Key factors to consider in UAE Corporate Tax

Here are the key factors companies, large and small, and individual natural persons should consider, with respect to UAE Corporate Tax regulations, when calculating and filing their corporate tax.

Taxable Persons and Exemptions

The UAE Corporate Tax Law applies to most businesses and commercial activities. This includes both juridical persons (companies, partnerships, etc.) and natural persons (individuals) who engage in a business or business activity.

• Juridical Persons: This is the most common category. All companies, whether on the mainland or in a free zone, are subject to the law.
• Natural Persons: Individuals are subject to corporate tax only if their combined revenue from a business or business activity exceeds AED 1 million within a calendar year. This does not apply to personal income from salaries, real estate investments (unless a license is required), or personal investments in securities.
• Exempt Persons: Certain entities are exempt from corporate tax, provided they meet specific conditions. These include government entities, qualifying public benefit entities, and qualifying investment funds.

Corporate Tax Rates and Thresholds

The UAE's corporate tax regime is known for its competitive and tiered rate system.

• 0% Tax Rate: This applies to taxable income up to AED 375,000. This threshold is designed to support small and medium-sized enterprises (SMEs) and startups, ensuring they can grow without an immediate tax burden.
• 9% Tax Rate: This standard rate applies to taxable income that exceeds AED 375,000.
• Large Multinationals: A different, yet-to-be-specified tax rate will apply to large multinational enterprises with consolidated global revenues of more than EUR 750 million, aligning with the OECD's Pillar Two global minimum tax rules.

For Qualifying Free Zone Persons (QFZPs), a 0% tax rate applies to their "qualifying income" provided they maintain adequate substance in the free zone and comply with all regulatory requirements. Any non-qualifying income will be taxed at the standard 9% rate.

Key Corporate Tax Concepts to Consider

1. Related Parties, Connected Persons, and Arm's Length Principle

• Connected Persons and Related Parties are broadly defined in the law to include individuals and entities with direct or indirect control or significant influence over a business. This can include shareholders, directors, their relatives, or other entities within the same group.
• Arm's Length Principle: A cornerstone of the UAE's corporate tax regime is the arm's length principle. This rule dictates that transactions between related parties must be priced as if they were conducted between independent, unrelated parties under similar circumstances. The goal is to prevent the artificial shifting of profits to reduce a company's taxable income. Any payments to a connected person that are not at arm's length are not tax-deductible.
• Transfer Pricing: The process of determining and documenting the pricing for transactions between related parties is known as transfer pricing. Businesses must be able to prove that their inter-company transactions, such as the sale of goods or provision of services, adhere to the arm's length principle. Certain thresholds may require businesses to prepare and maintain specific transfer pricing documentation, such as a local file and master file.

2. Tax Grouping

Eligible resident juridical persons (companies) can elect to form a tax group. This is a powerful tool for simplifying compliance and managing tax liability.

• Conditions: To form a tax group, a parent company must own at least 95% of the share capital, voting rights, and entitlement to profits and net assets of each subsidiary. All members must be resident persons, not exempt from corporate tax, and have the same financial year and accounting standards.
• Benefits: A tax group is treated as a single taxable person. This allows for the offsetting of losses from one group member against the profits of another, and intra-group transactions are generally disregarded for corporate tax purposes, reducing the administrative burden of transfer pricing.

3. Electing Realization Basis

Businesses that use the accrual basis of accounting can elect to be taxed on a realization basis for specific gains and losses.

• Concept: The realization basis disregards unrealized gains and losses from the calculation of taxable income. An unrealized gain or loss is an increase or decrease in the value of an asset or liability that has not yet been "realized" through a sale or other disposal.
• Example: If a company's investment portfolio increases in value on paper, that unrealized gain would not be subject to tax until the investments are actually sold. This can be beneficial for cash flow management. This election is generally irrevocable and must be made in the first tax return.