The UAE has implemented a progressive corporate tax system, meaning that different income thresholds are taxed at different rates

0% tax on taxable income up to AED 375,000.

0% tax on taxable income up to AED 375,000.

This structure is designed to support small and medium-sized enterprises (SMEs), as businesses with income below AED 375,000 will not be subject to the 9% tax. For larger businesses or companies with substantial revenues, only the income above the AED 375,000 threshold will be taxed at 9%.

In addition, multinational enterprises (MNEs) that meet certain criteria under the OECD's Pillar Two framework for large companies may be subject to a different tax rate. Specifically, MNEs with global consolidated revenues exceeding EUR 750 million may face a higher tax rate to comply with international regulations.

The next step in determining if you need to pay the 9% corporate tax is understanding what qualifies as taxable income. Taxable income generally refers to the company’s net profit, as reported in its financial statements, prepared in accordance with international accounting standards

From the company's net profit, certain adjustments will be made to account for:

Non-deductible expenses: Expenses that are not deductible for tax purposes will be added back to the net profit.

Tax-exempt income: Income that is exempt from corporate tax will be subtracted from the net profit.

For example, the UAE might exclude certain types of capital gains, dividends, or profits from qualifying investments from taxable income, depending on the nature of the business and the applicable regulations.

Once these adjustments are made, the result is the company’s taxable income, which will then be subject to the 0% or 9% tax rate, depending on whether it exceeds AED 375,000.

The UAE is home to several free zones designed to attract foreign investment and stimulate economic growth. Historically, businesses operating in these free zones have enjoyed significant tax benefits, including 0% corporate tax.

The new corporate tax regime maintains these tax incentives for companies operating in free zones, but with some important conditions:

The company must not conduct business with the UAE mainland.

It must comply with free zone regulations and maintain the necessary licensing and status within the free zone.

Businesses that do engage in mainland activities, such as selling goods or providing services directly to customers in the UAE mainland, may be subject to corporate tax on the income generated from those activities, even if they are based in a free zone. It’s essential for free zone businesses to monitor their operations closely to ensure they maintain their tax-exempt status.:

Not all businesses in the UAE are subject to corporate tax. Certain categories of businesses and activities are exempt from the 9% tax. These exemptions include:

Natural resource extraction: Companies involved in extracting natural resources such as oil and gas are already taxed at the Emirate level and will not be subject to the federal corporate tax.

Government entities and wholly government-owned businesses:Some entities that are owned by the government may be exempt from corporate tax if they perform specific government functions.

Public benefit organizations: Non-profits and other organizations that provide public benefits (e.g., charities, educational institutions) may be exempt, provided they meet certain regulatory requirements.

Qualifying investment funds: Certain investment funds may be exempt from corporate tax to encourage investment in the UAE.

Additionally, pension funds, social security funds, and sovereign wealth funds are also typically exempt from corporate tax to encourage their operations within the country.

With the introduction of corporate tax, businesses will now have additional compliance obligations. All businesses, including those in free zones and those not subject to tax, will need to register with the Federal Tax Authority (FTA) and may be required to file annual corporate tax returns.

The government has introduced a framework for filing these tax returns electronically, which includes the requirement to:

Maintain proper accounting records in accordance with international financial reporting standards (IFRS).

File tax returns and pay any applicable tax within the specified timeframe (typically within 9 months following the end of the relevant financial year).

Even businesses that are not subject to tax (such as those in free zones or under the AED 375,000 threshold) may still have reporting obligations to ensure transparency and compliance with the new tax regulations.

If you’re a business owner in the UAE, the new corporate tax regime brings several practical considerations:

Assess Your Income:If your business generates income exceeding AED 375,000, you will be subject to the 9% tax on profits above this amount. It’s crucial to assess your current and projected income to understand the potential tax liability.

Evaluate Your Taxable Activities:For free zone businesses, ensure that you are not inadvertently engaging in activities that could subject you to mainland tax. Consult with a tax advisor to ensure your business model is compliant with the new regulations.

Implement Strong Financial Practices:With corporate tax in place, maintaining accurate financial records and ensuring compliance with accounting standards is more important than ever. Consider investing in accounting software or hiring professionals to manage your books

Plan for the Future:The introduction of corporate tax represents a shift in the UAE’s business landscape. As a business owner, it’s essential to adapt to this change by planning for potential tax liabilities and understanding how it might affect your cash flow and investment decisions.

Whether or not you are required to pay the 9% corporate tax in the UAE depends on several factors:

Taxable income exceeding AED 375,000 will be subject to the 9% tax.

Free zone businesses may still enjoy a 0% tax rate if they meet the conditions for tax incentives.

Exempt businesses, such as those involved in natural resource extraction or public benefit organizations, will not be subject to corporate tax.

By understanding the corporate tax system, its thresholds, and its exemptions, you can better position your business for long-term success. Consult with tax advisors and professionals to ensure that your business remains compliant and benefits from any applicable incentives.