UAE business regulations and taxation: What companies need to know

Over the past decades, the United Arab Emirates has become an attractive destination for international businesses thanks to its competitive tax regime and modern legal framework. Since June 2023, the country has applied a federal corporate tax of 9%, while maintaining its long-standing policy of zero personal income tax. Magellan, an international mobility specialist, outlines how the UAE tax system works, the available legal structures, and the rules that apply to both local and foreign companies.

Corporate tax in the UAE

Since June 1, 2023, the UAE has applied a federal corporate tax at a standard rate of 9% on worldwide taxable income, including capital gains. This corporate tax applies to resident companies as well as non-resident companies that operate through a permanent establishment in the UAE.

Individuals may also fall within the scope of corporate tax if their annual revenue exceeds AED 1 million and they earn income from a UAE source or from activities, assets, investments, or services carried out in the country.

Tax exemptions and other Incentives

Businesses are fully exempt from corporate tax on annual profits up to AED 375,000. This threshold provides significant support to small businesses and early-stage entrepreneurs.

Free-zone companies may qualify for a preferential 0% corporate tax rate as long as they meet all three of the following conditions: demonstrate sufficient economic substance, generate only “qualifying income,” and comply with transfer pricing regulations.

Tax calculation and filing requirements

Corporate tax is calculated based on adjusted accounting income. Companies must exclude unrealized gains or losses, exempt income, and expenses that are not strictly business-related. Tax returns must be filed with the Federal Tax Authority within nine months of the end of the financial year.

VAT and indirect taxation

The UAE applies a standard Value Added Tax (VAT) rate of 5% on most goods and services. Specific categories qualify for a 0% rate or full exemption under specific conditions, such as international exports, certain financial services, and some basic food products.

Local authorities also levy municipal taxes on real estate transactions, with registration fees reaching up to 5% depending on the Emirate.

Withholding tax and tax treaties

The UAE technically applies withholding tax on certain types of UAE-sourced income paid to non-residents, including interest, dividends, royalties, and service fees. However, the current withholding tax rate is 0%, so there is no practical withholding obligation for these payments.

International tax treaty network

The UAE has built an extensive network of double-tax treaties designed to reduce or eliminate international double taxation. These agreements cover many major jurisdictions, with notable exceptions, such as Australia, Canada, and the United States, which have not yet signed bilateral tax treaties with the UAE.

The country has ratified the OECD Multilateral Convention and applies the Common Reporting Standard (CRS) for automatic exchange of financial information. Implementation of the DAC6 mandatory disclosure rules aimed at strengthening tax transparency is currently underway.

The United Arab Emirates’s legal system

The UAE is a federal constitutional monarchy made up of seven autonomous Emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah, and Umm Al Quwain. Each Emirate is governed by its own ruler and maintains a degree of legislative autonomy, particularly regarding local and municipal regulation.

The legal system is based on civil law, influenced by Islamic law (Sharia), and complemented by customary law and international legal principles. Legislation is structured across three levels: federal laws enacted by the Supreme Council of Rulers, local laws issued by each Emirate, and specific regulations applying to free zones.

Free zones and special legal frameworks

More than 40 free zones operate across the UAE, offering tailored regulatory and tax incentives. The most prominent include the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), each with its own independent legal framework inspired by English common law.

The DIFC draws heavily on English law and frequently cites English case law for interpretation. The ADGM directly applies English common law as the basis for its entire legal system. Both free zones have their own regulators and, in some cases, dedicated court systems.

Legal structures and business entities in the UAE

Limited Liability Companies (LLCs)

Limited liability companies are the most common business structure in the UAE. Shareholders’ liability is limited to their capital contribution. An LLC must have at least one shareholder and one director.

Federal Law No. 32 of 2021 abolished general restrictions on foreign ownership, except in designated strategic sectors. Resident LLCs are taxed on their global income, in line with UAE residency rules.

Public Joint Stock Companies (PJSCs)

Public joint stock companies may offer their shares to the public and must comply with stricter regulatory requirements. The minimum share capital is AED 30 million. They must have between 3 and 11 board members and at least 5 founders. Their tax treatment mirrors that of LLCs.

Partnerships and alternative structures

General partnerships that are not incorporated expose partners to unlimited liability. They benefit from tax transparency: each partner is taxed individually on their share of profit.

Limited partnerships and limited liability partnerships have separate legal personality and are taxed as standalone entities, with no further tax imposed on partners.

Unlimited companies, such as those created under the Ras Al Khaimah International Corporate Centre—, do not offer liability protection. Free-zone companies follow rules similar to LLCs but benefit from more flexible capital structuring and regulations tailored to their specific free zone.

Capital structure and financing

Equity financing

Equity investments consist of the nominal value of shares plus any share premium. Returns to shareholders may take the form of dividends, capital reductions, or share buybacks. All such transactions must comply with applicable laws and the company’s bylaws.

Debt financing

Interest paid to non-resident lenders is currently subject to a 0% withholding tax rate. Interest deductibility rules allow companies to deduct finance costs up to 30% of adjusted EBITDA.

Financial transactions with related parties must comply with transfer pricing rules and reflect arm’s-length conditions. UAE tax authorities may challenge financial arrangements that deviate from market practice.

Transfer pricing and cross-border transactions

Arm’s-length principle

Transfer pricing rules require transactions between related entities to follow the arm’s-length principle, meaning they must reflect the same terms and conditions that independent parties would agree to in comparable circumstances.

Accepted transfer pricing methods include the comparable uncontrolled price method, resale price method, cost-plus method, transactional net margin method and profit-split method. The appropriate method depends on the nature of the transaction and the availability of reliable comparables.

International compliance

The UAE applies the OECD Multilateral Instrument to prevent treaty abuse and tax base erosion. The country is progressively implementing the OECD’s global tax reform, including the minimum taxation rules for multinationals and the reallocation of taxing rights under Pillars One and Two.

Social security contributions and payroll taxes

As mentioned above, the UAE does not apply personal income tax, which is a significant advantage for employees. Social security contributions apply as follows: 5% for employees and between 12.5% and 15% for employers, depending on the sector and whether the employee is a UAE national or an expatriate.

Tax administration

The Federal Tax Authority (FTA), established in 2016 by decree of the late President Sheikh Khalifa Bin Zayed Al Nahyan, administers, collects, and enforces all federal taxes. It oversees taxpayer registration, return processing, tax audits, and recovery of outstanding taxes.

Key takeaways

The United Arab Emirates offers an attractive tax environment combining a moderate 9% corporate tax rate, a 5% VAT, and no personal income tax. Its modern legal system allows businesses to choose from a wide range of structures adapted to their needs.

Free zones provide additional tax and regulatory advantages for companies that meet economic substance requirements. The UAE’s broad network of tax treaties also supports international business while reducing exposure to double taxation.

Compliance with transfer pricing rules and international transparency standards remains essential for companies operating in the UAE.

Source:

Global tax guide to doing business in the UAE – dentons.com/en