Liable Incomes on Corporate Tax in Dubai

Liable incomes on corporate tax refer to the categories of income subject to taxation under the UAE's corporate tax framework. All annual taxable profits that fall under AED 375,000 shall be subject to a zero rate. All annual taxable profits above AED 375,000 shall be subject to a 9% rate. Liable incomes include various forms of business profits, including revenue generated from goods and services, investment returns, and other business-related earnings. Understanding these liable incomes is crucial for businesses operating in Dubai, as it directly impacts their tax obligations and overall financial planning. Accurate identification and reporting of these incomes are essential to ensure compliance with local regulations and optimize tax liabilities.

The UAE introduced a 9% corporate tax in June, but businesses operating in free zones have special rules. A 0% corporate tax rate in Dubai provides substantial benefits to businesses that are operating in free zones. The framework of corporate tax in Dubai is distinctive and advantageous, providing companies with substantial benefits.

Who Needs to Register for UAE Corporate Tax?

All businesses and entities operating in the UAE that generate taxable income are required to register for corporate tax, regardless of their revenue. Corporate tax registration applies to both juridical persons, such as corporations, and natural persons who are self-employed and meet the income criteria.

The primary groups required to register for corporate tax in the UAE include:

• Resident and Non-resident Businesses: All businesses and individuals conducting business activities within the UAE, whether based in the mainland or free zones, need to register and obtain a Corporate Tax Registration Number.
• Free Zone Entities: Businesses within the UAE's free zones are also mandated to register, even if they are eligible for a 0% tax rate on specific incomes. Registration ensures compliance and readiness for any tax obligations.
• Entities Exceeding AED 375,000 in Revenue: Although all businesses are required to register, taxable income under AED 375,000 is exempt from tax. However, businesses earning above this threshold must pay corporate tax at the applicable rate.
• Inactive Businesses: Even if a business is inactive, it must still register for corporate tax to avoid penalties for non-compliance.

In summary, the UAE’s corporate tax registration requirement encompasses nearly all business types to enhance transparency and streamline tax administration across the country

Who is Exempted from UAE Corporate Tax?

Certain entities and activities in the UAE are exempt from corporate tax, specifically to support social welfare and specific sectors. These exemptions include:

• Government Entities: UAE federal and local government bodies are fully exempt from corporate tax, allowing them to focus on non-commercial activities.
• Extractive and Non-Extractive Natural Resource Businesses: Companies engaged in the extraction of natural resources, such as oil and gas, are exempt from corporate tax under the UAE's existing tax regime for natural resources
• Charities and Public Benefit Organizations: Registered non-profit organizations, including charities and other public benefit organizations, receive exemptions to support their non-commercial activities aimed at public welfare.
• Pension and Social Security Funds: Public and private pension funds, as well as social security funds that provide retirement benefits, are exempt from corporate tax, aligning with the government’s social security goals
• Investment Funds: Investment funds, particularly qualifying investment funds managed by authorized financial institutions, are also exempt, incentivizing capital investments in the UAE.
• Wholly-Owned UAE Subsidiaries of Exempt Entities: UAE-based subsidiaries fully owned by tax-exempt entities may also qualify for exemption, provided they engage only in qualifying transactions and do not carry out other taxable commercial activities

These exemptions aim to boost economic development, support government objectives, and enable organizations involved in social welfare to operate tax-free in the UAE.

Qualifying for 0% Tax in Free Zones

There is 0% corporate tax in free zones, but companies need to qualify as Qualifying Free Zone Persons (QFZP). To achieve this, their income must be classified as Qualifying Income under the UAE's corporate tax law.

• Free zone businesses with Qualifying Income pay 0% corporate tax.
• A company that does not meet the Qualifying Income criteria is taxed at 9% and loses its QFZP status.

What is Qualifying Income?

Qualifying Income is any income earned by a QFZP that qualifies for the 0% tax rate. This income must come from business activities or transactions that are considered qualifying within the specific free zone.

Criteria to Determine Qualifying Income

A few factors we determine if someone qualifies for certain income benefits in a free zone:

• If they make money from doing business with other folks in the free zone, except for certain types of activities that don't count.
• If they earn money from doing business with people outside the free zone, but only for activities that count.
• Any other money they make that meets certain small amount requirements.

We consider income as coming from transactions with someone in the free zone if that person actually benefits from the stuff or services being bought.

Now, Who Exactly Counts as Someone Who Benefits?

Beneficial recipients enjoy what is purchased without being obliged to pass it on to someone else.

In addition, we verify if the person in the free zone has a permanent business setup in the country. Then anyone from outside the country can be considered a member of the free zone.

Qualifying Income for Domestic or Foreign Permanent Establishment

Business operations in the free zone are subject to 9% corporate tax in Dubai. Qualifying Free Zone individuals' income is considered taxable income.

Income earned by a Qualifying Free Zone Person through a Domestic or Foreign Permanent Establishment will be treated as belonging to an independent entity related to the Qualifying Free Zone Person.

The Qualifying Income for Immovable Property Located in a Free Zone

Income derived from transactions involving immovable property located in a Free Zone is considered taxable income and is taxed as follows:

• Transactions with Non-Free Zone Persons involving Commercial Property.
• Immovable property transactions with any individual other than a commercial property owner.

The taxable income from these transactions for a specific tax period is the income payable to the immovable property calculated based on the relevant provisions of the Corporate Tax Law.

At Reyson Badger, we're the experts in tax consulting, especially when it comes to Corporate Tax Law. We'll keep you posted on all the latest changes regarding Corporate Tax in Free Zones. With our team of FTA Approved Corporate Tax consultants in the UAE, we provide a complete solution for Free Zones. We can help you ensure your income qualifies for 0% corporate tax in Dubai, as well as meet all the requirements.