Corporate Tax in the UAE: What Freelancers and Solo Establishment Businesses Need To Know?

The United Arab Emirates (UAE) announced the introduction of a federal corporate tax, effective from June 1, 2023. This marks a significant change for businesses operating in the UAE, including freelancers and solo business owners. This blog post will break down what this means for you and your venture.

What is the Corporate Tax Rate?

The UAE’s corporate tax rate is set at 9%. This is relatively low compared to many other countries, making the UAE an attractive location to do business. However, there’s an important distinction:

• Taxable Income Below AED 375,000: Businesses with taxable income below this threshold will be exempt from corporate tax.
• Taxable Income Exceeding AED 375,000: The standard 9% tax rate will apply for any income above this threshold.

Who Needs to Pay Corporate Tax?

Corporate tax applies to all businesses and commercial activities in the UAE, with a few exceptions, including:

• Extraction of natural resources (these remain subject to separate Emirate-level taxation)
• Individuals earning salaries

Corporate Tax Details for Freelancers (Natural Person) and Solo Business Establishment:

• Natural persons conducting Businesses or Business Activities in the UAE are Resident Persons for Corporate Tax irrespective of their nationality, whether they hold a residency visa in the UAE, whether their income is sourced in the UAE or from abroad, or how much time they may physically spend in the UAE.
• Specifically, Corporate Tax only applies to natural persons who are engaged in Businesses or Business Activities in the UAE and earn Turnover from these Businesses or Business Activities in excess of AED 1,000,000 in a Gregorian calendar year.
• A sole establishment is a trading Business owned by a natural person, where the proprietor is not separate from the Business. This is because of the direct relationship and control of the natural person over the Business and their unlimited liability for the Business’ debts and other obligations. In such case the natural person trades in his own name instead of through a separate legal entity. 
• Whilst Business includes vocational, commercial, industrial and professional activities, it does not include employment, and Corporate Tax does not apply to a natural person’s salary, wages and other employment income. It also does not include income from Personal Investments and Real Estate Investments.
• Personal Investments are activities that a natural person undertakes in their personal capacity and not through a License (or not required to be undertaken through a Licence), and the activities are not considered a commercial business
• Real Estate Investments are activities undertaken by an individual in relation to the direct or indirect sale, lease, sub-lease and rental of land or real estate property in the UAE that are not conducted through a License (or are not required to be conducted through a License).

The 1 Million Threshold:

• Registration Threshold: Freelancers and sole proprietors in the UAE are required to register for corporate tax if their annual turnover exceeds AED 1 million within a calendar year (January to December).
• Taxable Income Threshold: While registration becomes necessary past AED 1 million, the actual corporate tax of 9% only applies to business profits exceeding AED 375,000 within a financial year.
•  Turnover vs. Profit: It’s important to distinguish between these two: 
  • Turnover: Total revenue generated before any expenses.
  • Profit: The amount left after deducting business expenses from turnover.

Example:

If a freelance graphic designer makes AED 1.2 million in a year but has AED 500,000 in business expenses, they would need to register for corporate tax (because they surpassed the turnover threshold). However, their taxable income would be AED 700,000 (1.2 million – 500,000). Only the portion above AED 375,000 (AED 325,000 in this case) would be subject to the 9% tax.

Why the AED 1 Million Threshold Matters:

This threshold, along with the lower AED 375,000 taxable income threshold, ensures that many freelancers and small businesses are not heavily impacted by the new corporate tax. It’s designed to maintain the UAE’s attractiveness for entrepreneurs, while ensuring larger and more profitable businesses contribute their share.

 Important Considerations:

• Record Keeping: Accurate record-keeping of income and expenses is essential for any freelancer, but it becomes even more crucial with the introduction of corporate tax.
• Expert Advice: Consult a tax advisor to understand your specific situation and stay up-to-date on any changes to the tax regulations.

For further information, these official resources are helpful:

• Federal Tax Authority (FTA): https://tax.gov.ae/en/default.aspx
• Ministry of Finance – UAE Corporate Tax FAQ: https://mof.gov.ae/corporate-tax-faq/

The UAE: Still a Freelancer’s Haven

Despite the introduction of corporate tax, the UAE remains a compelling destination for freelancers and solo entrepreneurs. The relatively low tax rate, the generous threshold, and the government’s support measures ensure that the UAE maintains its competitive edge.

In Conclusion

While the corporate tax marks a shift in the UAE’s tax landscape, it’s important to understand its implications for your freelance or solo business. By taking proactive steps, consulting professionals, and staying updated, you can ensure seamless compliance and continue thriving in the UAE’s dynamic business environment.