The United Arab Emirates is introducing a corporate tax system starting 2024 where companies will need to pay tax on profits. However, not all companies will have to pay tax as there are some exemption categories available.
This guide provides an in-depth overview of key UAE corporate tax exemption categories in simple terms. It aims to help businesses understand their eligibility and how to benefit from available exemptions.
Exemption for Onshore Free Zone Businesses
Onshore free zones in the UAE like Abu Dhabi Global Market and Dubai International Financial Centre function with special economic regulations to attract investments. Companies set up in these zones are completely exempt from corporate tax payments.
The zones offer world-class infrastructure and business friendly policies. Establishing operations here allows companies to save significantly on tax costs while growing their business. To qualify, one must obtain the required licenses and comply with rules of the specific free zone.
Exemption on Intellectual Property Income
Intellectual property refers to creations of the mind like patents, copyrights, trademarks etc. Income generated from legally owned intellectual property qualifies for a 100% tax exemption in the UAE.
This aims to encourage innovation and attract multinational corporations focusing on research & development. Businesses dealing with patents, copyrights and other such intangible assets can maximize tax savings under this head. Profits from license fees, royalties need to be segregated and documented properly for availing the exemption.
Exemption for Newly Established Companies
New companies beginning commercial operations in the UAE are eligible for a three-year 100% corporate tax exemption. This incentive supports start-ups and young businesses during their critical growth phase.
To qualify, one must complete registration on the Federal Tax Authority portal within 12 months of launch. Basic documents proving the date of establishment and ownership details need to be furnished. Maintaining records and filing annual returns ensures continuing eligibility through the exemption period.
Accelerated Depreciation Allowance Exemption
Through depreciation, the value of machinery, equipment, vehicles and buildings used in business is reduced over time due to wear and tear.
The UAE tax law allows claiming higher yearly depreciation percentages through an accelerated rates mechanism. This helps lower the taxable business income and thereby reduce the tax outgo.
Assets need to be categorized as per tax prescribed guidelines. Depreciation is calculated and deducted while filing provisional and final tax return statements each financial year.
Exemption for Specified Business Activities
Certain sectors and activities will be completely exempt from tax payments even after the 3 years period for new companies. This includes healthcare, education, renewable energy generation etc.
Businesses in these domains have to follow the regulatory guidelines of respective sectors and maintain required licenses/certifications to avail this long term exemption. It aims to promote priority industries contributing to the welfare and sustainable development of UAE’s economy.
Partial Exemption on Foreign Sourced Income
Income earned outside UAE by a domestic company is eligible for a partial 30% tax exemption. This exemption is applicable only for income streams that have already been taxed in the foreign jurisdiction.
Detailed records need to be maintained to segregate the foreign income amount eligible for partial exemption. Apportionment is required where part of the income relates to operations/assets situated inside UAE.
Group Relief Mechanism
Through group relief, a tax loss incurred by one group company can be offset against the profits of another in the same financial year, subject to certain rules. This provides relief for companies that are part of a larger business group.
The companies must be UAE resident, one should hold at least 50% ownership in the other and both should have the same financial year end for group relief to be applicable. Losses can be carried forward to future years if not fully offset in the same year.
Optional Tax Rulings
Businesses can obtain an optional tax ruling from the tax authority to gain certainty over the tax treatment of significant transactions in advance. This provides assurance while structuring or restructuring operations that could impact tax obligations.
Rulings require detailed application and are granted on case to case basis depending on merit. They remain valid only if facts and circumstances presented match actual outcomes.
Conclusion
The UAE’s tax incentives aim to reduce compliance costs through various exemptions. Proper understanding and timely claiming ensures businesses can benefit maximum. Consultation with tax experts helps avail all available reliefs under the new tax system commencing 2024 onwards.
FAQs
Businesses must evaluate their activities against the categories above. Speaking to an accredited tax consultant ensures correctly assessing specific eligibility.
Application requirements vary by exemption sought but generally include standard registrations, ownership proofs, nature of operations and income source details. Experts provide guidance on formal submission.
Eligible companies must complete the online exemption application process on the Federal Tax Authority web portal. All supporting documents and particulars must be furnished for due review and exemption confirmation.
In most cases, exemptions apply prospectively from the year of application. However, businesses can seek to apply exemptions retroactively by providing justification and documents for previous financial years as well.
