For a long time, the UAE was a tax-free haven that attracted entrepreneurs and corporations from across the world. Ever since 2023, in the wake of the UAE Corporate Tax Law, the country took a giant step toward conforming to global standards on taxation, thus inducing transparency and supporting the visions for long-term economic sustenance. For business setup in UAE, understanding this change is not just advantageous, but it is a must.
What Is the UAE Corporate Tax?
The UAE Corporate Tax is a direct tax levied on the net profits of businesses that operate in the country. The said law that went into force on 1 June 2023, federal-wise, is focusing on strengthening the financial setup of the country. Somehow, from a superficial point of view, it seems a big divergence away from the usual tax-free promises of the UAE; still, with the systems through which this is carried out, it promotes entrepreneurship and investment, particularly for SMEs.
Who Is Subject to the Law?
The law applies to a varied category of entities. All businesses incorporated in the UAE, whether they are mainland companies or free zone companies, are subject to the tax. Foreign companies having permanent establishment in the UAE, or gaining income which is connected with operations in the UAE, are also subject to it.
In addition, individuals who conduct business activities under a commercial license are considered taxable. This includes freelancers and sole proprietors if their business income crosses certain thresholds. However, personal income from employment, real estate, and investment returns is not subject to corporate tax.
Tax Rate and Its Impacts
The UAE has established a progressive and business-friendly rate structure. For taxable income up to AED 375,000, a 0% rate applies, providing a great deal of breathing space for startups and smaller businesses. Income exceeding this threshold is taxed at a 9% rate.
Under the OECD global minimum tax regime, a higher effective tax of 15% may apply to large multinational groups that satisfy certain global criteria, namely consolidated global revenues of at least €750 million. This is to ensure being fairly taxed andgo avoid shifting profits into no or low-tax jurisdictions.
Who’s Exempt?
Certain entities enjoy full exemption from the corporate tax regime. These include government bodies, government-controlled entities carrying out sovereign activities, and qualifying public benefit organisations. Other exemptions apply to extractive businesses and some investment or pension funds, provided they meet specific regulatory conditions.
Additionally, small business relief is available to support resident businesses with annual revenues not exceeding AED 3 million. This provision is especially valuable to new entrepreneurs during the early stages of operation and is valid until the end of 2026.
What About Free Zone Companies?
Business setup in UAE freezone areas has long been attractive due to tax incentives and flexible ownership structures. However, under the new law, companies in free zones must meet certain criteria to continue enjoying a 0% corporate tax rate on qualifying income. These criteria include maintaining adequate substance, such as office space and employees in the UAE and ensuring income falls within approved qualifying activities.
Non-qualifying income, such as transactions with mainland entities, may be taxed at 9%. While some de minimis exceptions exist, exceeding these limits could mean losing the free zone tax benefit. For new businesses, choosing the right free zone and activity becomes crucial under the new tax regime.
Registration and Compliance: A Must-Do
All taxable persons are required to register with the Federal Tax Authority (FTA), regardless of whether they expect to pay tax or not. Registration deadlines vary based on the license issue date and the nature of the business. For new businesses, it’s critical to register within the stipulated timeframe to avoid penalties.
After registration, companies are expected to file an annual corporate tax return and settle any tax liabilities within nine months following the end of the relevant financial year. Maintaining proper financial records is also mandatory, with a requirement to retain documentation for at least seven years. For many businesses, especially small ones, this means transitioning to well-organised accounting systems and possibly hiring professional tax advisors.
Transfer Pricing and Documentation
One of the more technical aspects of the law involves transfer pricing regulations. These rules apply to transactions between related parties and require businesses to transact at market value, referred to as the “arm’s length principle.” Businesses must document these transactions carefully and be ready to justify pricing methods if audited. For new businesses with parent companies abroad or multiple entities in the UAE, this area deserves close attention.
Common Pitfalls to Avoid
Many businesses may mistakenly assume that free zone registration guarantees exemption from corporate tax. In reality, failure to meet qualifying conditions or generate only qualifying income can lead to unexpected liabilities. Another common oversight is missing registration deadlines or not understanding the impact of permanent establishments created through agency or repeated service delivery.
Lack of proper bookkeeping, underestimating the complexity of transfer pricing, or failing to identify related-party transactions are also frequent challenges. New businesses should ensure they establish a solid tax compliance strategy from day one, which includes routine financial reporting, qualified consultation, and regular tax health checks.
How the Tax Affects Business Strategy
The introduction of corporate tax is more than a compliance issue; it has strategic implications. Businesses must now reevaluate their pricing models, profit margins, and reinvestment decisions. For those with operations in both free zones and the mainland, the tax structure may influence how and where services are offered or where goods are sourced.
Choosing the right corporate structure becomes more important. Should you register a holding company? Can group relief be utilised effectively? These questions are now central to both short-term planning and long-term growth. For those considering mainland company formation in UAE, corporate tax implications must be factored into the decision-making process.
Moreover, the need for compliance may encourage businesses to formalise and professionalise their operations earlier in their lifecycle. This includes hiring accountants, seeking advisory support, and investing in financial management tools, steps that ultimately contribute to business maturity and resilience.
The UAE’s Corporate Tax Law is not a step backwards, but rather a calibrated shift toward global best practices. The regime is designed to remain competitive while enabling sustainable development and fiscal responsibility. With tax credits for R&D, talent development, and potentially broader incentives in the pipeline, businesses that align early with these changes stand to benefit the most.
For new businesses, this is an opportunity to start strong. By setting up with clarity, registering on time, maintaining accurate records, and thinking strategically about tax, entrepreneurs can position themselves for long-term success in a more structured and predictable business environment. Anyone considering company formation in UAE should factor in these requirements from the outset. To learn more about the UAE Corporate Tax Law or to seek professional assistance, connect with Damaar.
