Impact of Corporate Tax in UAE

The UAE has long been a haven for businesses, boasting a tax-free environment that attracted companies from across the globe. However, with the introduction of corporate tax on 1 June 2023, the UAE's fiscal landscape underwent a significant shift. This guide delves into the core of this change, exploring the impact of Corporate Tax in Dubai, UAE, on businesses, potential opportunities, and strategies to navigate the new tax regime.

A corporate tax is a type of tax applied on a company's taxable profits, which are the profits remaining after deducting expenses under tax laws. Business tax has been a source of contention in the UAE since it was implemented by Federal Decree-Law No. 47 of 2022, which set a 9% business tax rate that went into effect on June 1, 2023. Businesses with annual profits of less than AED 375,000 will, however, be subject to a 0% corporation tax rate in the UAE, reducing the impact on small and medium-sized firms (SMEs). In addition, the UAE government has implemented Small Business Relief (SBR) to foster an appealing environment for SMEs. Corporate Tax Registration is a mandatory requirement for all businesses that fall within the scope of the UAE Corporate Tax regime, regardless of whether they qualify for a 0% or 9% tax rate.

The Federal Tax Authority (FTA) has issued Decision No. 5 of 2025, which clarifies the corporate tax treatment of partnerships, unincorporated entities, and family foundations. Additionally, Decision No. 7 of 2025 mandates that tax groups prepare audited special-purpose financial statements for tax periods beginning on or after 1 January 2025. These updates enhance transparency and ensure consistent compliance across group entities and structured entities in the UAE.

Understanding the Core: The UAE's Corporate Tax Framework

The UAE's corporate tax system is designed to be competitive and transparent. Here's a breakdown of its key features:

• Tax Rate: The standard corporate tax rate is set at a low 9%. This makes the UAE an attractive location compared to many other jurisdictions.
• Exemption Threshold: Businesses with annual taxable profits below AED 375,000 (approximately USD 102,000) are exempt from corporate tax.
• Applicability: The law applies to all businesses operating in the UAE mainland, including branches of foreign companies with a permanent establishment. Free zone companies with specific activities may benefit from different tax treatment.
• Multinationals: Large multinational enterprises (MNEs) with global consolidated group revenue exceeding AED 3.15 billion (approximately USD 860 million) may be subject to a different tax regime under the OECD's Base Erosion and Profit Shifting (BEPS) 2.0 framework.

New Update – Domestic Minimum Top-Up Tax (DMTT)

Starting 1 January 2025, the UAE introduces the Domestic Minimum Top-Up Tax (DMTT) aligned with the OECD’s Pillar II framework. This applies to multinational enterprise (MNE) groups with consolidated global revenues of EUR 750 million or more, ensuring a minimum effective tax rate of 15%.

The procedure of Corporate Tax Impact

Assessing of Document

To guarantee compliance, Corporate Tax document needs must be assessed. You can avoid Corporate Tax fines in the UAE if you know the complete list of required documents. Document assessments also include a form and the format of the documents that must be maintained.

To calculate your Corporate Tax due, you must keep financial records and other documents. These records and documents contain significant Corporate Tax data and supporting information. These documents contain all of the information needed to file Corporate Tax returns and other documentation with the FTA.

Having doubt on the documents required for Corporate Tax filing? Check out our article on all the necessary document requirements for corporate tax filing. 

The Process Of  Corporate Tax Impact

The detailed process for this Corporate Tax assessment is outlined below:

• Reviewing current tax circumstances.
• Analysing the tax implications of transactions.
• Implementing the tax approach.
• Identifying tax risk and opportunity
• Developing a Tax Strategy

Review of current financial situation: This is the first step, which entails a thorough examination of the company's current financial state, including earnings, cash flows, assets, and liabilities.

Analysis of new tax law: This step includes an in-depth review of recent tax regulations, such as Federal Decree-Law No. 60 of 2023 in the UAE, to ensure that businesses are fully informed.

Identifying risk: This step entails identifying potential tax risks and ensuring that organisations are ready to address them.

Strategic recommendation:  Based on the assessment, you will receive a premium recommendation to align your business operations with the tax system.

Weighing the Pros and Cons

The introduction of corporate tax presents both challenges and opportunities for businesses in the UAE. Here's a closer look:

Challenges

• Increased Compliance Burden: Businesses will need to adapt to new tax filing and record-keeping requirements, leading to additional administrative costs.
• Profit Margin Impact: For some companies, the 9% tax could eat into profit margins, especially those with previously tax-free operations.
• Contract Renegotiation: Existing contracts may require renegotiation to account for the new tax implications.

Opportunities

• Enhanced Transparency: The UAE's commitment to a transparent and internationally aligned tax system could improve its reputation as a global business hub.
• Infrastructure Development: The tax revenue generated can be used to invest in infrastructure and public services, potentially creating a more attractive business environment in the long run.
• Shift Towards Value-Added Activities: The tax regime may incentivize companies to focus on value-added activities and innovation to remain competitive.

The Impact of Corporate Tax on UAE Free Zones

The UAE promises to keep its obligations to businesses established in free zones that do not operate on the mainland, whether through exemptions or tax breaks. 

From 2024 onward, only entities qualifying as Qualifying Free Zone Persons (QFZPs) are eligible for the 0% Corporate Tax rate. To qualify, the entity must maintain adequate economic substance, derive qualifying income, and comply with transfer pricing and reporting requirements under FTA guidelines.
Many free zone companies may need to adjust their structures or ensure compliance to benefit from the 0% rate.

Want to know more about the tax regulations in free zone? Check out our article on free zone corporate tax in UAE.

The Impact of  Corporate Tax on MNC

The UAE is planning to impose one of the world's lowest tax rates, which is anticipated to attract more international investment and businesses. Its competitive tax policy makes it an attractive site for businesses.

The Impact of corporate Tax on Mergers and Acquisitions

Investors benefit from the tax-free dividends and capital gains generated by qualifying ownership. This results in a favourable change for mergers and acquisitions.

The Impact of Corporate Tax on FDI's

As the government works to transition the UAE from an oil-dependent economy to a technical powerhouse, the implementation of federal taxes demonstrates the country's significant progress in this area. According to experts, the government would transfer its focus from the mainland to free zones, thereby enticing more investment.

The Impact of Corporate Tax on Consumer's

Shareholders are likely to strive to keep their portion of profits while passing on the tax burden to the end user, which can limit consumers' purchasing power.

The Impact of Corporate Tax on Economy

While such a taxation scheme can increase the state's revenue, the risk of a drop in consumer purchasing power may diminish demand for goods, affecting production and sales and reducing short-term growth.

How Does Corporate Tax in the UAE Impact Businesses?

The implementation of corporate tax in the UAE has both beneficial and bad effects on local businesses.

On the bright side, the UAE government can use corporate tax money to help firms with infrastructure development, incentives, and subsidies.

On the negative side, organisations may see an increase in compliance and administrative costs, lowering profitability and competitiveness. Furthermore, restricted funds and cash flow issues may impede their expansion and investment in technology and manpower.

However, the 9% corporation tax rate applies exclusively to firm profits greater than AED 375,000, reducing the negative impact on SMEs.

Reducing the Impact: Strategies for Businesses

While navigating the new tax landscape, businesses can consider these strategies to minimize the impact:

Profitability Optimization: Review operational costs and identify areas for streamlining to improve profit margins before tax.
Tax Planning and Structuring: Consult tax advisors to explore legitimate tax planning strategies that comply with the regulations.
Free Zone Opportunities: Businesses with qualifying activities might consider relocating to free zones with specific tax benefits.
Transfer Pricing Review: MNEs should ensure their transfer pricing policies are aligned with the arm's length principle to avoid potential tax adjustments.

The Impact of Small Business Relief (SBR) on Corporate Tax in UAE

The UAE government's small company relief initiative, as defined in Ministerial Decision No. 73 of 2023, intends to reduce the burden of corporate tax in the UAE and compliance costs for start-up enterprises. To be eligible for SBR, taxable persons must earn less than AED 3 million from June 1, 2023 to December 31, 2026.

Qualifying freezone companies and members of a Multinational Group of Companies with revenue above AED 3.15 billion are not eligible for the small business exemption.

 Compliance & Record-Keeping

Audited Financial Statements Requirement: Starting 2025, tax groups must prepare audited special-purpose financial statements as per FTA Decision No. 7 of 2025. This measure enhances transparency and ensures consistency in group-level reporting.

Penalty for Late Registration

Deadline Extension: The FTA has extended the filing and payment deadlines for entities whose first tax period ended on or before 29 February 2024. The new deadline is 31 December 2024. Entities filing within seven months of their first tax period may also qualify for the AED 10,000 penalty waiver.

Looking Ahead: The Evolving Tax Landscape

The UAE's corporate tax is still in its early stages. Businesses should stay informed about any regulations or interpretations that may emerge. The global tax landscape is also constantly evolving, and the UAE might adapt its system in response to international developments.

The introduction of corporate tax marks a significant change for the UAE. While there are challenges to pass through, the new regime also presents opportunities for businesses that can adapt and strategize effectively. By understanding the Impact of Corporate Tax in UAE core aspects of the tax framework, its potential impact, and available mitigation strategies, businesses can remain competitive and thrive in the evolving UAE market.

Reyson Badger helps companies effectively manage and analyse the impact of corporate tax. We provide personalised strategies for saving money and complying with tax rules. Our team stays up to date on the latest tax laws and offers straightforward guidance and support. Choose Reyson Badger for experienced tax management that improves your financial situation and helps your business growth.