How the introduction of corporate tax is changing the UAE tax system

For the first time in its history, the UAE introduced a corporate tax, which came as a surprise to companies that were counting on zero rates. However, this innovation has not diminished the country's popularity among businesses. The new 9% tax remains one of the lowest in the world, which continues to attract companies. Government agencies are helping businesses smoothly adapt to the changes. Many business incentives have been retained, and the introduction of the tax is accompanied by support and transitional measures to make the process easier for companies and individuals.

Current trends in taxation

There is no single set of taxation laws in the UAE, instead each tax is governed by separate pieces of legislation. This can create ambiguities that lead to subjective interpretations by the authorities. Nevertheless, the UAE government actively engages with businesses and takes their views into account, which is particularly important in light of the dynamically changing tax laws. VAT (5 per cent) was introduced from 2018 and corporate tax (9 per cent) from June 2023 in line with international standards. The UAE is actively seeking to get off the grey lists of international organisations and enhance its reputation on the global stage. The introduction of the corporate tax was an important step in this direction, and the results are already tangible. In 2024, for example, the Netherlands removed the UAE from its blacklist of tax jurisdictions, signalling the country's successful efforts to bring its tax laws in line with international standards.

The UAE has clearly stated to the world its intention to move away from the status of a ‘tax haven’ and to do everything possible to achieve this. At the same time, the country is trying to maintain attractive conditions for investors, making it easier for businesses to adapt to the new conditions. Despite some uncertainties, local tax authorities are actively working to remove ambiguities. The Federal Tax Administration (FTA) publishes guides and official clarifications, often providing detailed interpretations of the new rules and commentary in English.

While the first tax period following the introduction of corporate tax in the UAE is underway, it is difficult to assess its full impact on businesses. Some companies have been unprepared for the changes because they were counting on a zero tax rate when they moved to the country. The first tax period will run from 1 January to 31 December 2024 and returns need to be filed by September 2025, giving businesses time to adapt. The 9% tax rate remains one of the lowest in the world, making the UAE a competitive jurisdiction in the Middle East. For companies with Russian beneficiaries, the process of opening bank accounts still requires time and effort due to strict compliance, but the UAE remains attractive due to its non-tax advantages, including the absence of currency restrictions and access to a developed banking system.

Tax optimisation for companies: effective strategies

Tax conditions in the UAE depend on the size and type of business. Small businesses are exempt from corporate tax if their income does not exceed AED 3 million annually. For the rest, a corporate tax rate of 9% applies, with an exemption on the first AED 375,000 of taxable income. Free economic zones, despite initial assumptions, are also subject to the tax, but freezone residents with certain types of income can apply a favourable rate of 0% if they meet the legal requirements.

Requirements for the application of the zero rate of corporate tax

1. Receipt of eligible income.

2. Compliance with minimum standards: non-qualifying income must not exceed AED 5 million or 5% of total income for the tax period.

3. Compliance with transfer pricing rules.

4. Existence of a sufficient level of economic activity in the UAE.

5. Submission of audited financial statements.

Sometimes it may be difficult or impractical to fulfil all the requirements for a favourable tax rate. Therefore, registration in free zones is often attracted not for tax advantages but for other privileges. For example, a firm in a freezone can be entirely foreign, without the need to add a UAE citizen co-founder. This simplifies the registration process. If the non-qualified income limits are breached, the company loses the benefits and switches to the general tax regime with a 9% rate, with no exemptions, as in the case of income over AED 375,000.

Taxation of individuals

The UAE is attractive not only for businesses but also for individuals, thanks to the absence of personal income tax. Europeans are increasingly choosing the UAE to live and work. To become a tax resident, a person must have spent at least 183 days in the country in the last 12 months or 90 days with a national ID card, home or business. Individuals can also become corporate tax payers if their business income exceeds AED 1 million per year, which is especially true for executives.

Double taxation

There is a double taxation agreement between Russia and the UAE, but it does not provide benefits to individuals and legal entities. The 2011 agreement covers only the income of states and their structures, with zero rates. In cases where a Russian company pays income to a UAE resident, double taxation may arise. However, there is no withholding tax in the UAE, which excludes such a situation in case of reverse payment. In the case of individuals, there is no double taxation, as no personal income tax is levied in the UAE.

At the moment, negotiations are underway on a new agreement, which may provide tax benefits not only to states, but also to companies and individuals. The Russian side is sticking to the ‘10-10-10’ model with a 10 per cent withholding tax on dividends, interest and royalties, while the UAE is pushing for lower rates. The next phase of negotiations is expected within a year.

The lack of an existing full-fledged agreement that applies to individuals is a disadvantage. However, its adoption is only a matter of time, and it is likely to further increase the attractiveness of the UAE for Russian business.