This blog breaks down the recently introduced Corporate Tax regime in the UAE—why it was introduced, who it applies to, what income gets taxed, and how it affects different types of businesses and individuals. Whether you’re a business owner, a freelancer, or just curious about the UAE’s tax shift, this is your go-to guide. Let’s get into it.
Background
The UAE’s journey with tax reform didn’t just start overnight. While it’s widely known for its oil and gas reserves, the country’s economic playbook has been changing for quite some time. In recent years, the government has shifted its focus more toward tourism and international business—and with that, came changes in taxation and financial compliance.
Here’s a snapshot of what’s happened so far:
- VAT was introduced back in 2018.
- That same year, the UAE joined the Inclusive Framework on BEPS.
- Laws targeting anti-money laundering and the financing of terrorism were enacted.
- Country-by-Country Reporting (CbCR) kicked off from January 2019 for UAE-headquartered multinational groups.
- Then came the Economic Substance Regulations (ESR) in April 2019.
- And in August 2020, the Beneficial Owner Procedures got formalized.
The latest in this line-up? Corporate Tax. A bold move that says the UAE is serious about staying globally compliant and economically progressive.
Introduction to Corporate Tax in UAE
So, what exactly is Corporate Tax—and why is it such a big deal now?
Corporate Tax is a direct tax on a business’s net income. It’s different from VAT (which applies to sales) and Excise Tax (on certain goods). The goal here is twofold: support the country’s growth and fulfill its international promise of tax transparency.
But it doesn’t apply to every business. Companies involved in natural resource extraction or some non-extractive operations (which are already taxed at the Emirate level) are currently excluded, if they meet certain conditions.
Other key points:
- It’s a federal tax, which means it applies across all Emirates.
- The tax applies to financial years that start on or after June 1, 2023.
- Businesses can choose any 12-month period as their tax year—useful for aligning with the reporting period of a foreign parent company, for example.
This setup not only encourages ease of compliance but also respects the way businesses already operate. Smart move.
Corporate Tax Rate
Now, let’s talk numbers.
Here’s how the tax rate breaks down:
| Net Income | Tax Rate |
| Up to AED 375,000 | 0% |
| Above AED 375,000 | 9% |
At first glance, that might seem simple—but there’s more under the hood. The OECD recommends a Global Minimum Tax (GMT) of 15% for large multinational companies with revenues of EUR 750 million or more. So right now, the UAE’s 9% rate is still below that threshold.
Will that change? Possibly. As a signatory to BEPS, the UAE may need to tweak its rates or introduce new mechanisms to match the GMT in the future. Something to keep an eye on.
‘Taxable person’ upon whom corporate tax is imposed
So, who exactly needs to pay this tax?
Let’s break it down into residents and non-residents.
Residents:
- UAE-based companies like LLCs, PSCs, PJSCs—even those in free zones.
- Foreign companies that are effectively managed and controlled from within the UAE.
- Individuals who run a business in the UAE.
- Any other category the Cabinet decides to include.
Non-Residents:
- Companies or individuals with a Permanent Establishment (PE) in the UAE.
- Those earning UAE-sourced income.
- Entities that have a nexus in the UAE, as defined by future Cabinet decisions.
Note: The detailed rules around PE and UAE-sourced income are expected in upcoming releases from the M2K series.
‘Income’ subject to Corporate Tax
So what kind of income is actually taxed?
Here’s how it breaks down by taxpayer type:
For individuals:
If you’re running a business (even as a freelancer), the income from that activity is taxable, as long as it’s within UAE and falls under Cabinet definitions.
For UAE companies:
Income earned in or outside the UAE is considered taxable.
For non-residents:
Only income attributable to their UAE operations (like a PE or UAE-sourced income) is taxed.
So yes, the UAE is casting a wide net—but only if the income has a meaningful connection to the country.
Taxation of Individuals
Let’s make one thing clear: not every individual living in the UAE is going to be taxed under this law.
If you’re earning a salary, you’re in the clear. That kind of income isn’t touched by the Corporate Tax.
Here’s what doesn’t get taxed:
- Salaries and employment income
- Dividends, interest, and personal investment income
- Capital gains and other earnings from owning shares or property
- Income from property held in your personal name
But here’s where it gets interesting.
If you’re a freelancer, consultant, or self-employed, your income might be taxed—but only if your activity qualifies as a business, based on Cabinet rules. Even then, you could still be eligible for:
- A basic exemption of AED 375,000
- A possible small business relief, which the Cabinet is expected to define soon
So, while the law is wide-reaching, it’s also structured to avoid burdening individuals unnecessarily.
Partnership Firms & Partners
What happens when you’re working in a partnership?
It depends on what kind of partnership you have.
- If it’s an unincorporated partnership (basically a contractual agreement), the partners get taxed individually, not the firm itself.
- If it’s an incorporated partnership (like an LLP), then the entity is treated like a company and gets taxed accordingly.
Simple? Almost. But there are some deeper rules in the next section.
Let’s zoom in on unincorporated partnerships (UPs).
- The partners are considered to own and operate the business, and are responsible for its income, assets, and liabilities.
- Profits, expenses, and even foreign tax credits are divided based on each partner’s share.
- If it’s unclear how to divide the shares, the Federal Tax Authority will step in with a method.
- Partners can deduct expenses they’ve personally incurred for the business.
- If a partner took out a loan to invest in the UP, the interest paid on that loan is also deductible.
But—and this is important—if the UP pays interest to a partner, that’s not deductible.
Now here’s a smart option: the partners can apply to have the UP treated as a taxable entity, which might reduce the hassle for partners not running any other business.
Family Foundation
Family foundations are commonly used to manage wealth and succession planning. Think of them like trusts—but with a more structured legal setup.
Now, by default, a foundation is treated as a separate taxable person.
But a Family Foundation (FF) can choose to be treated like a UP if:
- Its beneficiaries are identifiable people or charitable entities
- It mainly holds and manages investment assets
- It doesn’t run a business
- It’s not trying to dodge Corporate Tax
The Minister of Finance might set a few more conditions, but the idea here is to give family wealth vehicles a more flexible tax treatment.
Free Zone Persons
Free zone businesses—this part’s for you.
If your entity qualifies as a “Qualifying Free Zone Person”, then your income is taxed like this:
| Type of Income | Tax Rate |
| Qualifying Income | 0% |
| Non-Qualifying Income | 9% |
Let’s walk through two examples.
Scenario 1:
- Qualifying income: AED 200,000
- Non-qualifying income: AED 170,000
- Tax = AED 15,300 (which is 9% of 170,000)
Scenario 2:
- Qualifying income: AED 500,000
- Non-qualifying income: AED 170,000
- Same tax: AED 15,300
Now, if the business opts into the standard tax regime (Article 19), here’s what changes:
- Total income: AED 670,000
- Exemption: AED 375,000
- Taxable income: AED 295,000
- Tax = AED 26,550
But keep this in mind: once you opt into normal tax, it’s a one-way street. You can’t go back.
To qualify for the 0% rate, a Free Zone Person must:
- Have real operations in the UAE
- Earn qualifying income (awaiting Cabinet decision)
- Follow transfer pricing rules
- Not opt into normal Corporate Tax
These businesses still need to handle compliance like registrations and returns.
Also, if you’re part of a multinational group, expect more changes soon. Once Pillar II is added to UAE’s tax laws, the 15% GMT could kick in.
Another pending issue: when a business earns both qualifying and non-qualifying income, how should shared costs be allocated between the two? That detail’s still in the pipeline.
Final Thoughts
The UAE’s decision to introduce Corporate Tax marks a turning point. It’s not just a policy update—it’s a reflection of where the country is headed: toward global standards, long-term sustainability, and financial transparency.
While some areas still need clarity (like qualifying income or individual thresholds), the structure is now in place—and businesses have enough direction to start planning smartly.
More insights are coming in the next parts of the M2K UAE Knowledge Series, so stay tuned.
