The UAE has long been known for its favourable tax-free environment, making it a popular choice for enterprises seeking expansion and opportunity. However, in a significant turn toward global financial standards, the country passed its first corporation tax code, which went into force in 2023. This decision, along with other tax-related changes, will have an impact on enterprises of all sizes. As the UAE diversifies its economy and strengthens its international position, businesses must adapt to these developments and grasp the ramifications of the new tax structure.

Here’s an overview of the essential aspects of the UAE’s new tax rules, as well as what businesses should prepare for.

1. The Implementation of Corporate Tax.

In June 2023, the UAE introduced its first federal corporation tax code. The law imposes a 9% tax rate on taxable profits exceeding AED 375,000. Profits below this amount are exempt from corporate tax, effectively offering relief to small and medium-sized enterprises (SMEs) and start-ups. This represents a significant shift for the country, which has long been known for its tax-free status, notably in key industries such as finance and real estate.

The UAE’s corporate tax code is intended to harmonize with worldwide tax standards and promote transparency as the country grows into a major global commercial hub. The new law applies to the majority of enterprises operating in the UAE, including those in free zones, subject to the government’s particular exceptions and criteria.

What businesses should prepare for:

• Tax Registration: All businesses must register with the UAE Federal Tax Authority (FTA) to comply with the corporate tax requirements.
• Tax Filing: Companies must file annual tax returns and maintain proper documentation and financial records.
• Tax Planning: Businesses should revaluate their financial strategies to account for corporate tax expenses, particularly those with profits exceeding AED 375,000.
• Exemptions and Reliefs: Some businesses in certain sectors such as free zones, oil and gas, renewable energy, healthcare, education, technology, tourism, and financial services may qualify for tax exemptions or reduced rates, given that they meet specific conditions.

2. VAT Compliance.

VAT was introduced in 2018 and is still an important part of the UAE’s taxation system. Most goods and services are subject to VAT, which is currently set at 5%. However, businesses must remain watchful as the tax situation changes. While there have been no significant changes to the VAT rate, the government has imposed stiffer standards for VAT registration, filing and documentation.

What businesses should prepare for:

• VAT Registration: Businesses must ensure they are properly registered for VAT, especially if their annual turnover exceeds AED 375,000.
• Timely Filing and Payments: VAT returns need to be submitted on time, typically on a quarterly or annual basis, and businesses must ensure they meet deadlines to avoid fines or penalties.
• E-commerce and Digital Sales: The growing rise of e-commerce and digital transactions means businesses engaging in online sales need to be aware of VAT regulations for cross-border trade and digital services.
• Enhanced Reporting: As VAT reporting becomes more complex, companies should invest in systems that streamline compliance and track VAT accurately.

3. Changes to the Economic Substance Regulations.

The UAE’s Economic Substance Regulations (enacted in 2019) have become an integral part of the tax system. These regulations require enterprises that engage in specific industries, like as banking, insurance, and investment management, to maintain significant operations in the UAE in order to avoid being classified as “offshore” entities.

What businesses should prepare for:

• Compliance with Substance Requirements: Businesses involved in qualifying activities must ensure they have sufficient local operations, such as employees and office space, to meet the economic substance requirements.
• Annual Reporting: Companies that fall under these regulations must file annual reports proving their adherence to the substance requirements.
• Penalties for Non-Compliance: Failing to comply with these regulations can result in penalties, so businesses should ensure they are meeting the criteria to avoid fines.