New UAE Corporate Tax Law

Tim Elliott
Welcome to Lawgical, the UAE’s first, and still only, regular legal podcast. My name is Tim Elliott. As always, I’m at the Dubai-based legal firm, Yamalova & Plewka. We’re in Jumeirah Lakes Towers here in Dubai, and I’m with Ludmila Yamalova, the Managing Partner. Nice to see you.

Ludmila Yamalova
Good to be here with you, Tim.

Tim Elliott
Ludmila, we are recording on June 1, 2023. June 1, 2023 heralds a new era. Corporate tax has been officially—I was going to say launched. It’s not quite the right word. It’s introduced today. This is kind of day one, I suppose, of people trying to understand what the tax means, the threshold, the rate, and I guess also how to register. Those are the things I wanted to talk to you about today. Just briefly really, it’s incumbent on lots of different people—and we’ll talk about who—to register for corporate tax from today’s date, isn’t it? Let’s run through registration.

Ludmila Yamalova
Yes. First of all, what we’re talking about is what is otherwise known as the UAE corporate tax law.

Tim Elliott
Yes.

Ludmila Yamalova
Kind of a scary phrase, especially for all of those who have lived and worked and run businesses in the UAE for however many years. Until recently, the word “tax” was nonexistent in our vocabulary apart from VAT, which is the value-added tax introduced in 2018. That was enough of a shocker back then, but we have absorbed it and accepted it as just moving along with the times. Since VAT is not a direct tax, it didn’t really affect us so much personally, at least for many.

Now this is something different. This is now the UAE corporate tax law. Now, this particular tax does affect, in particular, businesses and people or natural persons directly. This is a direct tax versus an indirect tax like VAT.

This menacing concept, in a word or phrase, was introduced by virtue of the UAE Federal Decree Law No. 47 of 2022 on the taxation of corporations and businesses. That is the name of the law. The law was introduced in 2022, but as you rightfully said, it will start applying—well, the application or who it’s going to start applying to—will kick in after in 2023. In particular, it will start applying for any businesses as of June 1, 2023, which is right now for any businesses whose fiscal or financial year starts in June.

For all those businesses for whom the fiscal year starts in June, then as of today, they will now, technically speaking, be subject to the UAE corporate tax law, and we are going to go through what that means. But for now, it’s more procedurally rather than substantively, the definition of being subject to it. If you are a business and your fiscal year is June every year, so today’s the day when you are now officially subject to the UAE corporate tax. Also, as part of that, you will need to register with the UAE relevant authorities in the government.

Now, for all those businesses for whom the fiscal year starts on the calendar year, i.e., January 1, they will become subject to this law as of January 2024. So today is not the day—the D-Day—for all of the businesses in the UAE. It is really only for those whose fiscal year starts as of June. For all the other businesses, including, for example, our business, we operate on a calendar year, so we will become subject to this law as of January 2024.

Tim Elliott
You can register now, is the point. The platform, EmaraTax, is that right?

Ludmila Yamalova
Correct. Maybe it’s not so much the obligation yet, but the ability to register became available on May 15, 2023. The registration is done through what’s called the EmaraTax platform, which was launched by the UAE Federal Tax Authority (FTA).

But at present, at least as of May and as of today as well, the registration is only open for private companies or public joint stock companies. It is not yet available for free zones, so any businesses that are based in free zones, they cannot yet register. But certainly, the ability for those businesses, for free zones to be registered will become available later in the year.

This is another topic maybe for another day, but this does exactly mean what I just said, which is free zone companies and free zone businesses, even though they’re based in free zones, they are still subject to this law to an extent, and they still have to register with the authorities, with the FTA through this EmaraTax platform, even if they’re in free zones.

Similarly, the registration for other categories of taxable persons, such as natural persons, who are conducting business or business activity, will also be open later. For example, if you’re a freelancer, you also ultimately would have to register, and you will be subject to this law. As part of being subject to the law, you will have to register. You may not have to pay tax—we’ll come back to that—but you are subject to the law because you are a business, even if you are just a freelancer, and you will have to register.

But right now, the D-Day of June 1, which is today, it does not quite apply to, let’s say, natural persons because the system is not open, nor to free zone companies. Our firm is based in a free zone, so we also cannot register yet. It’s a rolling system. The services are being bolstered and refined as we go through the process, so right now it’s open to, once again, private companies and public joint stock companies. As time goes on, more and more businesses will be able to register.

Just a little bit about this platform, the EmaraTax platform—it’s a government platform. It’s not to be misunderstood. It’s not a private service. It is a government platform and integrates entities such as the UAE Central Bank, the UAE Pass, which we’ve talked about before. We even have a special podcast episode on just the UAE Pass and why it’s important. And voila, this is another example of why the UAE Pass is important.

You register and this is integrated. Your ability to integrate and register for this EmaraTax platform is linked with your UAE Pass and the UAE Central Bank and to basically other government services. We haven’t really used it ourselves because it’s not available to us, but at least by the representations of various government authorities, the whole EmaraTax platform is meant to be intuitive and easy to use, with various help options and will even be available for mobile soon.

All, obviously, with the objective of providing you no excuse not to register. It’s going to be very easy to register and very easy to receive answers so that you have zero excuse to claim, “I didn’t understand,” or “I couldn’t register.” Yes. That is the registration. It is now open for many businesses, and certainly, all those businesses whose fiscal year starts as of June 1 are already subject to this corporate tax.

Tim Elliott
Okay. Let’s talk about the tax rate and the thresholds. 9% is the headline figure, isn’t it?

Ludmila Yamalova
Yes. So, 9%. For those of us who didn’t even have tax in our vocabulary, it’s quite a lot.

Tim Elliott
The T-word.

Ludmila Yamalova
Exactly. I don’t want to say it out loud too much. But for many other businesses and for many individuals who are doing business as natural persons, 9% is still not very much if you compare it to other countries. That’s the other side of the argument.

You can compare it to certain European countries or Nordic countries where the tax rate can go up to 50% to 60%, and 9% is fairly moderate. But yes, the tax rate is 9%. It does not apply to all businesses. Not all businesses have to pay.

It only applies to income for businesses whose income is more than AED 375,000, which is about US 100,000 per year. If your income is below AED 375,000, the tax rate is 0%. So, it doesn’t apply to everyone’s income across the board.

It applies only to income above that threshold. For example, if your income is AED 400,000, you’re paying 9% only on the AED 25,000 above the threshold—not on the full AED 400,000. That’s an important caveat. It’s not your entire income that is taxed, just the margin above the threshold.

It’s also important to clarify that this is an income tax, not a revenue tax. This means you’re taxed on your income, not your revenue. For example, as a business, you might make AED 1,000,000 a year in revenue, but that’s not your income. Revenue refers to the money you receive from your clients.

Income is what’s left after you subtract your expenses from the revenue. Let’s say your expenses are AED 800,000, so your income is AED 200,000. Since AED 200,000 is below the threshold, you don’t pay any tax.

So, this is important because businesses that haven’t been doing proper bookkeeping or accounting will now have to change their practices significantly. They’ll need to maintain detailed records of all their expenses to ensure they accurately calculate and document their income. This will likely lead to significant operational changes for many businesses.

Tim Elliott
That’s an interesting point to highlight, actually. There’s also some tax relief for small businesses under the new law, Ludmila.

Ludmila Yamalova
Yes, there is. The small business relief is outlined in Ministerial Decision No. 73 of 2023. It’s called the Small Business Corporate Tax Relief.

According to this regulation, businesses or taxable persons whose income is below AED 3,000,000 per year for each reportable period are not subject to the 9% corporate tax. They will be taxed at 0%.

However, it’s important to note that this relief is not automatic. Eligible businesses must apply for it. Just because your income is below AED 3,000,000 doesn’t mean you’re automatically exempt from corporate tax. You have to specifically apply for the relief.

There are also exceptions. For example, if you’re part of a multinational enterprise group, you cannot benefit from the small business relief. Similarly, certain categories of businesses, like those linked to larger corporations, are excluded.

If your income exceeds AED 3,000,000, the standard 9% rate applies on the margin above that amount. So, if your income starts increasing above the threshold, you must start paying the tax.

This relief provides a cushion for smaller businesses, allowing them to operate without the immediate burden of corporate tax. But again, eligible businesses must actively apply for the relief to benefit from it.

Tim Elliott
Finally, I wanted to ask about obligations. Corporate tax in the UAE is, as of today, part of the country’s legislative framework. What do businesses need to know about their obligations?

Ludmila Yamalova
There are a few important points to highlight:

1. Registration
   All businesses, regardless of their size or type—whether they are legal entities or natural persons conducting business—are required to register with the Federal Tax Authority (FTA). This applies even to freelancers or small businesses operating in free zones.

For example, if you’re a freelancer, like a web designer or a songwriter, even if you don’t have a license, you’re still conducting business. In that case, you’re considered a natural person under the law and are subject to its provisions. Similarly, if you own multiple properties and manage them as a business, even in your own name, you are classified as a natural person conducting business and are therefore subject to the corporate tax law.

2. Free Zones
   The law applies to all businesses in the UAE, including free zones. There was a lot of speculation about whether free zone companies would be excluded from the corporate tax law, but the answer is that they are included.

While there are some exemptions and exceptions for certain categories, the general rule is that all free zone companies are subject to the law. This includes small companies in free zones, such as those in Ajman, Fujairah, Ras Al Khaimah, and Umm Al Quwain. Just being in a free zone doesn’t mean you’re excluded from the law.

3. Tax Returns
   All taxable persons—whether legal or natural—must register with the FTA and file annual tax returns. This obligation applies even if your income is below the taxable threshold of AED 375,000. For instance, if you’re a free zone business with a small consultancy license and make AED 100,000 a year, you still have to register with the FTA and file a tax return, even though you won’t pay any tax.
4. Bookkeeping
   All businesses must maintain proper financial records to accurately calculate and report their income. While only businesses earning over AED 50,000,000 annually are required to have audited financials, all businesses must keep detailed bookkeeping records. This will help them calculate their income accurately and substantiate their tax filings.

The obligation to register depends on your fiscal year. If your fiscal year starts in June, you need to register now. If your fiscal year starts in January, like ours, you’ll need to register by January 2024.

Tim Elliott
And you need a tax registration number from the Federal Tax Authority as part of this process, right?

Ludmila Yamalova
Correct. When you register with the FTA, you’ll be issued a Tax Registration Number (TRN). This number is essential for filing your tax returns and complying with corporate tax obligations.

There have also been recent clarifications regarding audited financials. Not all businesses are required to provide audited accounts. Only businesses earning more than AED 50,000,000 per year must have their financials audited by a professional accountant.

Smaller businesses don’t need audited accounts but are still required to maintain proper records and submit their tax returns. This clarification is a good example of how the corporate tax framework is evolving, with more regulations and details being issued as we go.

Tim Elliott
It sounds like this will lead to significant changes for businesses across the UAE.

Ludmila Yamalova
Absolutely. By January 1, 2024, all businesses and taxable persons must be registered with the FTA and maintain proper financial records with this law in mind. Tax payments for the 2024 fiscal year will be due by mid-2025.

This will have a significant impact on how businesses operate in the UAE. It’s a major shift in the country’s business landscape, but it’s also part of the UAE’s logical evolution as a global business hub.

Tim Elliott
This is certainly a big change and something we’ll be discussing in future episodes as the law continues to evolve. For now, that’s another edition of Lawgical. Ludmila, thank you for your expertise as always.

Ludmila Yamalova
Thank you, Tim, for another engaging discussion.

Tim Elliott
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