UAE Corporate Tax: A Compliance Guide For Individuals & Companies
As the UAE corporate tax regime is about to take effect from June 1st June 2023, entities are advised to assess their compliance obligations. In broader terms, the entities subject to the corporate tax in the UAE can be classified into natural persons and legal persons. It means both individuals and companies carrying out commercial activities with trade licenses in the UAE must assess their compliance status.
The UAE Corporate Tax Law is yet to be issued by the government, but the Ministry of Finance (MoF) has published FAQs and a consultation document regarding the tax. Based on the consultation document we can provide you with key insights on the applicability of UAE corporate tax on natural persons (individuals) and legal persons (various types of companies).
However, it is advisable to consult with tax agents in Dubai before making any corporate tax decisions. Read ahead to know further:
Applicability of Corporate Tax on Individuals
The corporate tax will be imposed only on the individuals engaged in a business or commercial activity in the UAE. The natural persons who will be subject to the UAE corporate tax include sole establishments or proprietorships and individual partners in an unincorporated partnership that conducts business in the UAE. The applicability of corporate tax on individuals carrying out a business in the UAE is determined by checking if the activity requires the individual to obtain a commercial licence or equivalent permit from the relevant competent authority.
The competent authority issuing a license could be the relevant Department of Economic Development (DED) or the registration authority of a UAE Free Zone. However, individuals will not be subjected to a parallel tax on their income. It means the corporate tax will not apply to employment income and various other forms of personal income such as dividends, rental receipts from UAE real estate investments, and other investment incomes. The same tax treatment will apply to the UAE real estate and other investments held through a private or family trust on behalf of beneficiaries that are natural persons.
Applicability of UAE Corporate Tax on Legal Persons
The UAE corporate tax will apply to UAE companies and legal persons incorporated in the UAE. Foreign legal entities with a permanent establishment in the UAE or earning UAE sourced income will also be subject the corporate tax. Legal persons subject to the corporate tax in the UAE include Limited Liability Companies (LLC), Private Shareholding Companies (PSC), Public Joint Stock Companies (PJSC) etc. Entities established under relevant UAE laws that have a separate legal personality also come within the scope of the corporate tax.
Applicability of Corporate Tax on Foreign Companies
The UAE corporate tax consultation document also mentions the applicability of tax on foreign companies. Legal persons incorporated in a foreign jurisdiction but effectively managed and controlled in the UAE will be treated as UAE incorporated entities for the purpose of corporate tax. Owners of foreign companies can consult with tax consultants in Dubai to obtain further information on the tax applicability.
Transparent Treatment for Partnership Firms
The UAE corporate tax regime will treat limited and general partnerships and other unincorporated joint ventures and associations of persons as transparent. It means such companies will not be considered taxpayers in their own right, but their income will ‘flow through’ and be taxed in the hands of the partners or members only. It is a tax practice followed across the globe to ensure tax neutrality for investors in collective investment funds that are structured as limited partnerships.
Entities investing in and through unincorporated partnerships in a cross-border context may face unintended tax consequences when one country treats the partnership as a transparent entity, and the other country taxes the partnership as a company. For foreign unincorporated partnerships in a cross-border context, the UAE corporate tax regime will follow the tax treatment of the partnership in the respective foreign jurisdiction.
Treatment of Limited Liability Partnerships
The corporate tax also applies to limited liability partnerships, partnerships limited by shares and other types of partnerships in which none of the partners has unlimited liability for the partnership’s obligations or other partners’ actions. However, such legal entities will be subject to corporate tax in the same manner as a UAE company.
Applicability of UAE Corporate Tax on Free Zone Companies
Companies and their branches registered in the UAE free zones fall within the scope of the corporate tax. They are required to fulfil key corporate tax obligations such as tax return filings. However, the free zone companies maintaining adequate substance and complying with all the regulatory requirements can continue to enjoy the tax incentives currently being offered to free zone businesses.
It means free zone businesses can benefit from a 0% corporate tax rate on income earned from transactions with businesses located outside of the UAE, or from trading with businesses located in the same or any other free zone. The 0% CT rate also applies to income earned from certain regulated financial services directed at foreign markets. Tax consultants in Dubai can help free zone companies to clear the air on their corporate tax obligations. A free zone with a mainland branch will be liable for 9% corporate tax on the mainland income. However, income earned from the free zone business can continue to benefit from the 0% corporate tax in the UAE.
Entities Exempt from the UAE Corporate Tax Regime
The following persons will be exempt from the regime of corporate tax in the UAE, either automatically or by way of application:
- The Federal and Emirate governments and their departments, authorities and other public institutions
- Wholly Government-owned UAE companies that carry out a sovereign or mandated activity, and that are listed in a Cabinet Decision
- Businesses conducting extraction and exploitation of UAE natural resources that are subject to Emirate-level taxation
- Charities and public benefit organisations listed in a Cabinet Decision
- Public and regulated private social security and retirement pension funds
- Investment funds (subject to conditions)
Consult with the Best Tax Consultants in Dubai, UAE
With the UAE corporate tax about to take effect, natural and legal persons should assess its scope, tax rates, timing and other key obligations. Since the corporate tax implications could be far-reaching entities can start preparing with the help of tax consultants in Dubai such as Jitendra Chartered Accountants (JCA). JCA has a dedicated corporate tax team based in the UAE who can support you throughout your corporate tax preparation process.