Understanding the tax framework
The UAE tax landscape is distinctively advantageous for residents and businesses, known for its absence of several traditional taxes. Notably, there is no personal income tax, inheritance tax, or gift tax in the UAE, positioning it as a tax-friendly environment that attracts professionals and entrepreneurs from around the world. However, in a historic shift, the UAE introduced a corporate tax system that became effective on June 1, 2023.
The legal foundation for the UAE’s corporate tax system is set out in Federal Decree-Law No. 47 of 2022, which formally introduced corporate tax to the country. Under the decree, corporate tax is applied uniformly across the UAE, with all businesses—whether domestic or foreign corporations operating in the UAE—required to adhere to the stipulated tax obligations based on their income levels.
Individual Emirates retain a degree of autonomy to impose additional taxes, particularly within specific sectors. For instance, the oil and gas industry, which plays a critical role in the UAE’s economy, is subject to higher corporate tax rates that can reach up to 55 percent. Similarly, certain foreign banks may face taxes of up to 20 percent, primarily reflecting each Emirate’s efforts to capitalize on revenue generated by key industries while maintaining favorable conditions for other business sectors.
To further incentivize business growth, the law includes several tax reliefs and exemptions. For example, Small Business Relief is available to qualifying small enterprises with annual revenues under AED 3 million, exempting them from tax obligations and promoting an entrepreneurial culture. Businesses operating within the UAE’s many free zones can benefit from a 0 percent corporate tax rate on qualifying income, provided they meet specified compliance criteria. Other incentives, such as Business Restructuring Relief and Foreign Tax Credits, assist companies with mergers, acquisitions, and cross-border transactions by minimizing tax liabilities, making the UAE a strategic base for multinational operations.
In addition, provisions such as Loss Carry forward allow businesses to offset future profits with prior losses, offering financial resilience against economic fluctuations.
Types of tax incentives in the UAE
Small businesses relief
This specific measure, offers a full exemption from corporate tax to eligible small businesses with annual revenue under AED 3 million. This exemption allows smaller enterprises to reinvest earnings and focus on expansion without the additional burden of tax liabilities. Businesses that are part of an MNE Group or classified as a Qualifying Free Zone Person are not eligible for this relief.
This provision applies to tax periods ending before December 31, 2026, and is intended to boost the entrepreneurial landscape. However, companies that intentionally split operations solely to meet the AED 3 million threshold are subject to scrutiny and potential adjustments by the Federal Tax Authority (FTA).
Participation exemption regime
Another significant feature of the UAE's corporate tax incentives is the Participation Exemption Regime. This applies to certain domestic corporations, exempting dividends and capital gains from qualifying shareholdings to encourage the formation and growth of holding companies. By relieving these income sources from corporate tax, the Participation Exemption supports a favorable environment for both local and international investment.
Losses carry forward
Losses carry forward provisions in the UAE, allows taxable entities to offset current losses against future taxable income.
To leverage loss, carry forward, businesses must meet specific criteria, such as:
- Maintaining accurate financial records;
- Adhering to transfer pricing rules;
- Ensuring compliance with the UAE’s economic substance requirements; and,
- The business must maintain continuity of ownership or activity.
Tax grouping
A group of UAE tax resident companies may choose to form a tax group, which allows them to be treated as a single taxable entity, provided they meet the following conditions:
- The parent company must hold at least 95 percent (either directly or indirectly) of the subsidiary's share capital, voting rights, profits, and net assets.
- Both the parent company and the subsidiary must share the same financial year and use the same accounting standards for preparing their financial statements.
- Neither the parent company nor the subsidiary can be classified as an Exempt Person or a Qualifying Free Zone Person, which would otherwise qualify for the 0 percent UAE corporate tax rate.
The tax group is required to prepare consolidated financial statements in line with the accounting standards applicable in the UAE. The parent company will consolidate the financial results, assets, and liabilities of each subsidiary during the relevant tax period, ensuring that any intercompany transactions are eliminated.
Foreign tax credits
The UAE provides Foreign Tax Credits to prevent double taxation for UAE-based businesses with overseas operations. Under this incentive, UAE taxable persons can claim credits for taxes paid abroad on income that is also subject to UAE corporate tax. However, this credit is limited to the amount of UAE corporate tax owed on the same income, and any unused portion cannot be carried forward or applied retroactively. This approach not only simplifies tax compliance but also encourages international business activity by reducing tax exposure on foreign earnings.
Business restructuring relief
Another essential tax incentive for international companies operating in the UAE is Business Restructuring Relief. This relief is available for companies engaged in mergers, acquisitions, and other restructuring activities, provided they meet specific conditions. For instance, the restructuring must involve a legitimate transfer of assets, shareholdings, or ownership interests in exchange for equity rather than cash. The goal is to promote efficient corporate restructuring without immediate tax burdens, thus facilitating seamless growth, consolidation, and reorganization of operations within the UAE.
Free Zone-specific tax benefits
Entities operating within Free Zones may be designated as Qualifying Free Zone Persons (QFZPs), allowing them to access significant tax advantages. QFZPs benefit from a 0 percent corporate tax rate on qualifying income, provided they meet regulatory standards, including maintaining an adequate presence within the Free Zone, deriving qualifying income, and complying with transfer pricing requirements. To maintain QFZP status, a business must ensure that core income-generating activities occur within the Free Zone.
Furthermore, QFZPs enjoy additional benefits beyond the corporate tax rate, such as:
- Exemptions from import and export duties;
- Full repatriation of profits; and,
- No withholding taxes on dividends or royalties.
However, Free Zone companies must adhere to certain compliance standards and meet de minimis requirements—meaning their non-qualifying revenue cannot exceed 5 percent of total revenue or AED 5 million, whichever is lower.
Any income outside qualifying activities may face a 9 percent tax rate. Additionally, if Free Zone companies establish a mainland branch, the income from that domestic presence, considered a domestic Permanent Establishment (PE), will be subject to the standard 9 percent corporate tax.
Eligibility criteria for tax incentives
Under UAE corporate tax law, "taxable persons" generally include both residents and non-residents with a permanent establishment (PE) in the UAE.
Businesses designated as "Qualifying Free Zone Persons" (QFZPs) or structured as Free Zone entities have access to preferential tax treatments. For QFZPs, the corporate tax rate on qualifying income is 0 percent, provided they meet specific operational and economic requirements.
Additionally, qualifying activities must align with designated economic sectors, such as manufacturing, technology, and logistics, within the Free Zones.
While most businesses within these zones are considered taxable entities, several exemptions exist for specific types of organizations:
- Entities controlled by government bodies and solely engaged in public or essential services are exempt from corporate tax.
- Pension and Social Security Funds, particularly those recognized as serving UAE residents, are exempt from tax.
- To foster growth in the finance sector, specific investment funds, particularly those structured to manage and grow regional capital, may qualify for tax exemptions, given that they adhere to UAE Ministry of Finance regulations.
Compliance requirements
For entities wishing to qualify for these incentives, compliance with UAE’s financial reporting, record-keeping, and operational transparency requirements is mandatory.
- Businesses must prepare and maintain audited financial statements, which clearly differentiate qualifying and non-qualifying income.
- Adherence to UAE transfer pricing rules is mandatory.
- Related-party transactions must reflect market value and must maintain transfer pricing documentation to substantiate their tax positions.
- Companies must demonstrate substantial business activities within the UAE or Free Zone.
- Core income-generating activities (CIGAs) must occur locally, within the Free Zone.
- Adequate resources such as employees, assets, and operational expenditures must be maintained locally.
- Outsourcing CIGAs is permitted if supervision and control are retained by the company.
- Detailed and accurate records must be kept for all transactions and operations.
- Documentation must be available for inspection to verify compliance with tax laws.
