Blog Blog

• July 28, 2023
• Dubai, United Arab Emirates

Tax Period:

In a momentous economic development, the United Arab Emirates (UAE) has taken a major step towards enhancing its fiscal stability and attracting foreign investments. As of June 1, 2023, the UAE has implemented a corporate tax as part of its efforts to align its tax framework with global standards and adapt to the changing global economic landscape.

Historically known for its tax-friendly environment, the UAE has been a top destination for foreign investors and entrepreneurs, owing to its business-friendly policies, zero personal income tax, and minimal corporate tax regulations. However, in response to international pressure to adopt more transparent tax practices, the UAE government has decided to introduce a 9% corporate tax rate for corporations and businesses.

The new corporate tax will have significant implications for foreign companies and individuals conducting business or making investments in the UAE. Non-resident individuals will generally be subject to corporate tax if they have a Permanent Establishment or Nexus determined by the Cabinet in the UAE.

Under this new tax regime, income attributable to such Permanent Establishment and Nexus will be taxed at 9% if it exceeds AED 375,000. Non-resident individuals falling under these criteria will need to register for corporate tax and fulfill their reporting and filing obligations.

However, there are exceptions to the corporate tax rule. Non-resident individuals whose revenue from business activities in the UAE does not exceed AED 1 Million will be exempt from corporate tax and will not be required to obtain corporate tax registration. Additionally, wages, personal investment income, and real estate income will remain exempt from corporate tax.

It is important to understand the concept of Permanent Establishment, which generally refers to a fixed place of business, such as an office, branch, factory, workshop, warehouse, or even certain construction or installation projects and services provided through employees. The presence of a dependent agent with authority to conclude contracts on behalf of the enterprise may also constitute a Permanent Establishment.

As of now, the Cabinet has not issued a specific decision regarding the Nexus for Individuals in the UAE, although they have done so for foreign entities.

Non-resident Individuals may also be subject to withholding tax on certain types of UAE-sourced income if they derive "UAE Sourced Income" without having a Permanent Establishment. The current withholding tax rate stands at 0%, and these individuals are not required to register for corporate tax.

UAE Sourced Income includes income derived from UAE residents or derived from UAE non-residents but connected to a Permanent Establishment, as well as income derived from activities performed, assets located, capital invested, rights used, or services performed or benefited from in the UAE. This encompasses business income from the sale of goods or services, investment income such as capital gains, dividends, royalties, interest, insurance, and more.

However, dividends earned by non-resident individuals from UAE companies and capital gains and other incomes from UAE companies in which they have a 5% or more interest and satisfy certain conditions (participation exemption) will be exempt from corporate tax. Nonetheless, these incomes may still be subject to withholding tax.

Non-resident Individuals must refer to the tax treaties between the UAE and their home countries to determine their tax obligations in the UAE. The UAE has an extensive tax treaty network that helps determine Permanent Establishment and the allocation of taxable profits between the home country and the UAE. These treaties also provide guidelines on income taxation, the prevention of double taxation, claiming of withholding tax credits, and dispute resolution mechanisms.

Overall, the introduction of corporate tax in the UAE marks a significant shift in the country's taxation policy, reflecting its commitment to global tax standards and its continued efforts to remain an attractive destination for foreign investments.