UAE Corporate Tax Essentials: The 9% Guide

4.1 General Deductibility Principle

Article 28 of Federal Decree-Law No. 47 of 2022 establishes the core rule:

Expenses are deductible if incurred "wholly and exclusively" for business purposes during the ordinary course of business to generate taxable income.

Key Requirements:

• Business purpose: Must be directly related to operations
• Not capital nature: Capital expenditures are generally not immediately deductible but may be depreciated
• Reasonable and justified: Must align with arm's length principles for related party transactions
• Properly documented: Adequate records and supporting documentation required

4.2 Fully Deductible Expenses

Operating Expenses:

• Employee salaries, wages, and bonuses (at arm's length for related parties)
• Employee benefits (medical insurance, pension contributions, training)
• Rent for business premises
• Utilities (electricity, water, internet)
• Professional fees (legal, accounting, consulting)
• Insurance premiums for business assets
• Marketing and advertising costs
• Software licenses and subscriptions
• Office supplies and consumables

Depreciation and Amortization:

• Depreciation on tangible assets (buildings, equipment, vehicles)
• Amortization of intangible assets (patents, licenses, software)

Finance Costs (Subject to Limitations):

• Interest expenses (see Section 4.4 for interest limitation rules)

Taxes:

• Value Added Tax (VAT) that is not recoverable
• Other taxes paid wholly for business purposes
• Note: Corporate tax itself is not deductible

4.3 Entertainment Expenses: 50% Limitation

Article 32 of Federal Decree-Law No. 47 of 2022 imposes a specific restriction:

Entertainment expenditure is deductible at only 50% of actual costs.

What qualifies as entertainment:

• Client meals and hospitality
• Business entertainment events
• Tickets to sporting or cultural events for customers
• Accommodation and transportation for business partners
• Facilities used for entertainment purposes

Important Distinction: Employee-related expenses (staff parties, team building, employee rewards) are fully deductible (100%) as they are employment costs, not entertainment.

4.4 Interest Deduction Limitation Rules

Article 30 of Federal Decree-Law No. 47 of 2022 implements interest limitation rules aligned with OECD BEPS Action 4:

General Interest Deduction Limitation Rule:

Net Interest Expenditure (NIE) is deductible up to 30% of adjusted EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization).

De Minimis Threshold: If NIE is AED 12 million or less, it is fully deductible without limitation.

Calculation:

Net Interest Expenditure = Interest Expense - Taxable Interest Income

Maximum Deductible NIE = Lesser of:
1. Actual NIE, or
2. 30% of Adjusted EBITDA

If NIE ≤ AED 12 million → Fully deductible (safe harbour)

Disallowed NIE: Any excess can be carried forward for up to 10 tax periods.

Example:

• Interest expense: AED 50 million
• Taxable interest income: AED 0
• NIE: AED 50 million
• EBITDA: AED 130 million
• 30% of EBITDA: AED 39 million
• Deductible interest: AED 39 million
• Non-deductible (carried forward): AED 11 million

4.5 Specific Interest Limitations - Related Party Loans

Article 31 of Federal Decree-Law No. 47 of 2022 prohibits interest deductions on related party loans used for:

• Dividend or profit distributions to related parties
• Share redemptions, buybacks, or capital reductions involving related parties
• Capital contributions to related parties

Exception: Deduction allowed if the taxpayer demonstrates the arrangement has genuine commercial substance and is not tax-motivated.

4.6 Non-Deductible Expenses

Article 29 of Federal Decree-Law No. 47 of 2022 explicitly prohibits deductions for:

• Fines and penalties imposed by government authorities
• Bribes and illegal payments
• Distributions to shareholders (dividends, profit distributions)
• Corporate tax itself
• Expenses related to exempt income
• Personal expenses of owners or employees
• Excessive or unjustified expenses not meeting arm's length standards
• Capital expenditures (though may be depreciated over time)
• Donations (except to Qualifying Public Benefit Entities, subject to limits)

8.1 Corporate Tax Registration

All taxable persons must register with the Federal Tax Authority (FTA) via the EmaraTax portal.

Registration Deadlines (per FTA Decision No. 3 of 2024):

• For entities incorporated before March 1, 2024: Deadlines varied based on trade license issuance month (from May 31, 2024 to December 31, 2024)
• For entities incorporated on or after March 1, 2024: Register within 3 months from date of incorporation
• For natural persons (individuals) conducting business:
• • If annual revenue exceeds AED 1,000,000 in 2024: Register by March 31, 2025
  • If commencing business after 2024: Register within 3 months of establishing taxable presence

8.2 Late Registration Penalty

Cabinet Decision No. 75 of 2023 imposes a penalty of AED 10,000 for failure to register by the deadline.

Penalty Waiver Initiative (2025): The FTA announced a waiver for late registration penalties, provided the taxable person files their first corporate tax return within 7 months from the end of their first tax period.

This is shorter than the standard filing deadline (9 months) and applies retroactively to penalties incurred from June 1, 2023.

8.3 Tax Return Filing Deadline & tax payement

Article 48 of Federal Decree-Law No. 47 of 2022:

Corporate tax returns must be filed within 9 months after the end of the tax period (financial year) and the taxable person shall settle the tax payable also within 9 months. 

8.4 Record Keeping Requirements

Article 56 of Federal Decree-Law No. 47 of 2022:

All taxable persons must maintain accounting records and supporting documents for 7 years from the end of the relevant tax period.

Records must include:

• Financial statements with mapping to trial balance
• Invoices and receipts
• Contracts and agreements
• Transfer pricing documentation
• Employee records (for salary deductions)
• Bank statements
• Tax computations and workings allowing to reconcile Tax filing, tax computation and financial statements.

DHAC Advice : as entrepreneur, ensure you have access to this documentation and do not rely only on your accounting firm.

10.1 Structuring for the 375,000 Threshold

For small businesses near the threshold:

• Consider timing of revenue recognition and expense incurrence
• Evaluate business structure (sole proprietorship vs. incorporation)
• Plan capital expenditures to optimize tax position

Example: Company with projected income of AED 400,000 might accelerate AED 30,000 of legitimate expenses to reduce taxable income below threshold, resulting in 0% tax instead of 9% on AED 25,000 (saving AED 2,250).

10.2 Group Structures and Loss Utilization

Tax Groups (Article 40-43 of Federal Decree-Law No. 47 of 2022) allow:

• Consolidation of profits and losses across group entities
• Transfer of tax losses between group members
• Single tax return for the entire group

Conditions:

• 95% or more common ownership
• All entities must be UAE tax residents or have UAE PEs
• Same financial year-end
• None can be QFZPs or exempt persons

10.3 Ensure Participation Exemption where possible

Article 23 of Federal Decree-Law No. 47 of 2022 provides a critical relief for businesses holding shares in other companies: dividends and capital gains from qualifying shareholdings are EXEMPT from corporate tax.

This prevents double taxation when corporate profits are distributed up ownership chains.

10.3.1 Participation Exemption - Income Qualifies for Exemption?

Three types of income can be exempt:

1. Dividends received from UAE or foreign companies 2. Capital gains on disposal of shares in UAE or foreign companies

3. Foreign exchange gains/losses related to qualifying shareholdings 4. Impairment losses (or reversal) on qualifying shareholdings

10.3.2 The Four Conditions for Participation Exemption

To qualify, ALL FOUR of these conditions must be met:

• Condition 1: Minimum Shareholding Threshold : Must hold at least 5% ownership in the company (Measured by capital, voting rights, or profit entitlement). Lower thresholds may be prescribed by Cabinet Decision for specific cases
• Condition 2: Minimum Holding Period : Must hold shares for at least 12 consecutive months, OR Demonstrate clear intention to hold for 12 months from acquisition
• Condition 3: Subject to Tax Test : The company (participation) must be subject to corporate tax of at least 9% in its jurisdiction, OR Be a UAE resident person subject to UAE corporate tax

Exception: If company is in a jurisdiction with 0% tax but is not set up primarily for tax avoidance, exemption may still apply (subject to FTA determination)

• Condition 4: Not a Portfolio Investment : The participation must not hold predominantly passive assets (>50%) / "Passive assets" = assets that would not qualify for participation exemption if held directly by you

10.3.3 Practical Examples

Example 1: Qualifying Dividend

• UAE parent company owns 20% of Singapore subsidiary / Held for 18 months
• Singapore subsidiary subject to 17% corporate tax and is an active trading business
• Result: Dividend received is TAX-FREE

Example 2: Non-Qualifying - Holding Period 

• UAE company buys 10% stake in UK company, Sells after 8 months with capital gain.
• Result: Capital gain is TAXABLE at 9% (holding period not met)

Example 3: Non-Qualifying - Tax Rate 

• UAE company owns 30% of Cayman Islands entity, Cayman has 0% tax and entity set up purely for tax deferral
• Result: Dividend is likely TAXABLE at 9% (fails tax test)

Example 4: Portfolio Investment Exception 

• UAE company owns 15% of Jersey holding company which holds only passive investments (real estate portfolios, securities)
• 80% of Jersey company assets are passive
• Result: Dividend TAXABLE at 9% (portfolio investment exclusion)

10.3.4 Foreign Permanent Establishment Exemption

Related to participation exemption, Article 24 allows UAE companies to elect to exclude foreign PE income from UAE taxation.

How it works:

• If your UAE company has a permanent establishment abroad (e.g., branch in Saudi Arabia)
• You can elect to not include that foreign PE's income and expenses in your UAE tax calculation
• Prevents double taxation on foreign operations

Conditions:

• Foreign PE must be subject to tax in the foreign jurisdiction
• Election is binding and cannot be easily reversed

10.3.5 Strategic Planning with Participation Exemption

Holding Company Structures:

• Establish UAE holding companies to receive dividends tax-free from operating subsidiaries
• Structure to meet 5% ownership threshold
• Plan 12-month holding period before distributions or exits

Exit Planning:

• If selling a business, structure as share sale (capital gains potentially exempt) rather than asset sale (taxable)
• Ensure 12-month holding period met before sale

Group Restructuring:

• Use participation exemption to repatriate profits from subsidiaries without tax leakage
• Consider timing of distributions relative to holding period requirements

International Tax Planning:

• Assess tax rates in subsidiary jurisdictions (need ≥9%)
• Document business substance in low-tax jurisdictions to pass avoidance test
• Consider treaty benefits in combination with participation exemption

10.5 Free Zone Optimization

For businesses with both mainland and Free Zone operations:

• Establish separate legal entities for each jurisdiction
• Ensure Free Zone entity meets QFZP conditions
• Structure transactions to maximize qualifying income
• Monitor de minimis thresholds closely

10.6 Intellectual Property Planning

Qualifying Intellectual Property in Free Zones can benefit from 0% rate if:

• IP developed within the Free Zone (qualifying expenditures)
• Nexus approach applied (linking income to R&D spend)
• Proper tracking systems maintained

Opportunity: Centralize R&D and IP management in Free Zone entities meeting substance requirements.

10.7 Timing of Major Transactions

Consider corporate tax impact when:

• Selling business assets or shares
• Restructuring corporate groups
• Making significant capital investments
• Planning mergers or acquisitions

Business Restructuring Relief (Article 27 of Federal Decree-Law No. 47 of 2022) may defer tax on qualifying intra-group transfers.

11.1 What Tax Authorities Will Review

FTA audits focus on:

• Tax return accuracy: Reconciliation with financial statements
• Deduction validity: Supporting documentation for expenses claimed
• Transfer pricing compliance: Related party transaction pricing
• QFZP eligibility: Substance requirements and qualifying income classification
• Record completeness: 7-year documentation requirement

Red Flags That Trigger Scrutiny

• Large fluctuations in taxable income year-over-year without explanation
• Consistently low profit margins compared to industry benchmarks
• High entertainment expenses relative to business size
• Significant related party transactions without transfer pricing documentation
• Free Zone entities with minimal substance claiming 0% rate
• Late filings or amendments to tax returns

11.2 Due Diligence Best Practices

Financial Statement Integrity:

• Prepare IFRS-compliant financial statements
• Ensure consistency between accounting and tax reporting
• Document all material accounting judgments

Transfer Pricing Documentation:

• Maintain Master File and Local File (if thresholds exceeded)
• Benchmark related party transactions annually
• Document functional analysis (functions, assets, risks)

Expense Documentation:

• Keep original invoices and receipts
• Document business purpose for each expense
• Maintain contracts and agreements
• Track entertainment vs. employee expenses separately

QFZP Compliance (if applicable):

• Document core income-generating activities in Free Zone
• Maintain employee records (presence in Free Zone)
• Track asset location
• Classify income as qualifying vs. non-qualifying
• Monitor de minimis thresholds monthly

12.1 Situations Requiring Expert Guidance

Complex business structures:

• Multiple entities across UAE and internationally
• Free Zone and mainland operations
• Joint ventures or partnerships

High-value transactions:

• Business acquisitions or disposals
• Major restructuring or reorganizations
• Significant financing arrangements

Cross-border activities:

• International related party transactions
• Foreign permanent establishments
• Double taxation treaty considerations

QFZP Status:

• Initial assessment of eligibility
• Annual compliance verification
• Substance requirement planning

Tax disputes or audits:

• FTA inquiries or audits
• Penalty assessments
• Reconsideration requests

12.2 The DHAC Approach

At DHAC, we combine Swiss precision with UAE expertise to help businesses navigate corporate tax compliance:

Our Services:

• Tax compliance: Registration, return preparation, filing
• Tax planning: Structuring advice, optimization strategies
• QFZP advisory: Substance requirements, qualifying income classification
• Transfer pricing: Documentation, benchmarking, policy development
• Due diligence support: Audit preparation, documentation reviews
• Integrated systems: Odoo ERP for real-time tax tracking and reporting

Why DHAC ?:

• Dual expertise: Swiss chartered accountants with deep UAE market knowledge
• Proactive approach: We identify issues before they become problems
• Digital-first: Real-time visibility into your tax position via integrated systems
• Clear communication: Complex tax concepts explained in plain language
• Strategic focus: Tax compliance as part of broader business strategy

Contact us

13.1 Immediate Actions (If Not Yet Done)

Register with FTA via EmaraTax portal (if missed deadline, use penalty waiver by filing within 7 months)

Determine your tax residency status (resident vs. non-resident, natural vs. juridical person)

Identify your first tax period (financial year starting on/after June 1, 2023)

Assess if you're a QFZP (if in Free Zone - verify conditions)

Implement proper accounting system (IFRS-compliant, 7-year record retention), consider fully digital accounting services

13.2 Ongoing Compliance Requirements

Annual:

•  File corporate tax return within 9 months of financial year-end
• Pay corporate tax liability within 9 months of financial year-end
• (if QFZP): Verify qualifying income, substance requirements, de minimis compliance

Continuous: Maintain accurate accounting records and supporting documentation

As needed: Prepare and maintain transfer pricing documentation

13.3 Strategic Planning Calendar

Q4 (Before Financial Year-End):

• Review projected taxable income
• Accelerate/defer expenses if near AED 375,000 threshold
• Plan capital expenditures
• Review QFZP status (if applicable)

Q1 (After Financial Year-End):

• Finalize financial statements
• Calculate tax liability
• Prepare tax return and supporting schedules
• Review transfer pricing documentation

Q2 and Q3 : 

• File corporate tax return (before 9-month deadline)
• Pay tax liability
• Conduct internal review of tax processes
• Begin planning for next financial year
• Review business structure optimization opportunities
• Update tax strategy based on business changes