The introduction of Corporate Tax (CT) in the UAE marks a major shift in the country’s financial and business landscape. However, not all businesses and individuals fall under the new tax system. Understanding who is subject to corporate tax, who is exempt, and the implications for different business structures is essential for compliance and tax planning.
Who is Subject to Corporate Tax?
The UAE Corporate Tax Law applies to businesses and individuals conducting business activities in the country. The following categories are subject to CT:
1. UAE-Based Businesses
All companies incorporated or registered in the UAE, whether on the mainland or in Free Zones, are subject to corporate tax. This includes:
- Limited Liability Companies (LLCs)
- Public and Private Joint Stock Companies
- Partnerships with separate legal status
- Branches of foreign companies operating in the UAE
2. Foreign Businesses with a Permanent Establishment (PE)
Foreign entities that have a significant presence in the UAE through a Permanent Establishment (PE) are also taxable. A PE is created when a foreign company has:
- A fixed place of business in the UAE (e.g., an office, branch, factory, or workshop).
- An agent conducting business on its behalf in the UAE with decision-making authority.
3. Individuals Conducting Business Activities
While individuals earning salaries or passive income (e.g., investments, real estate rental) are not subject to corporate tax, those engaged in commercial activities requiring a license must pay CT. This includes:
- Freelancers and sole proprietors operating under a commercial license.
- Self-employed consultants, traders, or service providers generating business income above the taxable threshold.
4. Free Zone Companies
Entities operating in UAE Free Zones may be subject to 0% corporate tax if they qualify under the Free Zone tax regime. However, they must meet the conditions outlined in Cabinet Decision No. 55 of 2023 to maintain their tax-free status.
Who is Exempt from Corporate Tax?
Certain entities are fully exempt from corporate tax, either due to their nature of operations or because they are already taxed under another regime. These include:
- Government entities and their subsidiaries carrying out sovereign activities.
- Government-controlled organizations performing public-interest functions.
- Charities and non-profit organizations, if registered and approved by the Federal Tax Authority (FTA).
- Public and private pension or social security funds.
- Natural resource extraction businesses, which remain subject to Emirate-level taxation instead.
Special Tax Considerations for Free Zones
Companies in designated Free Zones can enjoy a 0% corporate tax rate on income earned from:
- Transactions with other Free Zone entities.
- Income from international business activities (outside the UAE).
However, if a Free Zone entity generates income from UAE mainland transactions, they could become partially or fully taxable at the standard 9% rate.
Final Thoughts
Understanding the scope of UAE Corporate Tax is crucial for businesses to stay compliant and optimize tax planning. Companies must assess whether they qualify for tax exemptions or incentives, especially those in Free Zones or operating internationally. With clear guidelines from the Federal Tax Authority (FTA), businesses can make informed decisions about structuring their operations under the UAE's evolving tax system.