Taxes in the United Arab Emirates for Businesses in 2024: What You Need to Know

The United Arab Emirates (UAE) has introduced several transformative changes to its tax framework, including the implementation of a federal corporate tax. These changes aim to strengthen the country’s position as a global financial hub and align with international standards such as the OECD’s Base Erosion and Profit Shifting (BEPS) initiative. This article provides an in-depth overview of the UAE’s tax system, including corporate tax rates, VAT regulations, compliance requirements, and strategic considerations for businesses operating in or looking to expand into the UAE.

Overview of the Corporate Tax System in the UAE

The introduction of a federal corporate tax is a landmark development for the UAE, marking a significant shift in its fiscal policy. The new regime, which came into effect for financial years starting on or after June 1, 2023, introduces a standard statutory corporate tax rate of 9% and a 0% rate for taxable profits up to AED 375,000, benefiting small businesses and startups. Key features of the UAE’s corporate tax system include:

• Standard Corporate Tax Rate: The standard corporate tax rate is set at 9% for taxable profits exceeding AED 375,000. This rate is designed to remain competitive on a global scale while ensuring revenue generation for sustainable development initiatives.
• Small Business Relief: A 0% tax rate applies to taxable profits up to AED 375,000, aimed at supporting small businesses and startups by minimizing their tax burden.
• Exemptions for Specific Entities: Government entities, government-controlled entities, and certain extractive and non-extractive natural resource businesses are exempt from corporate tax if they meet specific conditions outlined in the Corporate Tax Law​ (Ministry of Finance)​ (Ministry of Finance).

The new corporate tax regime is part of the UAE’s broader strategy to attract international investments and promote transparency, while supporting the country’s long-term economic goals.

Value Added Tax (VAT) and Compliance Requirements

The UAE’s VAT system, introduced in 2018, is well-established and applies to most goods and services:

• Standard VAT Rate: The standard VAT rate is 5%, which is relatively low compared to other jurisdictions. This rate applies to most goods and services, with certain exemptions for sectors like healthcare, education, and residential real estate.
• VAT Filing and Payment Requirements: VAT-registered businesses must submit returns quarterly or monthly, depending on their turnover. The Federal Tax Authority (FTA) has introduced electronic filing and payment systems to streamline the process and ensure compliance ​(Ministry of Finance).

International Tax Compliance and Recent Developments

The UAE has been proactive in aligning its tax policies with international standards and has signed numerous Double Taxation Agreements (DTAs) to prevent tax evasion and facilitate international trade. Key developments include:

• Adoption of OECD BEPS Measures: The UAE has adopted several BEPS measures to enhance tax transparency and prevent base erosion and profit shifting. This includes Country-by-Country Reporting (CbCR) for large multinational enterprises with consolidated revenues exceeding EUR 750 million.
• Global Minimum Tax Compliance: The UAE has expressed support for the OECD’s Pillar Two initiative, which introduces a global minimum tax rate of 15%. This commitment reflects the UAE’s dedication to maintaining a fair and competitive tax environment while adhering to global tax standards​ (Ministry of Finance).

Compliance and Reporting Obligations for Businesses

The UAE has introduced a robust framework to ensure compliance with the new corporate tax regime:

1. Corporate Tax Registration and Filing:
   All businesses must register for corporate tax with the FTA and file annual corporate tax returns within nine months of the end of the relevant financial year. Companies operating in free zones must also comply with these requirements if they generate non-qualifying income.
2. Transfer Pricing Regulations:
   The UAE’s transfer pricing rules require that transactions between related parties are conducted at arm’s length. Companies must maintain documentation to support their transfer pricing policies and ensure compliance with local regulations.
3. Economic Substance Regulations (ESR):
   Businesses engaged in relevant activities, such as banking, insurance, and IP management, must demonstrate adequate economic substance in the UAE by conducting core income-generating activities locally and maintaining adequate levels of physical assets and employees.
4. VAT Compliance and Reporting:
   VAT-registered businesses must keep detailed records of taxable supplies, input VAT, and VAT adjustments. The FTA’s e-Services portal allows for electronic submission of VAT returns and payment of VAT liabilities.

Strategic Considerations for Businesses

To optimize tax efficiency and ensure compliance with the UAE’s new corporate tax regime, businesses should consider the following strategies:

1. Evaluate the Impact of the Corporate Tax Introduction:
   Assess the financial impact of the new corporate tax on your business and adjust your tax planning strategies accordingly. Consider restructuring operations or consolidating entities to optimize taxable income.
2. Leverage Double Taxation Agreements (DTAs):
   Utilize the UAE’s extensive network of DTAs to minimize withholding taxes on cross-border transactions and reduce the risk of double taxation.
3. Maximize Free Zone Benefits:
   Businesses operating in free zones can continue to benefit from a 0% corporate tax rate on qualifying income. Ensure that your activities meet the requirements set by the FTA to maintain these benefits.
4. Stay Informed About International Tax Developments:
   Monitor global tax policy changes, particularly the OECD’s Pillar Two initiative, to ensure compliance with new regulations and minimize the risk of unexpected tax liabilities.

Pros and Cons of Doing Business in the UAE

Pros:

• Attractive tax incentives, including a 0% corporate tax rate for free zone entities and small businesses.
• Strong network of double taxation agreements (DTAs) facilitating international trade.
• Strategic location and robust infrastructure supporting global business operations.
• Proactive compliance with international tax standards, enhancing transparency and reputation.

Cons:

• Complex compliance requirements due to the new corporate tax regime and transfer pricing rules.
• High operational costs in certain sectors, such as real estate and finance.
• Potential uncertainties during the transition to the new tax system.

Conclusion

The UAE’s evolving tax landscape offers numerous opportunities and challenges for businesses. The introduction of a federal corporate tax regime marks a new era for the UAE’s fiscal policy, supporting sustainable development while maintaining its status as a leading global business hub. Companies operating in the UAE must adapt to these changes, ensure compliance, and leverage available incentives to optimize their tax position.