Global Tax Guide to Doing Business in the UAE

Global Tax Guide to Doing Business in the UAE
The United Arab Emirates (UAE) has transitioned from a largely tax-free environment to a jurisdiction aligned with global standards, most notably through the introduction of a federal Corporate Tax (CT) regime. This shift is crucial for multinational entities operating or planning to establish a presence in the Federation.

Legal System
The UAE operates a Civil Law system, which means its legal framework is based on codified laws and statutes rather than judicial precedent. It is influenced by Islamic Sharia principles, particularly in personal matters and certain aspects of commercial law. The UAE has both a Federal court system and autonomous judicial systems in certain financial free zones, such as the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). These financial Free Zones utilize a distinct Common Law system, complete with English-language courts and independent regulatory bodies, offering an alternative legal framework for international finance and dispute resolution.
Taxation Authorities
Taxation is governed at the federal level. The two main authorities are:

1. The Federal Tax Authority (FTA): This is the principal body responsible for the administration, collection, and enforcement of all federal taxes, including Corporate Tax (CT), Value Added Tax (VAT), and Excise Tax. Businesses register with the FTA and file tax returns through its portal.
2. The Ministry of Finance (MoF): The MoF is responsible for drafting tax legislation, issuing Cabinet Decisions, and representing the UAE in international forums, including negotiating and implementing Double Taxation Treaties (DTTs).
   Business Vehicles
   Foreign companies typically structure their operations in the UAE using three primary entities:

• Mainland Limited Liability Company (LLC): This is the most common entity for trading activities within the UAE market. Recent legislative reforms have largely eliminated the mandatory requirement for a local partner in many sectors, allowing for up to 100% foreign ownership of an LLC.
• Free Zone Entity: The UAE hosts numerous Free Zones (special economic areas) that offer specific benefits, primarily 100% foreign ownership and the ability to repatriate all capital and profits. These entities are within the scope of Corporate Tax but may benefit from a 0% rate on qualifying income.
• Branch or Representative Office: These are considered an extension of the foreign parent company and are taxed as a Permanent Establishment (PE) in the UAE on locally sourced income.
  Financing a Corporate Subsidiary
  Financing a UAE-based subsidiary, typically through inter-company loans, is subject to strict compliance under the new Corporate Tax law, specifically concerning Transfer Pricing (TP) rules. The law adheres to the Arm’s Length Principle, requiring that the terms (including the interest rate) of related-party debt be consistent with what independent parties would agree to.
  Furthermore, the deduction of net interest expense is limited to 30% of the company’s Adjusted Taxable Income (an EBITDA-equivalent measure). This restriction aims to prevent excessive debt-loading within the UAE entity to shift profits out of the country.
  Corporate Tax (CT)
  The UAE introduced a federal CT regime (Federal Decree-Law No. 47 of 2022) effective for financial years commencing on or after June 1, 2023.
  The CT regime features a competitive dual-rate structure designed to support small and medium-sized enterprises (SMEs) while meeting international obligations:

1. 0% Rate: Applied to taxable income (profit) up to AED 375,000 (approximately US$102,000).
2. 9% Rate: Applied to taxable income exceeding AED 375,000.
3. Large Multinational Enterprises (MNEs): A different, currently unspecified, rate (expected to be 15%) will apply to large MNEs that meet the criteria for the OECD Pillar Two global minimum tax.
   Free Zone Taxation: Entities that qualify as a Qualifying Free Zone Person (QFZP) benefit from a 0% CT rate on their Qualifying Income. This zero-rate typically covers income derived from transactions with foreign parties or with other Free Zone entities, provided the QFZP maintains adequate substance.
   Cross-Border Payments
   The UAE maintains a favorable tax environment for cross-border transactions:

• Withholding Tax (WHT): The UAE currently imposes no domestic WHT on most payments made to non-residents, including dividends, interest, royalties, and service fees. This provides a significant advantage for multinational groups structuring their cash flows through the UAE.
• Transfer Pricing: While WHT is zero, the inter-company payments for services, royalties, or interest must still comply with Transfer Pricing documentation rules to ensure the payment amount is commercially justifiable at arm’s length.
  Payroll Taxes
  The UAE tax system is exceptionally simple for individual employees:
• Personal Income Tax: The UAE does not levy any personal income tax on wages, salaries, or other emoluments earned by employees.
• Social Security: While expatriate employees do not contribute to a mandatory payroll tax, employers are legally required to make mandatory contributions to a social security scheme for their UAE and GCC national employees only.
  Indirect Taxes
  Indirect taxes in the UAE primarily consist of VAT and Excise Tax, generating a substantial portion of the federal budget.
• Value Added Tax (VAT): Implemented in 2018, VAT is levied on most goods and services. The standard rate is 5%.
• Specific sectors and supplies, such as international transport, certain education and healthcare services, and exports, are subject to a 0% rate.
• Certain services, like specific financial services and residential property rentals, are exempt from VAT.
• Excise Tax: This tax applies to specific goods deemed harmful to human health or the environment. The rates are 50% for carbonated and sweetened drinks, and 100% for tobacco and tobacco products, electronic smoking devices, and energy drinks.