An overview of UAE Corporate Tax and Transfer Pricing
The UAE Corporate Tax law was introduced in December 2022 and is effective from 1 June 2023. All entities with financial years beginning on any date post 1 June 2023 shall have to comply with the Corporate Tax regime.
All resident judicial persons incorporated in UAE shall be liable to Corporate Tax. Furthermore, natural persons carrying on business activities and non-residents as well, under certain circumstances, shall be liable to UAE Corporate Tax.
The UAE Corporate Tax shall:
- Apply at 9% on taxable income above AED 3,75,000;
- For free zone entities, Corporate Tax shall be at 0%, subject to the satisfaction of conditions.
For free zone entities, it had been mentioned in the tax law that as long as they derive ‘Qualifying Income,’ the tax will be 0%. However, qualifying income had not been defined in the corporate tax law and the clarification in this regard has been long awaited. Recently, the cabinet finally came out with Ministerial Decision No. 55 and 139 of 2023, where the meaning of ‘Qualifying Income’ has been finally provided.
Free zone taxation regime in UAE
Entities established in a free zone in UAE can avail the 0% corporate tax regime provided that they become a Qualifying Free Zone Person (QFZP). In order to qualify as a QFZP, the free zone entity has to satisfy the following conditions:
| Sr. No. | Condition | Description |
|---|---|---|
| 1. | Substance | The free zone entity should maintain adequate substance in UAE. The entity should conduct core income-generating activities in the free zone and also have adequate assets, adequate number of qualified employees and incur adequate expenses in the free zone. |
| 2. | Qualifying Income | The entity should derive qualifying income only and its non-qualifying revenue should meet the de minimis conditions. |
| 3. | Meets the ‘De minimis’ requirements | The non-qualifying revenue of a free zone entity should not exceed 5% of its total revenue or AED 5 million, whichever is lower. |
| 4. | Election to be subject to corporate tax | The free zone entity should not have elected to be subject to corporate tax. |
| 5. | Transfer Pricing | The entity should comply with the arm’s length principle for related party transactions and connected persons. |
| 6. | Books of accounts | The free zone entity must prepare and maintain audited financial statements. |
| 7. | Others | The entity must comply with such other conditions as may be prescribed from time to time. |
What is Qualifying income?
Qualifying income shall comprise of the following:
- Income derived from transactions with another free zone person from activities that are not ‘Excluded Activities’;1
- Income derived from transactions with any other person (including outside of UAE) only form ‘Qualifying Activities’;2
- Any other income subject to the satisfaction of De minimis requirements.
The entire Qualifying Income of a free zone entity shall be subject to a 0% Corporate Tax rate, subject to the satisfaction of other conditions.
Points to consider for all UAE entities (including free zone entities)
- To ensure that UAE Corporate Tax registration is complete. Currently, the procedure for registration of certain entities (like a branch of a foreign company) are yet to be prescribed.
- The appropriate evaluation of incomes and expenses to be made in order to determine the taxability;
- The free zone entities need to be mindful of substance requirements, Transfer Pricing (TP) compliance and evaluate whether its income meets the definition of ‘Qualifying Income.’
- The entities should maintain appropriate books of accounts and get them audited wherever required;
- The entities need to evaluate the timelines for the first tax return filing based on the tax periods followed.
1. Meaning of Excluded Activities has been provided in the
Cabinet Decision No. 139 of 2023
2. Meaning of Qualifying Activities has been provided in
the Cabinet Decision No. 139 of 2023