The introduction of the Corporate Income Tax (CIT) regime in the United Arab Emirates (UAE) has reshaped the tax landscape for businesses. With a CIT rate of 9% on net profit for income exceeding AED 375,000, this tax system has specific provisions and exemptions that can significantly impact how businesses manage their tax obligations. In this article we will provide a comprehensive “Tax Planning Checklist” to help businesses navigate the CIT regime effectively.
Tax Planning Checklist
- Tax Rates
– 0% for taxable persons with their taxable income not exceeding AED 375,000; or Qualifying Free Zone Persons with their qualifying income
– 0% for taxable persons electing to fall under the small business relief where the revenue in a financial year does not exceed AED 3 million
– 9% for taxable persons with their taxable income exceeding AED 375,000
- Identifying Eligible Entities
– Juridical Persons incorporated in the UAE
– Foreign Juridical Persons that are effectively managed and controlled in the UAE
– A foreign juridical person that operates in the UAE through a Permanent Establishment or taxable nexus in the UAE
– Natural Persons (Unincorporated Partnership or Sole Proprietorship) if they are engaged in a Business or Business Activity in the UAE
- Taxable Income and Exempted Income
Taxable Income:
The accounting net profit (or loss) of the Taxable Person, after making the allowed adjustments and deductions.
Exempted Income:
– Dividends and other profit distributions received from UAE incorporated or resident Juridical Person or from a Participating Interest in a foreign Juridical Person. Read more here.
– Capital gains, foreign exchange gains/losses and impairment gains or losses from a domestic or foreign Participating Interest;
– Income from a foreign branch or PE where an election is made to claim the “Foreign PE” exemption;
– Income from non-residents from the operation or leasing of aircrafts or ships in international transportation
- Accounting Standards
– In case the Taxable Person´s revenue does not exceed AED 50,000,000, IFRS will be the accepted standard for Financial Statements.
– If the Taxable Person´s revenue does not exceed AED 3,000,000, it is acceptable to use the Cash Basis of Accounting (Small Business Relief) Small businesses with annual revenues below AED 3,000,000 can opt for Small Business Relief, which simplifies tax obligations and offers administrative and tax relief.
- Transfer Pricing Rules
Transactions between Related Parties need to be carried out on an arm´s length basis as if the transaction was carried out between independent parties. Those transactions need to be determined by reference to their “Market Value”. Related Parties are those in which one of the parties holds alone or with their related parties a controlling ownership interest of 50% or more of the shares of the company. However, the Transfer Pricing Rules do not apply to Intra Tax Group transactions. If a UAE resident Group opts for a Tax Group, it will be treated as a single taxable entity.
- Handling Cross-Border Transactions
A 0% Withholding Tax applies to cross-border payment of dividends, interest, royalties and other types of UAE-sourced income paid to non-residents.
Withholding Tax and other foreign taxes on income or profits can be offset against the UAE Corporate Tax liability. Foreign tax paid on income subject to UAE Corporate Tax can be deducted from the CIT as a Foreign Tax Credit.
- Administrative Tasks
Registration and Filing: Businesses must register for CIT, obtain a Tax Registration Number (TRN), and adhere to deadlines for filing tax returns and paying CIT. We covered this in-depth here.
How TME Services Can Support Your Business
The CIT regime in the UAE offers businesses a favorable tax environment with opportunities for tax planning and optimization. By understanding the CIT rates, eligible categories, exempted income, and other crucial aspects, businesses can strategically plan their tax obligations to maximize profitability. Whether you are a Mainland Person, a Free Zone Person, a QFZP, or a small business, thoughtful tax planning is essential for staying compliant and achieving financial success in the UAE’s evolving tax landscape. Consulting with tax professionals familiar with UAE tax regulations is a prudent step to ensure your business’s tax planning aligns with the CIT regime’s requirements.
TME Services is a team of 45 professionals in the field of legal-, tax-, accounting and compliance with over 18 years of experience. We advised a significant number of SMEs in the context of the implementation of the tax framework in the UAE and KSA over the last decade to make sure that our clients are well oriented in the new and fast evolving tax landscape and to reduce the legal liability of managers which may arise in connection with non-compliance.
