The corporate tax in the UAE is set to change significantly in 2025. The UAE introduced a federal Corporate Tax (CT) law that came into effect on June 1, 2023, as part of its efforts to diversify its economy and align with international tax standards. Below are key highlights for the UAE corporate tax in 2025:

Corporate Tax Rates:

• 0% tax rate on taxable income up to AED 375,000.
• 9% tax rate on taxable income above AED 375,000.
• Different rates may apply to large multinationals that meet specific conditions under the OECD Base Erosion and Profit Shifting (BEPS) Pillar Two rules, including a 15% global minimum tax rate.

Key Features of UAE Corporate Tax:

1. Scope of Corporate Tax:

   • Applies to businesses operating in the UAE across all sectors (except for natural resource extraction).
   • Free zone businesses can continue to benefit from tax incentives if they meet all regulatory requirements.

2. Exemptions:

   • Government entities, government-controlled entities, extractive businesses, and some non-extractive natural resource businesses are exempt from corporate tax.
   • Dividends and capital gains earned by UAE businesses from qualifying shareholdings are exempt.

3. Free Zone Incentives:

   • Businesses in free zones will continue to enjoy tax incentives (e.g., 0% tax rate) if they comply with specific conditions, such as not conducting business with mainland UAE.

4. Transfer Pricing Rules:

   • The UAE Corporate Tax Law incorporates OECD-aligned transfer pricing rules, requiring businesses to maintain transfer pricing documentation.

5. Losses:

   • Companies can carry forward losses to offset future taxable income, provided the conditions are met.

6. VAT and Corporate Tax:

   • Corporate tax is separate from Value Added Tax (VAT), which remains at 5%.

Compliance and Filing:

• Businesses need to prepare for annual corporate tax returns.
• Tax returns must be filed electronically within nine months of the end of the relevant tax period.

Key Considerations for Businesses:

1. Taxable Income:

   • Taxable income is generally determined by adjusting the accounting profit of a business for tax purposes, considering allowable deductions, exemptions, and adjustments as per the Corporate Tax Law.
   • Business expenses such as employee salaries, operating costs, and depreciation are typically deductible, but personal expenses are not.

2. Tax Filing and Payment:

   • Businesses will need to file their corporate tax return electronically through the UAE's Federal Tax Authority (FTA).
   • Tax payments are due within nine months from the end of the financial year. For most businesses, this means that their first corporate tax filing will be due by March 31, 2024 (if their financial year ends on December 31, 2023).
   • Companies must maintain proper financial records, as they will be required to substantiate their claims for deductions and exemptions.

3. Transfer Pricing Documentation:

   • The UAE has introduced transfer pricing rules aligned with the OECD guidelines. Businesses engaging in intercompany transactions must comply with documentation requirements, ensuring that these transactions are conducted at arm's length (i.e., at market prices).
   • Companies may need to prepare and maintain transfer pricing reports and disclose related-party transactions to the FTA.

4. Free Zones and Tax Incentives:

   • Certain free zones offer attractive tax incentives, such as a 0% tax rate for specific industries (e.g., IT, tech startups, manufacturing).
   • To benefit from the exemptions, businesses operating in free zones must meet conditions like not conducting business within the mainland UAE or adhering to other regulatory standards.
   • In cases where businesses operate in both a free zone and the mainland, they will need to carefully navigate the rules regarding income sourcing to determine which parts of their business are eligible for tax exemptions.

5. International Impact:

   • The UAE’s corporate tax law is designed to comply with international tax standards, particularly the OECD's BEPS (Base Erosion and Profit Shifting) project. This will help the UAE align itself with global tax regulations, improving its reputation in terms of tax transparency.
   • Multinational corporations with operations in the UAE need to assess their tax obligations under the OECD’s Pillar 2 rules, particularly the global minimum tax rate of 15% for large businesses.

6. Corporate Tax for Multinationals:

   • For businesses that are part of large multinational groups, the UAE has agreed to implement the global minimum tax as part of the OECD’s efforts to tackle tax avoidance.
   • This could result in additional tax obligations for companies in the UAE, particularly those with foreign operations, as tax is assessed at a global level. This is important for determining if the business needs to pay tax in other jurisdictions with higher tax rates.

7. VAT and Corporate Tax Interaction:

   • It’s important to note that corporate tax and VAT are separate. Businesses will need to continue to comply with the 5% VAT on most goods and services in addition to meeting corporate tax requirements.
   • The VAT registration and filing process will remain unchanged, and businesses must continue to submit regular VAT returns.

Tax Incentives for Innovation and Sustainability:

• R&D Tax Incentives: Companies investing in research and development (R&D) may qualify for certain tax benefits, including potential deductions for qualified R&D activities.
• Sustainability Initiatives: The UAE is emphasizing sustainable business practices. Some tax incentives may be available for businesses involved in sustainable development or green technologies.

Corporate Tax and Small Businesses:

• While the corporate tax rate applies to most businesses, the 0% tax rate on profits up to AED 375,000 will benefit many small businesses and startups, especially those in their early stages.
• Small and medium-sized enterprises (SMEs) will need to ensure that they are compliant with tax filing and reporting requirements to take advantage of these benefits.

Upcoming Developments:

• The UAE government may introduce additional guidelines or regulations to clarify certain aspects of the corporate tax law, particularly in relation to specific industries, business structures, and cross-border transactions.
• The implementation of digital tax technologies may streamline tax administration and improve compliance processes, making it easier for businesses to file their taxes and track payments.

The UAE’s corporate tax system in 2025 will bring greater transparency, while still maintaining an attractive environment for businesses. It's important for companies to stay updated on any changes and ensure that they meet all tax obligations to benefit from the favorable tax rates and exemptions available.