United Arab Emirates

Foreign tax credit

A credit is available for foreign taxes paid on a UAE taxable person’s income. The foreign tax credit is limited to the amount of CT due on the relevant income. Any unutilised foreign tax credit cannot be carried forward or back and will ultimately be lost.

Small business relief

The UAE CT Law provides tax relief for small businesses. A tax resident person may elect to be treated as not having derived any taxable income where the revenue for the relevant and previous tax periods does not exceed AED 3 million during each relevant tax year. If such threshold is exceeded, then the taxable person will be subject to UAE CT at the relevant rates as provided under the CT Law. The abovementioned revenue threshold will be applicable starting on or after 1 June 2023. However, it will only apply to subsequent tax periods that end before or on 31 December 2026. If a tax resident person applies for ’small business relief‘, certain provisions of the CT Law will not apply, such as exempt income, reliefs, deductions, tax loss relief, and transfer pricing compliance requirements, as specified in the relevant chapters of the CT Law. The FTA may request any relevant records or supporting information to verify the compliance within a timeline (to be confirmed). If a taxable person intentionally separates its business solely to meet the threshold of AED 3 million and elects not to be subject to UAE CT, the FTA can make compensating adjustments to the UAE CT liability of the relevant taxable person.

Transfers within a qualifying group

The UAE CT Law provides tax relief on intra-group transfer of assets or liabilities between taxable persons that are members of the same qualifying group. Taxable persons will be treated as members of the same qualifying group if all the following conditions are met:

• The taxable persons are tax resident entities, or non-residents that have a PE in the United Arab Emirates.
• The taxable persons are at least 75% commonly owned and have the same financial year and prepare the financial statements using the same accounting standards.
• None of the taxable persons are regarded as an exempt person or a QFZP.

There is a clawback period of two years from the date of initial transfer in the case there is a subsequent transfer of such asset or liability outside the permitted group or where transferor or transferee ceases to be a member of the permitted group.

Business restructuring relief

Similar to intra-group transfer of assets or liabilities within a qualifying group, the UAE CT Law provides tax relief on mergers, spin-offs, and other corporate restructuring transactions where the whole or an independent part of the business is being transferred in exchange for shares or other ownership interest, provided the following conditions are met:

• The transfer is undertaken in accordance with the applicable regulations in the United Arab Emirates.
• The taxable persons are resident persons, or non-resident persons that have a PE in the United Arab Emirates.
• None of the persons are regarded as an exempt person or a QFZP.
• They have the same financial year and prepare the financial statements using the same accounting standards.
• The transfer is undertaken for valid commercial or economic reasons.

There is a claw back period of two years from the date of the transfer if there is a subsequent transfer to a third party, or shares or ownership interests received are transferred or otherwise disposed of, and the gains or losses on the initial transfer will be reported in the period in which the subsequent transfer is made to the third-party.

Free Zones (FZs)

Companies (and branches in some cases) registered in Free Zone are considered taxable persons under the UAE CT Law and are required to meet normal compliance obligations, including transfer pricing requirements. However, provided a Free Zone entity meets the conditions to be considered a Qualifying Free Zone Person (QFZP), it should be eligible for a 0% UAE CT rate on its qualifying income. The income of a QFZP that is not qualifying income will be taxed at a 9% CT rate.

In order to qualify for the 0% UAE CT rate, a QFZP must meet all of the following conditions:

• Be a Free Zone person (i.e. a juridical person incorporated, established, or otherwise registered in a Free Zone, including branches).
• Maintain adequate substance in the United Arab Emirates (in a Free Zone).
• Derive qualifying income.
• Not have made an election to be subject to the standard UAE CT regime.
• Comply with all transfer pricing rules and documentation requirements.
• Its non-qualifying revenue does not exceed the de minimis requirements.
• Prepares audited financial statements.

Adequate substance

In order to maintain adequate substance in a Free Zone, the QFZP’s core income-generating activities (CIGAs) shall be undertaken in a Free Zone and the QFZP must maintain adequate assets, adequate number of qualified employees, and incur an adequate amount of operating expenditures.

The QFZP may opt to outsource its CIGAs to a related party in a Free Zone or a third party in a Free Zone, and the QFZP must have adequate supervision of the outsourced activity.

Qualifying income

Qualifying income includes the following:

• Income derived from transactions with other Free Zone persons, except for income derived from ‘excluded activities’.
• Income derived from transactions with a non-Free Zone person, but only in respect of ‘qualifying activities’ that are not ‘excluded activities’.
• Income derived from the ownership or exploitation of qualifying intellectual property (IP).
• Any other income, provided that the QFZP satisfies the de minimis requirements.

Excluded activities

Excluded activities include the following:

• Transactions with natural persons (subject to certain exceptions under ‘qualifying activities’ related to shipping and aircraft plus fund, wealth, and investment management).
• Regulated banking, finance, leasing, and insurance activities.
• Ownership or exploitation of immovable property, except for transactions with Free Zone persons in relation to commercial property located in a Free Zone.

Qualifying activities

Qualifying activities include the following:

• Manufacturing or processing of goods or materials.
• Trading of qualifying commodities.
• Holding of shares and other securities for investment purposes.
• Ownership, management, and operation of ships.
• Regulated reinsurance, fund management, wealth, and investment management.
• Headquarter, treasury, and financing services to related parties.
• Financing and leasing of aircraft.
• Logistics.
• Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof, or processes or alters such goods or materials, or parts thereof, for the purposes of sale or resale.
• Any activities that are ancillary to the activities listed above (i.e. serve no independent function but are necessary for the performance of the main qualifying activity).

The activity of distributing goods or materials must be undertaken in or from a Designated Zone, and the goods or materials entering the state must be imported through the Designated Zone.

Generally, the listed excluded and qualifying activities shall have the meaning provided under the respective laws regulating these activities, unless otherwise prescribed.

De minimis requirements

The de minimis requirements will be satisfied where non-qualifying revenue does not exceed 5% of total revenue or AED 5 million, whichever is lower. Non-qualifying revenue is revenue derived from excluded activities or activities that are not qualifying activities where the other party is a non-Free Zone person.

Certain revenue shall not be included in the calculation of non-qualifying revenue and total revenue. This includes revenue attributable to certain immovable property located in a Free Zone (non-commercial property, and commercial property where transactions are with non-Free Zone persons) and revenue derived from the ownership or exploitation of IP. It also includes revenue attributable to a domestic PE or a foreign PE.

Where a Free Zone person fails to meet any of the qualifying conditions set out in UAE CT Law and in the corresponding Decisions, it will be treated as a taxable person subject to 9% CT rate for a minimum of five tax years.

Domestic PE

The Decisions introduce the concept of a domestic PE where a QFZP has a place of business or other form of presence outside the Free Zone in the United Arab Emirates. Income attributable to a domestic PE should be calculated as if the establishment was a separate and independent person and shall be subject to CT at 9%. However, it will not disqualify the Free Zone person from benefitting from a 0% CT rate on qualifying income or be factored into the de minimis test (as above). A mainland branch of a QFZP will therefore generally constitute a domestic PE and be subject to CT at 9%.