New Corporate Tax in the UAE:
Are Free Zones Exempt?

On December 9, 2022, the UAE Ministry of Finance (MoF) introduced Federal Decree-Law No. 47 of 2022, known as the Corporate Tax Law, to establish a new corporate tax (CT) regime in the country. The law will come into effect for accounting periods beginning on or after June 1, 2023.

The new CT regime will apply to both resident and nonresident persons, including juridical entities incorporated in the UAE or outside, natural persons conducting business activity in the UAE, and nonresident entities with a permanent establishment, a nexus, or UAE-sourced income.

The CT rate will generally be 9%, with a 0% rate applying to taxable income not exceeding a threshold to be specified by a Ministerial Decision (anticipated to be AED375,000).

The law does not specify a higher rate for large multinationals subject to Pillar Two, but the FAQs state that this will be introduced in due course.

The following entities will be exempt from CT under certain conditions:

• persons exploiting UAE natural resources,
• government, and government-controlled entities,
• qualifying public benefit entities,
• charities,
• public benefit organizations,
• pension or social security funds, and
• qualifying investment funds.

Some exemptions, including for qualifying investment funds, will require an application to the Federal Tax Authority.

UAE businesses will be subject to CT on their worldwide income, excluding dividends and capital gains that meet the conditions of the participation exemption. A foreign branch profits exemption applies if the profits have been taxed overseas at a rate of at least 9%.

The foreign tax credit is available for taxes paid overseas on forms of income not exempt from UAE CT. Residents will only be taxable on income from business activities in the UAE, while nonresidents will be subject to CT on taxable income attributed to a permanent establishment or nexus in the UAE, or UAE-sourced income.

A permanent establishment in the UAE will exist for nonresidents if they have a fixed place of business or a dependent agent in the country, with other forms of nexus to be determined through a Ministerial Decision.

The Corporate Tax Law provides examples of UAE-sourced income, including income earned by UAE residents and income from activities, assets, or rights used for economic purposes in the UAE.

The concept of a Qualifying Free Zone Person (QFZP) is introduced, which is a company or branch registered in a free zone that satisfies substance, transfer pricing, and other conditions to be specified by a Ministerial Decision. A QFZP will still be subject to CT but may benefit from a 0% rate on its qualifying income, or choose to be subject to the standard CT rate.

The taxable income will be based on the accounting income reported in the standalone financial statements, subject to adjustments such as unrealized gains or losses, non-deductible expenses, and depreciation.