Income Tax in the UAE and IP-Box Benefits

The rate of the new corporate tax depends on the annual amount of profit of the company:

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0% - if the company's profit is less than AED 375,000 (USD 102,000) per year

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9% - if the company's profit is more than AED 375,000 (USD 102,000) per year

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How is the tax base determined?

Income tax is payable from accounting net profit based on financial statements prepared in accordance with acceptable international accounting standards, after making any necessary adjustments for tax purposes.

The following sources of income are exempt from tax:

• Dividends from subsidiaries.
• Capital gains from the sale of shares or interests in companies.

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To qualify for the exemption, the taxpayer's (parent company's) shareholding in another company must meet the minimum threshold of qualified participation. The size of such threshold has not yet been determined, but it is assumed to be from 10%.

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As a rule, income can be reduced by expenses incurred in the course of ordinary business activities. However, personal expenses cannot be deducted. There are also restrictions on bad debts, donations, fines, penalties, tax expenses, dividends, interest, etc.

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What income is not subject to income tax?

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What is the tax calculation start period? 

If the financial year of a business entity begins on January 1, 2023, the first tax period will be from January 1 to December 31, 2024.

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Procedure for submitting reports and paying taxes

All companies must register with the tax authority and file reports within 9 months after the end of the financial year.

It is necessary to prepare and submit one report for the entire tax period (1 year). The tax is also paid once (there are no advance payments).

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Are there any benefits? 

• Dividends and capital gains from the sale of shares or interests are exempt from taxation (as stated above).
• There will be no withholding tax on the income of non-residents.
• If a taxpayer has paid tax in other jurisdictions, then in the UAE he will be able to offset it against the corporate tax payable (tax credit). This is regardless of the existence of a bilateral tax treaty.
• Companies involved in mining are exempt from the new tax. They will still be subject to the tax regulations of specific emirates.

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To receive a preferential rate, companies must simultaneously meet two conditions:

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1. Have sufficient economic presence in the UAE:

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• the company's profit is generated in the Free Zone,
• enough workers to operate the company,
• the company has the assets necessary for its operations in the UAE,
• the company bears the costs necessary for its activities in the UAE

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1. The company's income falls into the required category:

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• received from transactions with other Free Zone companies, and
• relate to individual types of activities,
• with the remaining income not less than AED 5,000,000 per year

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In October 2023, by decisions of the Government and the Ministry of Finance of the UAE, a special benefit was introduced for R&D-intensive companies:

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0% on IP profit

This benefit is developed on the basis of OECD recommendations (Action 5) and is very similar in principle to the IP-Box regimes in other countries, for example, in Cyprus or the CIT benefits in Astana Hub in Kazakhstan.

‍To benefit from this benefit, a company must simultaneously meet several requirements:‍

1. The company is registered in one
2. from Free Zone.

This benefit is developed on the basis of OECD recommendations (Action 5) and is very similar in principle to the IP-Box regimes in other countries, for example, in Cyprus or the CIT benefits in Astana Hub in Kazakhstan.

1. The company has sufficient economic presence in the UAE:

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• your assets,
• full-time employees,
• office,
• adequate expenses

This is a real company that actually operates in the UAE.

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Shell and wallet companies cannot benefit from the IP-Box benefit.

1. The company profits from certain types of IP:

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• software rights
• patentable solutions

All other types of income (for example, royalties for trademarks; interest on loans; dividends from other companies; sales of merchandise, etc.) are not eligible for the benefit and are taxed according to the general rules.

1. The company submits more complex reports to confirm its right to the benefit.

How does a company calculate its right to benefits?

1. Allocate IP profit (from patents and software) from the total profit.

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The 0% rate does not apply to all profits, but only to a portion of the profits from IP.

1. Calculate the correlation coefficient.

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This is the ratio of qualified R&D expenditure to total R&D expenditure.

1. Multiply IP profits

on the correlation coefficient.

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It is to the result of this multiplication that the 0% rate can be applied.

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