In general, dividends carried interest, interest, fees, and other forms of investment income received by a foreign investor are exempt from corporate tax in UAE. However, international organizations and people will be required to pay corporate tax if they maintain continuous or periodic business operations in the United Arab Emirates.
Generally, UAE Corporate Tax Law will apply to;
- Personal income earned by UAE residents outside of the context of a trade or industry, such as wages, rent, sale of assets, interest, and dividends; Investment income such as dividends, capital gains, and interest received by foreigners.
Exemption from UAE Corporate Tax will be available for;
- Gains in the form of capital appreciation and dividends received on qualified shareholdings.
- Changes inside a group that qualify as transactions or restructurings.
Since it is a tax on income, it applies to all of the Emirates. Therefore, the corporate tax in UAE will be administered, collected, and enforced by the Federal Tax Authority. For the sake of underlying bilateral/multilateral agreements and international information exchange for tax reasons, the UAE Ministry of Finance will continue to be the Competent Authority.
How Does the Corporate Tax Framework Deal with Income Earned by Foreign Investors?
Whether or not a company’s profits are subject to taxation under the UAE corporate tax framework hinges on the residency concept. The Corporate Tax system will treat as a “resident” any legal person created in the UAE, including, but not limited to, public shareholding manufacturers, public joint – stock, and other entities. The Corporate Tax system will apply to foreign firms that are effectively controlled and monitored in the UAE.
The non-taxable resident’s income from a PE (permanent establishment) in the UAE and revenue originating in the UAE will also be taxable to the corporate tax regime. The Second Optional Tax Convention provides the internationally accepted rules for identifying a PE in Article 5, which informs the corporate tax regime’s implementation of the PE concept[1].
When a foreign company has a physical presence in the UAE and operates there, that is considered to be a permanent establishment (PE). Any location where work is done for longer than 6 (six) months is considered a permanent location, including but not limited to central offices, regional offices, manufacturing facilities, retail outlets, and construction sites. The idea of residence determines how much of a profit is taxable under the Dubai corporate tax framework. Entities such as limited liability corporations, public ownership businesses, public s corporations, and others formed in the United Kingdom shall be considered “occupant” persons for the purposes of the corporate tax in UAE. All international companies that are managed and overseen appropriately in the UAE should be able to use the corporate tax system.
The corporate tax regime will apply solely here to quell residents’ profit either as a PE in the UAE or revenue generated in the UAE. The corporate tax system’s PE idea is based on Article 5 of the Tax Convention of 2017, which lays out the generally accepted criteria for determining whether a certain entity has a PE.
A PE in Dubai is established when a foreign firm maintains an office in the city and operates at least partially from that location. A central office, branch office, industrial factory, workshop, property, or building site are all examples of places where operations can be sustained for at least six months.
Despite having no fixed address in the UAE, As a “dependent agent,” a foreign firm may in fact cause a PE to be issued. The convention states that the dependent agent technique will be undertaken where a visitor nor UAE-based persons serving as agents of the foreign businesses has the power to finalize contracts in the identity of the multinational company and without the substantial participation of the foreign firm. Consult experts like Farahat and co. for detail.
How freezones will avail 0 percent corporation tax advantage?
By lowering startup costs and streamlining business operations, the UAE’s freezones have boosted the country’s economy. The corporation tax system mandates registration with the corporation tax office and submission of a corporate tax return online from all businesses operating inside a freezone. Any corporate tax regime will, however, uphold the 0% tax rebate for freezone businesses that continue to demonstrate adequate substance and meet all regulatory standards. Providing some regulated financial services in foreign markets and engaging in international trade with non-UAE corporations, other freezone companies, and non-freezone companies all result in tax-free earnings for a freezone company.
The corporate profit rate for a freezone business with a subsidiary on the UAE mainland is 9%, however, there is no tax on any other revenue. However, a freezone company with no offices on the mainland pays no corporate tax on interest, royalties, earnings, or capital gains from selling shares of a company. There will be no taxation on the earnings. If a freezone business has access to prospects for profit on the mainland beyond passive revenue, it will no longer qualify for the 0% corporation tax rate. With regards to sales tax, business establishments located in a freezone are eligible to participate in the 0% corporation tax incidence on sale proceeds of items to UAE shore enterprises that seem to be the import with reference to those items.
The 0% tax rate will apply to dealings between freezone businesses and its group firms situated in mainland UAE but fees paid toward the freezone firm will not be a relevant cost to ensure the corporation tax stability of such transactions.
freezone enterprises should initiate a maximum impact assessment to review their business strategies, legal frameworks, and the economic content required to advantage of the 0% corporation tax rate benefit business and their group companies located in mainland UAE but payments made to the freezone business will not be a deductible expense to ensure the corporation tax neutrality of such transactions.
freezone businesses should start a high-level impact assessment to evaluate their business models, legal structures, and the economic substance requirements to avail of the 0% corporation tax rate benefit.
Corporate Tax Advisory Services
Whether you are a UAE resident, a foreign investor, a freelancer, or anyone who is concerned about the subjection of corporation tax law, you can get all of your concerns answered with the assistance of our corporate tax advisors.
