Frequently Asked Questions

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Does Your Free Zone Company preserve the tax-exempt status?

Since the issuance of Federal Decree-Law No. 47 of 2022, as many companies have their fiscal or financial year aligned with the calendar year, it is crucial for the Free Zone Companies to adhere to the specified conditions required to be a Qualified Free Zone Person and thereby preserve the tax-exempt status!!!

The UAE Ministry of Finance recently issued the following two significant decisions detailing the Qualifying Income, Qualifying Free Zone Person, Qualifying Activities & Excluded Activities, which are retroactively effective from June 1, 2023:

1. Cabinet Decision No.100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person (repealing the previously issued Cabinet Decision No. 55 of 2023), and 

2. Ministerial Decision No. 265 of 2023 Regarding Qualifying Activities and Excluded Activities (repealing the previously issued Ministerial Decision No. 139 of 2023) for the purposes of Federal Decree-Law No. 47 of 2022.

As per the revised decisions published, the scope of ‘Qualifying Income’ has been widened to include the following:

· Income derived from ownership and exploitation of ‘Qualifying Intellectual Property, calculated based on the methodology of the OECD’s modified nexus approach.

· Trading of Qualifying Commodities.

Specific Conditions to satisfy to be considered as a Qualifying Free Zone Person (QFZP):

· Derives Qualifying Income from relevant categories of income. (see below)

· Maintain adequate substance (refer to Point 4) in the UAE.

· Satisfy the de minimis requirement. (refer Point 5)

· Have not elected to be subject to Corporate Tax.

· Comply with the transfer pricing rules and documentation requirements under the Corporate Tax Law.

· Prepare and maintain audited Financial Statements for the purposes of the Corporate Tax Law.

Qualifying Income of the Qualifying Free Zone Person (QFZP) shall include the following categories of income:

· Income derived from another Free Zone Person (FZP), except for income derived from Excluded Activities. Further, the FZP should be the “Beneficial Recipient” of the relevant services or Goods (i.e., there is no contractual liability or obligation to pass on such goods or services to another person).

· Income derived from Non-Free Zone Person (NFZP), in respect of Qualifying Activities (refer Point 1) that are not Excluded Activities (refer Point 2).

· Income derived from the ownership or exploitation of Qualifying Intellectual Property (refer to Point 3).

· Any other income provided QFZP satisfies the de minimis requirements.

· The following income does not form part of the Qualifying Income: 

· Income attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment. (Such PE will be considered a separate and independent Person that is a Related Party of the Qualifying Free Zone Person and will be subject to tax @ 9% without basic exemption)

· Income derived from the ownership or exploitation of immovable property. 

Further income derived from the following means will be subject to tax @ 9%, without basic exemption:

a. Transactions with NFZP, in respect of commercial property.

b. Transactions with any person, in respect of non-commercial property.

Income derived from the ownership or exploitation of intellectual property that is not Qualifying Intellectual Property. Further the income in excess of Qualifying Income derived from Qualifying Intellectual Property as per the formula provided under Ministerial Decision no. 265 of 2023. (This income will be subject to tax @ 9% without basic exemption)

The Qualifying Activities have been streamlined by offering concise descriptions for each Qualifying Activity and Excluded Activity. This is described as follows in the decisions published.

1. Qualifying Activities

· Manufacturing of goods or materials includes production, improvement or assembly of products and materials from raw materials or components.

· Processing of goods or materials includes preparation, treatment, transformation or conversion of goods or materials into another form of good or material for commercial or industrial use or sale.

· Trading of Qualifying Commodities includes physical trading activities of Qualifying Commodities and associated derivative trading used to hedge against risks involved in such activities. Qualifying Commodities include metals, minerals, energy, and agriculture commodities that are traded on a Recognised Commodities Exchange Market in raw form. 

· Holding of shares and other securities for investment purposes includes:

a. Ownership of shares in another legal entity or other equitable interests that provide rights to receive profits and liquidation proceeds, either as a legal or beneficial owner. 

b. Negotiable and non-negotiable financial instruments, including derivatives, financial commodities, and other investment vehicles that are tradable in public or private markets, convertible into securities, or grant the right to purchase securities, with the exception of financial instruments issued in connection with the securitization of receivables from non-financial assets. 

c. There should be an intention to hold the Shares and other securities for a continuous period of at least (12) twelve months.

· Ownership, management, and operation of Ships including Ships used in the international transportation of passengers, goods, or livestock, towing activities and the provision of general assistance to Ships at sea, dredging activities at sea, and leasing and chartering of Ships on a bareboat basis. With a specific exclusion for Ships used for local transportation or leisure or recreational purposes, or as floating hotels, restaurants, or casinos.

· Reinsurance servicesmeans reinsurance operations that are regulated under Federal Law No. 6 of 2007 on the Organization of Insurance Operations, and its amendments.

· Fund management services include the activities of portfolio management, risk management, discretionary and non-discretionary fund management services, and other services relating to the day-to-day management and operation of an investment fund by a fund manager who is appointed by the fund or its investors.

· Wealth and investment management services include the activities of providing discretionary and non-discretionary investment management and advisory services, portfolio management, and wealth and investment advisory services.

· Headquarters services to related parties include the administering, overseeing, and managing of Business Activities of Related Parties, including the provision of senior and general management, captive insurance services, administrative services, procurement services, business planning and development, risk management, coordination of group activities, and in general incurring expenditures on behalf of related parties and providing other support services to related parties.

· Treasury and financing services to Related Parties include the provision of cash and liquidity management, financing, debt management, and financial risk management and related advisory services to Related Parties, including centralized payment and collection activities for or on behalf of Related Parties.

· Financing and leasing of Aircraft include the financing, leasing, and securitization of the financing and leasing of Aircraft, Aircraft engines, or rotable components, granting the right to use Aircraft, Aircraft engines, or rotable components in exchange for rental or other consideration pursuant to a finance lease, operating lease or other arrangement and related advisory and agency services for the procurement, sale or leasing of Aircraft, Aircraft engines or rotable components undertaken by the Qualifying Free Zone Person.

· Distribution of goods or materials in or from a Designated Zone, includes the buying and selling of goods, materials, component parts, or any other items that are tangible or movable and may include the importation, storage, inventory management, handling, transportation and exportation of those goods or materials to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale, provided such activities are conducted in or from a Designated Zone and the goods or materials entering the State are imported through the Designated Zone.

· Logistics services include the storage and transportation of goods or materials on behalf of another person without taking title to the goods or material of that other person, freight forwarding and brokerage services, document preparation, packing and unpacking, and other related services. 

2. Excluded Activities

· Any transactions with natural persons other than:

a. Ownership, management, and operation of Ships.

b. Fund management services.

c. Wealth and investment management services.

d. Financing and leasing of Aircrafts.

· Banking activities mean the regulated financial activities specified under Article (65) of Federal Decree-Law No. 14 of 2018.

· Insurance activities mean insurance operations that are regulated under Federal Law No. 6 of 2007 on the Organization of Insurance Operations, and its amendments.

· Finance and leasing activities means the provision of credit or financing for any kind of consideration, and the letting or otherwise granting the right to use an asset in exchange for rental or other consideration pursuant to a finance lease, operating lease, or other arrangement, that are subject to the regulatory oversight of the Competent Authority in the State.

· Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone and transacted with a Free Zone Person.

General

Any activities that are ancillary to both Qualifying Activities and Excluded Activities specified above means activity shall be considered ancillary where it is necessary for the performance of the main activity or where it makes a minor contribution to it and is so closely related to the main activity that it should not be regarded as a separate activity.

3. Qualifying Intellectual Property 

Income from ownership or exploitation of Intellectual Property (‘IP’) is no longer considered an Excluded Activity. The new Free Zone regulation introduces the concept of Qualifying Intellectual Property (‘QIP’). 

Definition

QIP includes Patents, Copyrighted Software, and any right functionally equivalent to a Patent, but does not include any marketing-related IP such as trademarks.

Formula for calculation

A formula (as below) is provided to calculate the amount of Qualifying Income derived from IP, which aims to calculate the portion of the income that qualifies for a 0% tax rate by establishing a direct link between the research and development (‘R&D’) expenditures and the overall income generated from the IP:

'Qualifying Expenditures' - expenditures incurred to fund R&D activities, conducted either by QFZP or outsourced to any person in the State or any person outside the State that is not a Related Party, directly connected with the creation, invention or significant development of the QIP.

Overall Expenditures means total expenditures incurred to fund R&D activities, conducted either by the QFZP or outsourced to any person, directly connected with the creation, invention or significant development of the QIP,

including acquisition costs of the QIP.

Overall Income means royalties, or any other income derived from QIP as determined according to the provisions of the CT Law, including embedded IP income derived from the sale of products and the use of processes directly related to the QIP as determined in accordance with the arm’s length principle.

Uplift Expenditures means the qualifying expenditure increased by 30%. Further, ensure that the amount of qualifying expenditure after up-lift does not exceed the amount of overall expenditure. 

Documentation for Qualifying Income from QIP

The QFZP should maintain adequate records to substantiate the following: 

- Ownership and right to exploit the QIP.

- Qualifying expenditures and overall expenditures incurred.

- Overall income derived from QIP.

- The link between qualifying expenditures and overall income derived from QIP.

4. Maintaining Adequate Substance and Outsourcing in a Free Zone

· FZP is required to undertake its core income-generating activities (CIGA) in a Free Zone or a Designated Zone.

· CIGA may vary according to the specific activity but mainly consist of those significant functions that drive the business value for each activity carried out by a Qualifying Free Zone Person and are not exclusively or mostly support activities.

· The QFZP shall have adequate assets and qualified full-time employees in the free zone or Designated Zone and incur adequate operating expenditure.

· CIGA can be outsourced to another Person in a Free Zone, or a Designated Zone provided the Qualifying Free Zone Person has adequate supervision of the outsourced activity.

· CIGA in respect of QIP can be outsourced to any other Person in the State and to any other Person who is not a Related Party outside the State, with adequate supervision of the outsourced activity by QFZP.

5. De minimis Requirements 

· The de minimis requirements shall be considered satisfied where the non-qualifying Revenue derived by the QFZP in a Tax Period does not exceed:

a.  5% (five percent) of the total Revenue of the QFZP or 

b. AED 5,000,000 (five million dirhams), whichever is lower.

· Non-qualifying Revenue is Revenue derived in a Tax Period from any of the following:

a. Excluded Activities.

b. Transactions with NFZP, where the activities are not Qualifying Activities.

c. Transactions with FZP, where such FZP is not the ‘Beneficial Recipient’ of the relevant services or Goods.

· The following Revenue shall not be included in the calculation of non-qualifying Revenue and Total Revenue:

a. Revenue attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment. 

b. Revenue derived from the ownership or exploitation of immovable property, located in a Free Zone through:

o Transactions with NFZP, in respect of commercial property.

o Transactions with any person, in respect of non-commercial property.

Income derived from the ownership or exploitation of intellectual property that is not Qualifying Intellectual Property. Further the income in excess of Qualifying Income derived from Qualifying Intellectual Property as per the formula provided under Ministerial Decision no. 265 of 2023.

Key Takeaways:

1. Detailed analysis and clarity on the entity’s activities would be required to determine eligibility as a QFZP.

2. Adequate Substance must be maintained in the free zone or designated zone based on the activity conducted either by themselves or through another outsourced Free Zone Person.

3. A detailed examination of the tax implications is needed for transactions involving income from intellectual property and commodity trading.

Disclaimer: The information provided in this article is for general informational purposes only and should not be considered legal, financial, or tax advice. Readers are encouraged to consult with qualified professionals or experts for guidance specific to their individual corporate tax situations.

The United Arab Emirates (UAE) is a sought-after destination for investors, international organisations, and start-ups alike. The economy continues to grow, benefitting from strong domestic activity. Non-hydrocarbon GDP growth is expected to exceed 4 percent this year and to remain at a similar pace in 2024, driven by tourism, construction, and real estate related developments. Social and business-friendly reforms and the UAE’s safe haven status continue to attract foreign inflows of capital and labor, underpinning growth and contributing to elevated real estate prices, particularly in high-end segments.

As the UAE continues to grow, it is essential for organisations, institutions, and businesses who set up in the emirates to ensure they adhere to the local laws, rules and regulations.

The UAE has introduced several legislations in recent years, designed to regulate and safeguard businesses across the UAE. However, amidst a rapidly changing regulatory landscape and with certain distinctions between industries and emirates, organisations face a challenging task in ensuring they remain compliant.

Non-compliance can have a significant impact – it can affect both business finances and business reputation. To help ensure your ongoing business compliance, here are the most recent legislations and measures you need to know.

1. Corporate Tax

Corporate tax is a form of direct tax levied on the taxable income of corporations and other entities from their business in a tax period. The businesses will become subject to UAE Corporate Tax from the beginning of their first financial year that starts on or after June 1, 2023.

Applicability of Corporate Tax

Broadly, Federal UAE Corporate Tax Law will be applicable across all Emirates and will apply to all businesses or business activities, except to the following exempt persons (subject to conditions):

a. UAE government entity. 

b. UAE government-controlled entity.

c. Person engaged in an extractive business in the United Arab Emirates.

d. Person engaged in a non-extractive natural resource business in the United Arab Emirates.

e. Qualifying public benefit entity.

f. Qualifying investment fund.

g. Public pension or social security fund, or a private pension or social security fund that is subject to regulatory oversight of the competent authority in the state and that meets any other conditions that may be prescribed by the Minister.

h. Juridical person incorporated in the state that is wholly owned and controlled by certain exempt persons.

i. Any other person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.

Rates of Corporate Tax

The Federal UAE Corporate Tax will be applicable at the following rates:

Taxable Income not exceeding   AED 375,000

0%

Taxable Income exceeding AED   375,000

9%

Qualifying Free Zone Persons [QFZP] (subject to conditions):

Qualifying Income will be taxed @ 0%

0%

Non-Qualifying Free Zone Persons (who does not satisfy QFZP conditions):

Taxable Income & Non-Qualifying Income will be   taxed @ 9%

9%

2. Value Added Tax

The Value Added Tax (VAT) is a consumption tax which is implemented in the United Arab Emirates (UAE) on January 1, 2018. It applies to all registered businesses in UAE, irrespective of whether the business operates in the mainland or in the free zone. It is levied on the supply of goods and services at each stage of the production and distribution chain. The standard VAT rate in the UAE is 5%, but certain goods and services may be subject to a zero rate or exempted.

Registration for VAT

A business must mandatorily register for VAT if:

a. The total value of its taxable supplies and imports (excluding foreign businesses) exceeds the mandatory registration threshold of AED 375,000 over the previous 12 months, or

b. The business anticipates that the total value of its taxable supplies and imports (excluding foreign businesses) will exceed the mandatory registration threshold of AED 375,000 in the next 30 days.

A business may voluntarily register for VAT if:

a. The total value of its taxable supplies and imports or taxable expenses in the previous 12 months exceeds the voluntary registration threshold of AED 187,500, or

b. The business anticipates that the total value of its taxable supplies and imports or taxable expenses will exceed the voluntary registration threshold of AED 187,500 in the next 30 days.

3. Excise Tax

Excise tax was introduced across the UAE in 2017. Excise tax is a form of indirect tax levied on specific goods which are typically harmful to human health or the environment. These goods are referred to as “excise goods”:

a. Carbonated drinks

b. Energy drinks

c. Tobacco and tobacco products

d. Electronic smoking devices and tools

e. Liquids used in such devices and tools

f. Sweetened drinks

Rate of Excise tax

Carbonated drinks

50%

Energy drinks

100%

Tobacco and tobacco products

100%

Electronic smoking devices and tools

100%

Liquids used in such devices and tools

100%

Sweetened drinks

50%

4. Economic Substance Regulations

The Economic Substance Regulations (ESR) in the UAE were introduced in April 2019 (amended in August 2020). ESR was issued pursuant to the global standard set by the Organization for Economic Cooperation and Development (“OECD”) Forum on Harmful Tax Practices, which requires entities undertaking geographically mobile business activities to have substantial activities in a jurisdiction.

Applicability of ESR

ESR is applied to financial years commencing on or after 1 January 2019. The regulations require UAE’s onshore companies, free zone companies, and other business forms that undertakes any of the following ‘Relevant Activities’ listed in the regulations’ framework to maintain and demonstrate an adequate ‘economic presence’ in the UAE.

Relevant Activities

a. Banking business

b. Insurance business

c. Investment fund management business

d. Lease finance business

e. Headquarters business

f. Shipping business

g. Holding company business

h. Intellectual property business

i. Distribution and service centre business

Deadline for submissions to Ministry of Finance

Every Licensee (including Exempted Licensee) that conduct a relevant activity must submit an Economic Substance Notificationwithin 6 months from the end of the relevant financial period.

Only Licensees that earn income from a Relevant Activity during the relevant financial period and that are not exempt from the Regulations are required to demonstrate economic substance in the UAE and file an Economic Substance Report within 12 months from the end of the relevant financial period.

5. Ultimate Beneficial Owner (UBO)

In July 2021, the UAE implemented the Ultimate Beneficial Owner (UBO) and shall apply to the registered Legal Persons in UAE (including Commercial Free Zones) excluding companies which are wholly owned by the Local or Federal Government, or any other companies wholly owned by such companies, and the Financial Free Zones (viz. DIFC, ADGM). 

Definition

Ultimate Beneficial Owner (UBO) or Real Beneficiaries can be any of the following:

a. Natural Person who ultimately owns or controls the Legal Person through direct or indirect ownership shares of 25 % or more; or 

b. Natural Person who holds the right to vote by 25% or more or the right to appoint or dismiss the majority of its directors or any other means by which he exercises ultimate control over the Legal Person.

c. In cases where UBO cannot be identified through the two conditions above, then a natural person who holds the position of higher management official shall be deemed as the Beneficial Owner.

Deadlines for submission to Relevant Authorities

All the registered Legal Persons, as applicable, are required to maintain the UBO register or a register of Shareholders of the Company. The Legal Person shall, within (60) sixty days from the date of licensing or registration of the Legal Person, furnish the Registrar with the data contained in the Register of Beneficial Owner and Register of Partners or Shareholders.

6. Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organisations (AML-CFT Law)

As part of the UAE government’s efforts to fight these financial crimes, AML/CFT regulations have been issued, supported by the detailed guidelines issued by various supervisory Authorities, laying down the principles and best practices necessary to identify the financial crime instances and mitigate the risks.

Applicability of AML-CFT Law

The AML Law in UAE applies to financial institutions, banks, insurance companies, Designated Non-Financial Businesses and Professions (DNFBPs), and Virtual Asset Services Providers (VASPs) (including Free Zones & Financial Free Zones). 

Who is DNFBPs?

Anyone who is engaged in the following trade or business activities shall be considered a DNFBP:

a. Brokers and Real Estate Agents

b. Dealers in Precious Metals and Precious Stones 

c. Corporate Service Providers and Trusts

d. Lawyers, Notaries & Other Legal Professionals and Practitioners

e. Auditors and Accountants 

Registration for goAML

These DNFBPs must register with the integrated digital platform “goAML” system through which Suspicious Transaction Reports (STRs) and Suspicious Activity Reports (SARs) are reported to UAE Financial Intelligence Unit (UAEFIU).

7. Country by Country (CbC) Reporting 

Country by Country (CbC) Reporting is part of Action 13 of the Base Erosion and Profit Shifting (BEPS) initiative led by the Organisation for Economic Co-operation and Development (OECD) and the Group of Twenty (G20) industrialised nations, which requires large Multinational Groups of Entities (MNEs) to file a CbC Report.

Applicability of CbC Reporting

In the UAE, Country by Country (CbC) Reporting requirements are applicable to the UAE-headquartered MNE Groups with ‘financial reporting years’ starting on or after January 1, 2019.

The Companies who meet the following criteria is considered as a UAE-headquartered Groups of companies:

a. MNE Groups i.e., Groups which consist of two or more enterprises that are residents for tax purposes in different jurisdictions (an enterprise that is resident for tax purposes in one jurisdiction and has a taxable permanent establishment in another jurisdiction should be considered as a separate enterprise in the context of this definition); and

b. Have a total consolidated revenue that is equal to or more than AED 3,150,000,000 for the financial year preceding the concerned reporting year.

The CbC notification must be made no later than the last day of the financial reporting year of the MNE. For example, the MNE Group, whose financial year commences on the January 1, 2022, submit its CbC notification in the UAE no later than the December 31, 2022.

The CbC report should be filed within 12 months from the end of the reporting year of the MNE Group. E.g., with respect to the financial year commencing on January 1, 2019 and ending by December 31, 2019, the CbC Report should be filed no later than December 31, 2020.

8. Automatic Exchange of Information - Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS)

AEOI is the Automatic Exchange of Information between competent authorities of different jurisdictions pursuant to international agreements as implemented into domestic law to cooperate in the global effort towards tax transparency.

FATCA and CRS regimes require UAE Reporting Financial Institutions (“UAE RFIs”) to report information on certain financial accounts maintained by reportable account holders and/or controlling persons to the UAE Ministry of Finance (“UAE MoF”) on an annual basis.

UAE MoF then exchanges the data with the IRS and peer jurisdictions for FATCA and CRS, respectively. The UAE MoF may also have adhoc requests from time to time pursuant to the FATCA and CRS regimes.

FATCA / CRS System

All UAE Reporting Financial Institutions are required to register on the CRS/FATCA system and submit data and risk assessment by the stipulated domestic reporting deadline.

9. Environmental, Social and Governance (ESG)

Environmental, Social, Governance (ESG) is rising to the top of corporate agenda, driven primarily by the rise of responsible investing. ‘Responsible investing’ is the trending investment strategy adopted by many key investors seeking to account for both financial returns and social/environmental good in their investment decisions.

With the UAE in the spotlight as the host of the upcoming COP28 summit, ESG will remain will a focus for the government who will look to business to support the UAE national agenda and in turn, the UN Sustainable Development Goals (SDGs).

Listed PJSCs are required to prepare a sustainability report reflecting the company’s long-term strategy and its impact on the environment, society and the economy and governance. In addition, Listed PJSCs must comply with the Global Reporting Initiative (GRI) standards and also any sustainability standards and requirements that are issued by the DFM or ADX, depending on which market the Listed PJSC is listed on.

In 2020, UAE Securities and Commodities Authority (SCA), which regulates listed companies onshore in the UAE, issued a requirement for public joint stock companies listed on the Dubai Financial Market (DFM) or the Abu Dhabi Securities Exchange (ADX) to publish a sustainability report, within 90 days from each financial year end or before the date of the annual general assembly meeting, whichever is earlier.

The requirement mandates that the sustainability report must include details on the company’s long-term strategy and the impact of its activities on the environment, society, economy and governance.

10. Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) has gained significant traction in the United Arab Emirates (UAE) in recent years, due to government initiatives, evolving consumer preferences, talent attraction, stakeholder engagement, and sustainability goals.

CSR benefits businesses by enhancing reputation, attracting talent, fostering innovation, and driving cost savings. It benefits employees by boosting engagement, fostering a sense of purpose, and enhancing career prospects. Communities are benefited by promoting environmental protection, social development, and economic growth. It benefits the environment by reducing environmental impact, improving air quality, and protecting biodiversity.

Overall, CSR is becoming an integral part of the UAE business landscape, with businesses increasingly recognizing its value in enhancing reputation, attracting talent, building strong relationships with stakeholders, and contributing to a sustainable future. As the UAE strives to achieve its ambitious development goals, CSR will play an increasingly crucial role in driving responsible and sustainable practices across all sectors.

11. Maintain Books of Accounts and Annual Audit of Financial Records

For UAE mainland companies, it is necessary to get the financial records audited. However, it is not required to submit the audited accounts with the authorities in which they are registered.

For UAE free zone companies, audit requirements depend entirely on the jurisdiction of the free zone in which the companies are registered in. UAE free zone companies may need to get their financial records audited and submitted to their respective free zone authority in the time frame specified by each governing free zone.

Irrespective of the fact if companies require an audit of their financial statements or not, it is a general requirement for all businesses to maintain their records for a period of at least 5 years.

In the ambit of the introduction of Value Added Tax (VAT) effective on or after January 1, 2018 and Corporate Tax effective on or after June 1, 2023, maintenance of books of accounts are required to be kept for a minimum period of Five (5) years.

A Non-Resident Person, who is a juridical person, is required to register for Corporate Tax purposes and obtain a Tax Registration Number when the Non-Resident Person is subject to Corporate Tax due to having:

1. a Permanent Establishment ((i.e., a fixed place of Business or other form of presence in the UAE)) in the UAE (a facility, such as an office, a work location, premises or, in certain instances, machinery or equipment, which is used by the Non-Resident Person to carry on its Business in the UAE)

or

2. a nexus in the UAE 

· any area or land over which rights or interest or services can be created; or 

· any building, structure or engineering work attached to the land permanently or attached to the seabed; or 

· any fixture or equipment which makes up a permanent part of the land or is permanently attached to the building, structure or engineering work or attached to the seabed. 

Accordingly, a Person that is not a Resident Person in the UAE, and who derives income from the UAE should determine if the income qualifies as State Sourced Income. There will not be a need for the Non-Resident Person to register for Corporate Tax if the State Sourced Income they derive is not attributable to a UAE Permanent Establishment or a nexus in the UAE.

Corporate – Deductions

Expenditure that is not of a capital nature and is incurred wholly and exclusively for the purposes of the taxable person’s business should generally be tax deductible.
Depreciation and Amortization: The CT Law is silent on the tax treatment of depreciation / amortization.
Charitable contributions: Donations paid to entities that are non-qualifying public benefit entities will not be considered as deductible for UAE CT purposes.
Entertainment expenses: Expenses associated with entertainment of customers, shareholders, suppliers, and other business partners, such as meals, accommodation, transportation, admission fees, facilities, and equipment used for entertainment and other expenses specified by a Cabinet decision, can be deducted up to 50% of the amount incurred.
Bribes, kickbacks, and illegal payments: Bribes or other illicit payments will not be considered as deductible for UAE CT purposes.
Fine and penalties: Fines and penalties (other than compensation for damages for breach of the contract) will not be considered as deductible for UAE CT purposes.
Taxes: CT, recoverable VAT, and taxes imposed outside the United Arab Emirates will not be considered as deductible for UAE CT purposes.
Other non-deductible expenses: Dividends/profit distribution and other expenses specified in the Cabinet decision will not be considered as deductible for UAE CT purposes: Expenditure incurred in deriving Exempt Income.· Losses not connected with or arising out of the Taxable Person’s Business Amounts withdrawn from the Business by a natural person who is a Taxable Person or a partner in an Unincorporated Partnership.· Contributions made by employers to a private pension fund in respect of its employees which are not paid in the Tax Period or are in excess of 15% of the employee’s total remuneration in the relevant Tax Period.
Interest expenses: The UAE CT Law provides that net interest expense (NIE) up to 30% of tax adjusted earnings before interest taxes depreciation and amortization (EBITDA) will be deductible. However, this should not apply if the NIE for the relevant tax period does not exceed the threshold of AED 12 million. If this threshold is exceeded, the taxable person may deduct the higher of the threshold or 30% of EBITDA. 

 Ministerial Decision No. 114 of 2023 delineates that solely the International Financial Reporting  Standards ("IFRS") and the International Financial Reporting Standard for Small and Medium-sized  Entities ("IFRS for SMEs") hold validity in the UAE concerning Corporate Tax matters. 

Acceptable Accounting Methods (IFRS, IFRS for SMEs) For Corporate Tax purposes,  Taxable Persons may use IFRS for SMEs if they derive revenue not  exceeding AED 50 million in a Tax Period. 

However, if revenue exceeds the AED 50 million threshold,  only full IFRS is permissible.

Choice for Small Businesses having Revenue not exceeding AED 3 million.

Cash Basis of Accounting or Accrual Basis of Accounting •

Cash Basis of Accounting Under the Cash Basis of Accounting, Revenue, and expenditure are reported, for corporate tax purposes,  in the Tax Period in which the amounts are received or paid. The Cash Basis of Accounting applies equally to both Revenue and expenditure recognition. There is no balance sheet under the Cash Basis of Accounting.

Examples: Company B, a Taxable Person with a Financial Year ending on 31 December, using the Cash Basis of  Accounting pays its employees’ salaries on the 2nd day following each month, The salaries for the  month of December 2024 amount to AED 80,000 and are paid via bank transfer on 2 January 2025. As Company B uses the Cash Basis of Accounting, it will not recognise these salaries as an expense in  December 2024 (2024 Tax Period). Instead, the expense will be recorded in January 2025 (i.e. the 2025  Tax Period) when paid.

      However, payments can be made other than in cash, for example, credit or debit card payment, cheque payment, and in-kind payment. Where the payment is made through one of these methods, the actual  cash flow should be considered.

A debit card payment would be considered as an immediate payment for the buyer because the cash is  directly debited from their bank account.

     During its life cycle, a Taxable Person may face Revenue fluctuations. If Revenue derived during a Tax  Period exceeds AED 3 million by applying the Cash Basis of Accounting, the Taxable Person should  switch to the Accrual Basis of Accounting. 

Businesses that elect for Small Business Relief are able to prepare financial statements based on the  Cash Basis of Accounting if their revenue does not exceed AED 3 million.

       Accordingly, a Person may apply either IFRS (or IFRS for SMEs) or the Cash Basis of Accounting in  order to calculate their Revenue to determine if they are eligible for Small Business Relief. The Cash  Basis of Accounting is always used to determine eligibility to prepare Financial Statements on the Cash  Basis of Accounting for Corporate Tax purposes. Therefore, if IFRS or IFRS for SMEs is used to determine Revenue for the purpose of Small Business Relief, the cash basis still has to be used with regard to eligibility for the Cash Basis of Accounting.

Accrual Basis of Accounting Under the Accrual Basis of Accounting, Revenue, and expenditure are recognised when they are earned  or incurred, not necessarily when payments are received or made, or invoices are received or sent.         Example: Revenue recognition under the Accrual Basis of Accounting  Company X has a Financial Year ending on 30 April. 

On 5 April 2025 - Company X delivered consulting services worth AED 12,000 to Customer A. On 10 May 2025 - Company X sent Customer A an invoice.  • On 15 June 2025 - Customer A paid for the services.  Company X should recognise the Revenue as soon as the services are provided, as this is when it was earned. Therefore, the Revenue should be recorded on 5 April 2025, which falls in its Financial  Statements for the year ending on 30 April 2025. It does not matter when the invoice is issued or the payment is received. 

A further choice for Accrual Basis of Accounting

Realised versus Unrealised Basis of Accounting.

Realised gains are gains that have been converted into consideration received (for example,  cash) by the completion of a transaction. The same is equally applicable for losses. 

Unrealised gains are gains that have not been converted into consideration and can arise in respect of, for example, items subject to fair value accounting, such as financial instruments which are liquid and short-term. The same is equally applicable for losses. 

Effect of applying “Realised versus Unrealised” basis to Taxable Income

Taking into account gains and losses on a realisation basis means that unrealised gains and losses recorded in the Taxable Person’s Financial Statements would be disregarded for Corporate Tax purposes. However, for unrealisation basis, the treatment will be vice versa. 

     Banks and Insurance Providers that are Taxable Persons and that prepare Financial Statements on an  Accrual Basis of Accounting may elect to recognise gains and losses on a realisation basis only in  relation to all assets and liabilities held on the capital account at the end of a Tax Period. 

The election for the realisation basis (irrevocable) must be made by the Taxable Person during the first  Tax Period which practically will be at the time of submitting the first Tax Return. 

Administrative penalties As mentioned above, Taxable Persons are required under the Corporate Tax Law to use IFRS or IFRS  for SMEs (as applicable) to calculate Taxable Income. Failure to do so will be viewed as a violation of  the Corporate Tax Law and may result in administrative penalties.