The introduction of a corporate tax in the UAE, effective for financial years starting on or after 1 July 2023, represents a significant shift in the country’s corporate landscape. Traditionally known for its tax-free status, the UAE has implemented this change to diversify its revenue sources, cement its position as a global hub for business and investment, and align with international standards for tax transparency. For businesses operating in the UAE, understanding this new regime is crucial to ensure compliance and avoid penalties. As businesses prepare to produce their first corporate tax filings in 2025, we explore the core elements of this new corporate tax, along with the key compliance requirements.

Over view of the Corporate Tax Regime

The new corporate tax law, under Federal Decree-Law No. 47 of 2022, introduces a tiered tax system that imposes a 9% corporate tax on taxable income above AED 375,000 while exempting businesses with taxable income below this threshold[1].This regime applies across all the emirates, including free zones, though companies in free zones may maintain a 0% tax rate if they meet specific qualifying conditions[2].This tax structure aims to align the UAE with international standards and pave the way for compliance with the OECD’s global minimum tax standards under Pillar Two, which mandates a minimum tax rate of 15% for multinational corporations with significant global revenue​.

Who is Subject to the Corporate Tax?

The corporate tax applies to juridical persons (business entities) and natural persons (individuals) engaged in business activities in the UAE, as well as to foreign businesses with a permanent establishment in the UAE. Exemptions apply to government entities, investment funds, persons engaged in an extractive business or a non-extractive natural resource business, and qualifying public benefit organizations. Free zone businesses are also exempted from this tax if they meet certain criteria, most notably that their non-qualifying income (i.e. income derived from transactions with non-free zone persons or from specified excluded activities[3])does not exceed 5% of their total revenue or AED 5,000,000, whichever is lower[4].

Compliance Requirements

• Ministry of Finance, https://mof.gov.ae/corporate-tax.
• Federal Decree by Law No. (47) of 2022 Concerning Corporate and Business Tax, Article (18).
• Cabinet Decision No. 55 of 2023 on Determining Qualifying Income for the Qualifying Free Zone
• Person for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations,Article (4).
• Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities for the
• Purposes of Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses,, Article(4).

To comply with the new corporate tax law, businesses must meet specific administrative and reporting requirements set by the Federal Tax Authority (FTA). Key requirements include:

1. Corporate Tax Registration: All taxable businesses must register with the FTA, with specific registration deadlines depending on the entity type. For instance, juridical residents incorporated before March 1, 2024, must register based on the date their business license was issued. Late registration incurs a penalty of AED 10,000.
2. Filing and Reporting Obligations: Businesses must file tax returns annually, documenting their taxable profits and allowable deductions. The deadline for submission is within nine months of the end of the financial year.
3. Transfer Pricing Documentation: The law also requires businesses involved in related-party transactions to maintain transfer pricing documentation, including a Local File and Master File, consistent with international standards. This requirement affects companies with extensive inter-group transactions and aims to prevent tax base erosion.

Penalties for Non-Compliance

The FTA has introduced strict penalties to enforce compliance. Failure to register, submit tax returns on time, or report taxable income accurately can result in fines, including penalties for late submission and incorrect filing. Penalties may include:

1. AED 10,000 for failure to register by the prescribed deadline.
2. A monthly penalty of 14% per annum for late payment of taxes, for each month or part thereof following the due date.

Corporate Tax Implications for Free Zone Companies

Free zones, traditionally tax havens within the UAE, continue to offer a 0% corporate tax rate for businesses that meet qualifying criteria. This exemption requires that 95% of transactions occur within free zones or involve approved business activities, and in any case non-qualifying income should not exceed AED 5,000,000 . However, non-qualifying activities, like conducting business with mainland entities, banking and insurance activities, or real estate and intellectual property activities , could negate this tax-free status. Free zone companies should closely monitor transaction types and ensure that any mainland engagements comply with these guidelines to retain their tax-exempt status​.

Preparing for Compliance: Key Takeaways

As the corporate tax regime reshapes the UAE’s business environment, companies should take immediate steps to align with the law:

• Register promptly with the FTA to avoid registration penalties.
• Ensure thorough documentation of financial statements and, if applicable, related-party transactions, to satisfy auditing and transfer pricing requirements.
• Engage a tax advisor to stay informed of ongoing changes and leverage exemptions where applicable.

The implementation of corporate tax in the UAE marks a new era for businesses operating in the region, demanding a higher level of transparency andcompliance. Adapting to these changes will be essential for businesses aimingto maintain compliance and optimize their tax planning strategies within the UAE’s evolving regulatory framework.