Introduction of UAE Corporate Tax – Key Points for Japanese Companies

Introduction of UAE Corporate Tax – Key Points for Japanese CompaniesLearn the latest information.

With the introduction of corporate tax in the UAE in 2023, both local and multinational companies operating in the country have become subject to taxation. Since the implementation of corporate tax, many companies have faced compliance requirements. However, they also encounter the complexities of the system, where applicable responses and tax rates differ depending on which region a corporation operates in. In this article, we will explain an overview of UAE corporate tax and the applicable approaches in each region (Mainland and Free Zone).

After Reading This Article…

• Understand the overview of UAE corporate tax

• Understand regional tax system differences (Mainland vs. Free Zone)

• Understand how to approach subsidiaries, branches, and representative offices located in the UAE

Chapter 1: Effective Date of UAE Corporate Tax

UAE corporate tax became effective on June 1, 2023. However, it applies from the fiscal year beginning after June 1, so there is no need to immediately file a tax return. For example, if your fiscal year ends in December, the first taxable period will be “January 2024 through December 2024,” and if it ends in March, the first taxable period will be “April 2024 through March 2025.” Additionally, the corporate tax registration deadline and the first-year tax return filing deadline are both 9 months after the end of the fiscal year in question. Please refer to the table below.

Taxable Period and Tax Filing

Example: Schedule for a company with a December fiscal year end

(Source: Federal Tax Authority, UAE)

Chapter 2: Taxable Persons and Exempt Persons

In the UAE, both residents and non-residents may be subject to taxation, but the details are defined as follows. Note: With the exception of certain industries, you should understand that most corporations and self-employed individuals become taxable persons as a general rule.

Taxable Persons
1. Residents
– Entities incorporated in the UAE
– Entities incorporated in a foreign jurisdiction but substantially managed and controlled in the UAE
– Natural persons conducting business or business activities in the UAE
– Other entities as determined by Cabinet decision

Non-residents
– Those with permanent establishments in the UAE
– Those receiving income sourced from the UAE
– Those with nexus to the UAE (as determined by Cabinet decision)

Exempt Persons
– The Federal Government and Emirate Governments (including wholly-owned companies)
– Entities engaged in extraction of UAE natural resources (including related activities)
– Qualifying public benefit entities
– Qualifying investment funds
– Public or private pension or social security funds
– Other entities as determined by Cabinet decision

Chapter 3: Corporate Tax Rates

For taxable persons, either 0% or 9% is applied depending on annual income and the jurisdiction in which the entity is located. The tax rates applied under each condition are as follows.

Taxable persons are subject to either 0% or 9%, which varies depending on the annual income amount and the region in which the entity is located. The applicable tax rates for each condition will be explained below.

Chapter 4: Mainland and Free Zone

The applicable corporate tax rates differ depending on whether a company is located on the Mainland or in a Free Zone, as follows. Note: A detailed overview of each jurisdiction is omitted here.

Mainland

Mainland companies are recognized as taxable persons unless they belong to a specific industry. The corporate tax rate is determined based on annual taxable income (please note this refers to taxable income, not accounting revenue or net profit). The benchmark threshold is AED 375,000 (approximately 15 million yen). The applicable tax rate changes depending on whether income exceeds this amount.

Free Zone

For Free Zone companies, the applicable tax rate differs based on two conditions, so tax filing must be conducted while carefully considering the conditions below. While we would like you to refer to the conditions below, they are quite complex, so if you are a Free Zone company, we recommend utilizing our assessment services.

In particular, please note that “Qualified Free Zone Person,” “Qualifying Income,” and “Qualifying Activities” are distinct concepts.

Condition 1: Recognition as a Qualified Free Zone Person
A “Qualified Free Zone Person” is not automatically granted to all entities in a Free Zone, but rather to entities that meet all the following requirements. Upon recognition as a Qualified Free Zone Person, the entity obtains the right to the 0% tax rate (please note that the 0% rate is not automatically applied).

Requirements for Recognition as a Qualified Free Zone Person:

• Has substantial economic substance (not a shell company or similar)

• Derives qualifying income (explained in Condition 2 below)

• Has not opted for the general 9% tax rate

• Complies with transfer pricing regulations and maintains required transfer pricing documentation

• Complies with other government announcements

If the above requirements are not met, the company will be treated the same as a Mainland company, and the applicable tax rate will be determined based on annual taxable income.

If the above requirements are met, the company will be recognized as a Qualified Free Zone Person. However, from this point, each transaction must be classified as either exempt income (qualifying income) or taxable income (non-qualifying income) based on the nature of the transaction.

Condition 2: Recognition of Qualifying Income
Among the transactions conducted by a Qualified Free Zone Person, transactions recognized as qualifying income are subject to 0% corporate tax.

Qualifying Income

• Income arising from transactions with other Free Zone entities

• Income arising from qualifying activities in transactions with non-Free Zone entities

Qualifying Activities
– Manufacturing and processing of products and materials
– Holding of shares and other securities
– Owning, managing, and operating vessels
– Reinsurance activities recognized by regulatory authorities
– Fund activities recognized by regulatory authorities (including asset and investment management services)
– Head office services for related parties
– Financing and financial services for related parties
– Services ancillary to the above
– Aircraft leasing
– Sale of products or materials to customers within designated areas or from designated areas
(For designated areas, VAT rules must be consulted)

Excluded Activities:
– Transactions with individuals
– Banking services recognized by regulatory authorities
– Insurance services recognized by regulatory authorities
– Financial and leasing services recognized by regulatory authorities
– Ownership and development of real estate
– Ownership and development of intellectual property
– Services ancillary to the above

• Transactions with minimal value or below

If these two conditions are successfully met, the entity can finally obtain the 0% corporate tax benefit available to Free Zone entities.

Chapter 5: Summary

As described above, the conditions for obtaining preferential tax rates in Free Zones are quite complex and handling them is challenging. However, if handled correctly in the first year (assuming the business model is not significantly changed), corporate tax-related compliance risks can be substantially reduced. Conversely, if first-year compliance is mishandled, there is a high likelihood of significant penalties and fines when tax audits begin a few years later. Therefore, we recommend engaging a third party such as our firm for first-year tax filing.

In our next article, we will address topics that global companies should especially be aware of, including the treatment of permanent establishments (PEs) and compliance with transfer pricing regulations.

If you are interested, please feel free to contact us.

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