023. This directive provides explicit guidance for the registration exceptions permissible under the statute. The following entities are not required to register with the Federal Tax Authority under the present UAE CT regime:

• A governmental entity.
• A government-controlled entity.
• A person operating in an extractive business that fits the requirements of Article 7 of the Corporate Tax Law.
• A person operating in a non-extractive natural resource business who fits the requirements of Article 8 of the Corporate Tax Law.
• A non-resident person who obtains only state-sourced income under Article 13 of the Corporate Tax Law and does not have a permanent establishment in the state as defined by the Corporate Tax Law.

These exclusions do not apply if the entities indicated above become a ‘Taxable Person’ under the provisions outlined in the law. Now, let’s look at the specifics of firms that are free from UAE Corporate Tax under the standards outlined in the law.

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UAE Government & Government-controlled Entities

Certain government and government-controlled entities are free from UAE corporation taxes. These entities include the UAE’s federal and local administrations, as well as their respective departments, agencies, ministries, authorities, and public institutions. Let us have a look at some key provisions of the statute here:

• The tax exemption applies only if these entities do not perform any business activities under a license issued by a suitable licensing authority, such as the Department of Economic Development or the Central Bank of UAE, depending on the nature of the firm.
• Any such commercial activity is deemed an independent business, and the entity is required by law to maintain separate financial statements for such transactions.
• Any transactions involving the above-mentioned business activity or other activities carried out by the entity would be considered related party transactions.
• If a government body meets the Minister’s standards, it may request that all of its commercial activities be treated as a single ‘Taxable Person’.

This exemption policy is intended to assist the operations of government and government-controlled entities. It enables them to focus on their mandated responsibilities without the added financial burden of corporate tax.

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Businesses that Generate Less than AED 375,000 in Taxable Income

According to UAE corporate tax law, small enterprises with taxable income of up to AED 375,000 are not liable to the 9% corporate tax. This means that, under the rules, the tax rate is effectively zero. This exemption is part of the UAE government’s commitment to assisting small businesses and fostering a conducive climate for their expansion.

However, if your taxable income exceeds AED 375,000, any earnings above this amount would be taxed at 9%. This implies you will have to pay a 9% tax on the amount unless your company is eligible for other deductions under UAE corporate tax exemption laws. This progressive tax scheme is intended to ensure that larger, more lucrative firms pay to national revenue.

It is important to note that if a ‘Free Zone’ entity meets the requirements to be declared a ‘Qualifying Free Zone Person’, it will be eligible for a 0% UAE CT rate on its qualifying income.

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Businesses Involved in Natural Resource Extraction

According to the guidelines, enterprises that harvest natural resources can benefit from UAE corporate tax exemption. Instead, they continue to pay corporation taxes at the Emirates level. This exemption applies to enterprises that meet the conditions indicated in Federal Decree-Law No. 47 of 2022.

• To be eligible for this UAE corporate tax exemption, a company must directly or indirectly own or have a stake in a privilege, concession, or license granted by a local government to conduct extractive operations.
• The firm must be effectively taxed under the emirate’s applicable legislation.
• The enterprise must notify the Ministry in the form and manner agreed upon with the Local Government.

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Typical Corporate Tax Exemption UAE Rules

There may be instances where a business that fits these criteria earns money from both an extractive business and any other business defined in corporation tax legislation. In that instance, the net income from the extractive business will be determined and taxed by the Emirate’s applicable regulations.

This means that the tax levied by the government of Abu Dhabi on such economic activity within a calendar year may differ from that levied by the government of Dubai. The money earned from the other firm will be subject to the usual corporate tax requirements as follows:

• Nonextractive commercial operations are taxed separately. Financial records must be kept for each type of business operation. The only exceptions to this rule are non-extractive economic operations that are incidental and contribute less than 5% of total revenue.
• Shared costs between extractive and non-extractive operations must be allocated effectively depending on the revenue from each segment throughout the tax period.
• Related party transaction regulations govern interactions between different business units within the same corporation. They must follow the arm’s length concept outlined in corporation tax legislation.

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Non-Extractive Natural Resource Businesses

To be eligible for UAE corporation tax exemption, a non-extractive natural resource business must meet the requirements listed in Federal Decree-Law No. 47 of 2022.

• The business must have a direct or indirect stake in a right, concession, or license. This authorization must be issued by a local authority, and the enterprise must be permitted to perform non-extractive natural resource operations in the UAE.
• Qualifying income from non-extractive natural resource firms must be sourced only from individuals who engage in business or commercial activities.
• The corporation must be taxed under the emirate’s applicable regulations.
• The company must have notified the Ministry in the way recommended by the local government.

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Additional Tax Rules from Other Activities

When such a UAE business obtains income from other operations covered by the Corporate Taxation (CT) law, the following extra regulations apply:

• The revenue from non-extractive businesses is taxed following Emirate-specific legislation.
• Corporations’ profits from additional business activities are governed by Federal Decree-Law No. 47 of 2022 unless these activities qualify for UAE corporate tax exemption.
• Ancillary or incidental operations that do not generate more than 5% of total revenue are not considered separate taxable companies. However, separate financial reporting is required for each business segment. This will be based on an accurate allocation of shared costs in proportion to their respective income.
• Transactions between the non-extractive business and any other division with the same ownership are considered related party transactions. They must follow the arm’s length concept, as required by UAE legislation.

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Qualifying Public Benefit Entities

Public benefit entities play an important role in the UAE, offering services such as education, healthcare, and philanthropy. Because of its societal relevance, the government has granted them UAE corporate tax exemption. According to Article 9 of the UAE Corporate Tax Law, a qualifying public benefit entity can receive exempt revenue provided it meets all of the following conditions:

• It must be established and operated only for charity, religious, cultural, sports, healthcare, educational, or other objectives specified by Connecticut law. Chambers of business and professional organizations that act only for the benefit of the public may also be included in the definition.
• It must not engage in any business activities other than those directly related to the objective for which it was established.
• The earnings or assets must be utilized solely for the formation of the organization or to cover any necessary and reasonable expenses.
• No part of the revenue or assets should be used for the personal gain of any shareholder, trustee, founder, member, or settlor. This rule does not apply to qualifying public benefit entities, the government, or government-controlled entities.

Such entities must keep their records up to date at all times to ensure that they continue to meet the requirements. These records may be requested by authorities at any point during the fiscal year.

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Qualifying Investment Funds

According to Article 10 of the UAE Corporate Tax Law and Cabinet Decision No. (81) of 2023, investment funds may request tax exemption from the Federal Corporate Tax if they meet all of the following conditions:

• The fund or its manager must be subject to regulatory oversight by a UAE or recognized foreign body. This guarantees that the fund follows a regulatory framework that safeguards investors’ interests.
• Fund interests must be traded on a recognized stock market. Otherwise, they should be adequately marketed and made available to a diverse group of investors. This enables a diverse range of investors to participate in the fund’s activities.
• The fund’s principal objective must not be to evade corporate taxes. This is a vital criterion to ensure that operations are carried out with honesty and do not violate the spirit of UAE tax law.
• Any other criteria that the UAE government may establish from time to time.

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Small Business Relief Initiatives

The UAE government has launched the “small business relief” project to foster a favorable environment for small enterprises. This measure aims to reduce the financial strain on small firms and allow them to reinvest their profits in business growth. This plan exempts firms and people from corporation taxes based on the following guidelines:

• Businesses and individuals with annual revenues less than AED 3 million are eligible.
• The business must be a resident.
• The relief does not apply to QFZPs or members of Multinational Enterprises Groups (MNE Groups) as specified in Cabinet Decision No. 44 of 2020. MNE Groups are enterprises that operate in more than one nation and have aggregated revenues of more than AED 3.15 billion.
• The revenue threshold applies to tax months beginning on or after June 1, 2023. It will continue to apply to tax periods ending before or on December 31, 2026.

While this exemption provides significant relief, small businesses must retain a detailed understanding of their financial operations. Even if your firm is now exempt from UAE corporation tax, keeping track of its expenses is vital. Real-time visibility into company expenditure can help identify potential cash leaks, take corrective action, and create exact budgets for future development plans.

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Taxable Companies Free Zones (FZs)

Companies registered in Free Zones (FZs) are taxable under UAE CT Law and must comply with regular regulations, including transfer pricing. However, if a Free Zone entity meets the requirements to be classified as a Qualifying Free Zone Person (QFZP), it should be eligible for a 0% UAE CT rate on its qualifying income. A QFZP’s non-qualifying income will be taxed at a rate of 9% CT. To be eligible for the 0% UAE CT rate, a QFZP must fulfill all of the following requirements:

• Be a Free Zone person (a legal entity formed, founded, or registered in a Free Zone, including branches).
• Maintain appropriate substance in the UAE (free zone).
• Determine eligible income.
• Not have elected to be subject to the regular UAE CT regime.
• Follow all transfer price rules and documentation requirements.
• Its non-qualifying revenue does not surpass the De minimis threshold.
• Compiles audited financial accounts.

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De minimis Criteria

The de minimis standards will be met if non-qualifying revenue does not exceed 5% of total revenue or AED 5 million, whichever is less. Non-qualifying revenue is revenue produced from excluded or non-qualifying activity in which the other party is not a Free Zone person. Certain revenue will not be included in the computation of non-qualifying revenue or total revenue.

This comprises revenue from some immovable property located in a Free Zone (non-commercial property and commercial property with non-free Zone transactions) as well as revenue from the ownership or exploitation of intellectual property. It also includes revenue attributed to either a domestic or international PE.

If a Free Zone person fails to meet any of the qualifying conditions outlined in UAE CT Law and the relevant Decisions, it will be classified as a taxable person subject to a 9% CT rate for at least five tax years.

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Domestic PE

The Decisions introduce the idea of a domestic PE, which occurs when a QFZP has a commercial location or other type of presence outside the Free Zone in the UAE. Income attributable to a domestic PE should be assessed as if the institution were a separate and independent person, subject to 9% CT.

However, it will not prohibit the Free Zone resident from receiving a 0% CT rate on eligible income or being considered in the de minimis test (as described above). A mainland branch of a QFZP is therefore generally considered a domestic PE and is liable to CT at 9%.

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Trade License UAE is a fundamental step for establishing a taxable business in the region. While UAE withholding tax and income tax are not typically imposed, understanding the regulations surrounding Qualifying Free Zone Persons and the federal government’s policies is essential. Whether your business involves UAE oil or other sectors, ensuring compliance with the following income guidelines will secure your operations and align with UAE’s evolving business landscape.