The United Arab Emirates will introduce a 9 % corporate tax on profits generated within the country, but the new regime contains several exemptions and distinct rules for mainland and free‑zone entities.
Scope of the corporate tax
- Effective date: The tax applies to financial years starting after June 2023, i.e., the 2024 fiscal year (January – December 2024).
- Taxable base: Only income earned on activities carried out in the UAE is subject to the tax. Income earned abroad is excluded.
- Exemption threshold: The first USD 100 000 of taxable profit is exempt from the 9 % rate.
Personal income and capital gains
- No personal income tax: Owners can draw salaries or other personal income from the company without incurring UAE tax.
- Capital gains: Not taxed under the current framework.
Free‑zone companies
- Current exemption: Free‑zone entities are not subject to the 9 % corporate tax at present.
- Future risk: Taxation of free‑zone companies may be introduced in 3–5 years, though details are not yet final.
- Compliance: Free‑zone firms must still file annual tax returns and may be audited, similar to a U.S. LLC owned by a non‑resident: a declaration of revenue, expenses, and profit is required, but no tax is due unless the exemption is exceeded.
Mainland companies
- Taxable income: Mainland entities are liable for the 9 % tax on profits above the USD 100 k exemption.
- VAT: Companies operating in the mainland must register for value‑added tax (VAT) at 5 % on sales, effective from 2024. Registration is advisable even for free‑zone firms that might be required to do so later.
- Mixed operations: If a business earns both free‑zone and mainland income, the two streams should be separated. Mainland income should be reported under a mainland licence, while the free‑zone portion remains exempt.
Filing and audit obligations
- Tax returns: Every company—free‑zone or mainland—must submit an annual corporate tax return.
- Audits: The UAE tax authority may audit free‑zone firms to verify that they are not conducting mainland sales.
- Closing a free‑zone company: An audit will be performed before the licence is terminated.
Interaction with foreign tax obligations
- U.S. citizens: Federal U.S. tax (currently 10.5 %) is payable on worldwide income. Any UAE tax paid can be credited against the U.S. liability, potentially eliminating the UAE tax due.
- Foreign tax credit: Taxes paid to another jurisdiction are deducted from the UAE corporate tax owed, but no additional tax credits or refunds are available beyond this offset.
Practical steps for businesses
- Determine the tax residency of income – separate mainland and free‑zone revenue streams.
- Maintain detailed records of income, expenses, and profit for each entity.
- File separate tax returns for each company, ensuring the exemption threshold is applied correctly.
- Register for VAT (5 %) if any activity occurs on the mainland, and consider early registration for free‑zone firms to avoid future compulsory registration.
- Monitor regulatory updates – the tax authority may issue guidance on free‑zone taxation and VAT obligations in the coming months.
- Consult qualified tax advisors familiar with UAE law, especially for complex structures or cross‑border tax credit calculations.
Overall, the 9 % corporate tax will primarily affect large mainland enterprises with substantial profits. Most free‑zone businesses, especially those serving clients outside the UAE, will continue to operate tax‑free, subject only to filing and audit requirements.
