Update June 2023: More Information on the New UAE Corporate Taxation System

Update: It is now June 2023, and the new UAE corporate tax has been in force for almost a month. We have therefore written this short article to clarify all the points that were unclear at the time. We can now assess the implications of this new tax with precision.

Generally speaking, it can be said that owners of companies in free trade zones can breathe a sigh of relief: the changes will probably make it easier to open bank accounts for their companies and, in many cases, they will be able to continue paying no taxes, although they will have to keep and submit their company accounts.

For more information, see the latest update on corporate tax changes in the UAE.

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Update June 2023: more information on the new UAE corporate taxation system

Some time ago we talked about the changes coming in the UAE. In this update we will explain how things have changed since the first version of this article.

As anticipated, the new corporate tax rate of 9% came into effect on June 1st. As we said at the time, an exempt amount of AED 375,000 on profits (just under USD 100,000) applies. At the time, however, it was not yet clear how this profit, on which tax would ultimately have to be paid, would be calculated, as the rules on salaries and deductions were not at all clear.

All the information can now be found in the official UAE government report. In this link you can find the law.

The average salary of a CEO in Dubai is AED 60,000 (USD 16,000) per month. At least this salary – and probably quite more – will remain deductible. What is important here is that it is a “normal”, market salary: an unrealistic salary that cannot be compared locally will not be tax-deductible. This means that if the average salary for managers in our area is USD 200,000 per year, we can easily take a salary of USD 240,000 per year, but certainly not of USD 600,000.

So, for example, if we take a salary of USD 20,000 per month (a common salary in the Emirates, as we said), we would be deducting USD 240,000 per year. This means that, if we take into account our salary, the company in the UAE could have a tax-free profit of around USD 340,000 per year. Of course, if our spouse is also listed as a manager, the amount of profit on which we would not have to pay tax would rise to USD 580,000 per year.

In general, companies in the Emirates will be able to deduct expenses related to the development of their activity as in any other jurisdiction. Accounting in the UAE follows the same rules and regulations that we are familiar with from other countries. You will have to keep receipts for 7 years. It remains to be seen how this is applied in practice.

Another thing to bear in mind is that also the turnover will influence the taxation of companies in the UAE. Any business in the UAE will be tax-free as long as its turnover is below AED 1 million (currently around USD 270,000). Therefore, you have nothing to worry about as long as you do not exceed this amount.

If you are an Emirati tax resident and operate through foreign companies, you have nothing to worry about as long as you are below this turnover limit. If you are above it, it would be preferable that you appoint at least one trustee for your foreign company or, if you travel abroad a lot but are still an Emirati tax resident, that you can show that the effective management is not in the UAE (i.e. corporate decisions are not made there).

It has now also become clear that businesses of mainland companies – as well as non-qualified free zone companies – will be eligible for so-called Small Business Relief, which is based on a turnover threshold of AED 3 million (just under USD 816,000) and will initially apply up to and including 2026. You will also benefit from simplified accounting and will not be obliged to undergo audits.

Presumably, previously existing free zone companies will benefit from the advantage of continuing to pay no taxes. If you have established a company in a free zone before 1 June 2023 – in IFZA, for example – little will change for you in terms of taxation, or at least that is what follows from paragraph 18-4 of this law, provided that the competent ministry confirms its agreement with the free zone.

For common free zones such as IFZA or Meydan, this should remain the case for another 50 years. It is likely that the free zones themselves will finally confirm this in the next few days.

Corporate income tax does not apply to capital gains and dividends, which also affects holding companies incorporated in the UAE. Rental income remains tax exempt for individuals, but may be taxed in companies if there is a corresponding business or profit. Foreign owners, on the other hand, pay tax on profits above AED 375,000 and are not eligible for the turnover exemption. To qualify, they would have to become resident in the UAE.

The news that the benefits of pre-existing companies in the free zones will be maintained has caused many to breathe a sigh of relief at last.

The new corporate tax rules for qualifying free zone companies are only relevant to companies incorporated after June 1st. The following definition of qualifying free zone income has been determined:

For a free zone to be tax exempt, the following three conditions must be met:

First, the company must generate 95% of its turnover from the activities listed below:

• manufacture of goods or materials
• processing of goods or materials
• reinsurance
• holding of shares and other securities
• ownership, management and operation of ships;
• fund activities;
• asset and investment management;
• head office activities;
• treasury services and internal financing;
• financing and leasing of aircraft, including engines and jets;
• transportation of goods or materials;
• logistics services; and
• any activities in addition to those listed above.

Secondly, the following activities are not permitted for free zones:

• transactions with natural persons
• income from certain regulated financial services;
• income from intangible assets; and
• income from real estate, except for transactions with other free zones in relation to commercial real estate in a free zone.

Thirdly, it has been confirmed that free zone companies are eligible for tax exemption only if the value creation takes place entirely in the free zone. Therefore, you will need to have employees in a local permanent establishment to benefit from the continued tax exemption.

All these measures are in line with internationally recognised free zone principles and should bring Dubai into compliance with many more compliance requirements in several areas. In principle, this will have a positive effect on all companies in the country and may, over time, allow for better banking options.

As we can see, it seems that there will not be many changes for those who already have their companies in free zones, since they will continue to pay no taxes. However, accounting returns and bookkeeping will increase costs for all companies and make the option of owning a company in an Emirate free zone less attractive than other alternatives such as an USA LLC.

Start-up companies in the UAE will be tax-free as long as they do not exceed the turnover and profit thresholds that have been set, but will have to comply with accounting and other requirements.

If you want to live in the Emirates, operating through a foreign company (an American LLC, for example) may be your best option, especially if you are in the B2C sector.

Of course, private individuals who are residents in the UAE will still not be taxed on dividends, real estate and investments, salaries or any income that is not derived from a business or other form of commercial activity authorised or permitted in the UAE.