"Taxation is the price which civilized communities pay for the opportunity of remaining civilized." - Albert Bushnell Hart

Evolution of Corporate Taxation: A Historical Perspective

Corporate tax is a relatively new tax that has been introduced in various political systems. In the United States, large businesses were traditionally organized as sole proprietorships or partnerships, where taxes were imposed at the individual level since income was directly attributed to the owners. However, as more corporations with diverse ownership structures emerged, policymakers realized the importance of treating the company as a separate legal entity with its own identity, separate from its owners. This shift helped streamline the tax system by simplifying income calculations and tax levies based on corporate profits instead of individual incomes.

The introduction of corporate tax as a method of entity-based taxation has greatly benefited governments and complemented existing tax structures. Today, most countries around the world, including many in the Middle East, have implemented comprehensive corporate tax systems. A competitive corporate tax system based on international best practices is expected to solidify the UAE's position as a leading global business and investment hub, contributing to the country's development and transformation in line with strategic objectives. The implementation of a federal corporate tax system also demonstrates the UAE's commitment to adhering to international tax transparency standards and preventing harmful tax practices.

The UAE introduced the federal corporate tax with a standard statutory rate of 9 percent starting from the financial year beginning on or after June 1, 2023. Taxable profits below that threshold will be subject to a 0 percent rate. Each legal entity or natural person that is subject to UAE Corporate Tax is generally considered as one Taxable Person for Corporate Tax purposes. Where multiple legal entities apply to form a Tax Group and be treated as a single Taxable Person, these entities will only benefit from one AED 375,000 threshold.

Applicability of Corporate Tax

Corporate Tax is a form of direct tax levied on the net income or profit of corporations and other businesses. Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions. For the application of the Corporate Tax Law to companies and other juridical persons, all activities conducted, and assets used or held will generally be considered activities conducted, and assets used or held, for the purposes of a “Business”.

The following entities will be subject to UAE Corporate Tax irrespective of the residence and nationality of the individual founders or (ultimate) owners of the entity:

1. Juridical persons that are incorporated or resident in the UAE

In the UAE, a juridical person encompasses entities like limited liability companies, foundations, trusts, public or private joint stock companies, and other entities with separate legal identities under UAE mainland laws or Free Zone regulations. UAE incorporated companies, including LLCs, private and public joint stock companies, and other juridical persons, will be liable for Corporate Tax as Resident Persons. Any entity incorporated in the UAE is automatically considered a Resident Person for Corporate Tax purposes. Similarly, any individual conducting business or business activities in the UAE will also be classified as a Resident Person for Corporate Tax purposes.

Can a foreign company be treated as a Resident Person for UAE Corporate Tax?

Yes, provided that if it is “effectively managed and controlled” in the UAE. All facts and circumstances must be considered in determining where a company is effectively managed and controlled, but a relevant indicator may include the place where the board of directors of the company make the strategic decisions affecting the company.

2. Foreign entities that have a Permanent Establishment or taxable nexus in the UAE

Is the Corporate Tax Registration Mandatory?

Businesses established on or after March 1, including those in free zones, must register for corporate tax within three months of the date of incorporation, establishment or recognition to avoid penalties.

Specify the Tax Period!

The "Tax Period" for corporate tax is typically the financial year, usually following the Gregorian calendar year from January 1 to December 31, unless the business uses a different 12-month period for financial statement preparation.

Are there any Exemptions Available?

While some exemptions from UAE Corporate Tax are granted automatically, others require approval. The following entities are automatically exempted:

• UAE Federal and Emirate Governments, their departments, authorities, and public institutions

• Companies wholly owned by a Government Entity conducting a Mandated Activity as per a Cabinet Decision

• Businesses involved in extracting UAE Natural Resources or related activities subject to Emirate-level taxation, provided certain conditions are met

• Qualifying Public Benefit Entities listed in Cabinet Decision No. 37 of 2023 or subsequent relevant decisions

Entities exempted from UAE Corporate Tax upon approval by the Federal Tax Authority include:

• Qualifying Investment Funds meeting specified criteria

• Public or private pension or social security funds meeting conditions outlined in Ministerial Decision No. 115 of 2023

• UAE juridical persons wholly owned by certain exempted entities and undertaking activities detailed in Article 4 of the Corporate Tax Law.

Corporate Tax and Free Zones

Free zones in the UAE are crucial for driving economic growth domestically and internationally. Companies operating in free zones can benefit from 0% corporate taxation on qualifying activities and transactions.

Relief for Small Businesses

Businesses with revenues equal to or less than AED 3 million in both the current and previous tax periods have the option to opt for "Small Business Relief" that end on December 31, 2026. By choosing this relief, the business will be considered to have no taxable income for that period and will have simpler compliance requirements. To apply for Small Business Relief, the business must make an election in their Corporate Tax Return for the respective tax period.

Let us do a calculation!

• Where the annual Revenue of the business is AED 3 million or below, it can elect for Small Business Relief for Tax Periods that end on or before 31 December 2026 provided it also meets the other relevant conditions. The business will then be treated as if it earned no Taxable Income and no Corporate Tax will be payable.

• If a Taxable Person that has earned Taxable Income of AED 1 million is not eligible for Small Business Relief or chooses not to elect for it, the Corporate Tax liability will be calculated as follows:

• Taxable Income of AED 375,000 subject to Corporate Tax at 0%: AED 375,000 x 0% = AED 0

• Taxable Income exceeding AED 375,000 subject to Corporate Tax at 9%: (AED 1,000,000 – AED 375,000) = AED 625,000 x 9% = AED 56,250

• Thus, the UAE Corporate Tax liability for the Tax Period will be AED 0 + AED 56,250 = AED 56,250.

The Ministry of Finance and Federal Tax Authority regularly update the public on the Corporate Tax Law through decisions, guidance, and other materials. It is recommended that the public regularly visit the websites of the Ministry of Finance and the Federal Tax Authority for the latest information on the UAE Corporate Tax regime.