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The United Arab Emirates (UAE) has embarked on a new chapter in its taxation landscape by introducing a federal corporate tax (CT) regime, effective for financial years starting on or after June 1, 2023. While this development marks a significant shift, it also presents opportunities for businesses to understand and navigate the complexities of UAE tax exemption rules. A crucial aspect of this understanding lies in distinguishing between exempt and taxable persons.
In this article, we embark on a journey to decode the intricacies of exempt and taxable persons under the UAE Corporate Tax Regime. By shedding light on these distinctions, we aim to provide businesses with the knowledge and insights necessary to navigate the changing tax landscape effectively.
Certain entities are granted UAE corporate tax exemption, recognizing their contributions to society and the economy. These exempt persons fall into two main categories:
UAE Government Entities: The UAE Federal and Emirate Governments, departments, authorities, and public institutions are automatically exempt from corporate tax.
Government-Controlled Entities: Businesses wholly owned and controlled by a Government Entity, involved in a specific Mandated Activity, and listed in a Cabinet Decision are also exempt from corporate tax.
Extractive and Non-Extractive Natural Resource Businesses: Companies engaged in extracting natural resources or related non-extractive activities, subject to Emirate-level taxation, are exempt under certain conditions according to UAE tax exemption rules.
Qualifying Public Benefit Entities: Entities listed in Cabinet Decision No. 37 of 2023 or subsequent decisions, such as charities and non-profit organizations, are exempt from UAE corporate tax.
Exempted upon Approval:
Qualifying Investment Funds: Investment funds meeting specified conditions, such as a minimum size and investment focus, can apply for exemption from UAE corporate tax.
Pension and Social Security Funds: Public or private pension or social security funds meeting conditions in Ministerial Decision No. 115 of 2023 can apply for exemption from UAE corporate tax.
UAE Legal Entities Wholly Owned by Exempt Entities: UAE legal entities wholly owned and controlled by specifically exempted entities, engaged in activities mentioned in paragraph (h) of Clause 1 of Article 4 of the Corporate Tax Law, can be exempt upon approval of an application submitted to the Federal Tax Authority.
Companies not falling under the UAE tax exemption categories are considered taxable persons. Taxable persons are classified into two types:
A Resident Person is a company incorporated or established in the UAE, including a Free Zone Person or a foreign jurisdiction company that is effectively managed and controlled in the UAE. Resident Persons are taxed on their worldwide income, regardless of where it is generated.
A Non-Resident Person is a company incorporated or established outside the UAE that does not have a Permanent Establishment in the UAE. Non-resident persons are only taxed on their income generated within the UAE.
The taxable income for a company is calculated based on its accounting profit, with certain adjustments as specified in the Corporate Tax Law. The tax rate applicable to taxable income is 9%, with a minimum income of AED 375,000 annually. This means that companies with taxable income below AED 375,000 will not be subject to CT.
Taxable persons are required to register for CT and comply with the relevant filing and reporting requirements.
The introduction of CT has significant implications for businesses operating in the UAE. Companies must assess their tax positions, identify potential liabilities, and implement appropriate compliance measures. Seeking professional advice from tax advisors is crucial to ensure adherence to the new regulations.
The UAE’s CT regime introduces a new layer of complexity to the taxation landscape. However, it also presents opportunities for businesses to optimize their tax positions and enhance their financial planning. Companies can navigate the corporate tax regime effectively and minimize their tax burden by understanding the distinctions between UAE tax exemption and taxable persons.
As the UAE continues to evolve as a global business hub, the importance of CT compliance will only grow, making it essential for businesses to stay informed and adapt to the changing regulatory environment.
