Overview of key thresholds under UAE CIT Regime

The United Arab Emirates (UAE) have introduced Corporate Income Tax (CIT) with effect for financial years starting on or after 1 June 2023. Whilst the regulations have already come into effect for certain businesses, the first tax period for most businesses will commence on 1 January 2024. In practice, this means that numerous companies are still evaluating their tax position under the CIT framework. This is particularly relevant in light of the regulations regarding the tax regime applicable to free zone entities, which were only published recently on 1 June 2023.

The UAE CIT regime provides many benefits, incentives and reliefs to taxpayers. In most cases, taxpayers will only be able to leverage these benefits if their revenue falls within specified thresholds. On the other hand, the CIT Law and its implementing decisions also lay out various compliance obligations on taxpayers. Some of these obligations will only come into play where the taxpayer exceeds the relevant thresholds specified in the regulations.

It is crucial for businesses to understand how these thresholds work in order to accurately determine their tax status under the new CIT regime. In this article, we zoom in on several of these key thresholds, shedding light on their implications for UAE taxpayers.

 

Taxable income threshold – AED375,000

Under the UAE CIT regime, a distinction is made between ‘regular taxpayers’ and ‘Qualifying Free Zone Persons’:

• Regular taxpayers are subject to the statutory CIT rate of 9% on taxable income exceeding AED375,000, whereas a 0% rate will apply for taxable profits up to AED375,000.

• Qualifying Free Zone Persons are eligible for a 0% tax rate on ‘Qualifying Income’. Income that is not Qualifying Income will in principle be subject to 9%.

Read our article on Qualifying Free Zone Persons here.

 

Small business relief – AED3,000,000

Small Business Relief is intended to provide tax relief to small businesses by reducing their overall tax burden and compliance costs. Resident taxpayers that opt for Small Business Relief, will be treated as not having derived any Taxable Income within a tax period. In addition, they will be able to benefit from reduced compliance requirements. Taxpayers that opt for Small Business Relief will still be required to register for CIT purposes and (presumably) file (nil) tax returns.

Only Taxable Persons that are Residents are eligible for Small Business Relief, provided their revenue does not exceed AED3 million for the current and previous tax periods.

It should be noted that Small Business Relief will not be available for:

• Constituent Entities of Multinational Enterprises Groups (MNE Groups) with a total consolidated group revenues of more than AED 3.15 billion; and
• Qualifying Free Zone Persons.

Read our article on Small Business Relief here.

 

De minimis threshold – AED5 million

A Qualifying Free Zone Person (QFZP) is only allowed to derive income that is not eligible for the 0% tax rate within certain limits. Under the regulations, this is referred to as the de minimis rule. The de minimis rule imposes a limit in terms of the amount of Non-Qualifying Revenue a QFZP can derive, without losing its status as a QFZP.

Non-Qualifying Revenue refers to revenue derived from Excluded Activities and Revenue from activities that are not Qualifying Activities with a Non-Free Zone Person. The de minimis threshold is set at AED 5 million or 5% of total revenue, whichever is lower.

If the QFZP exceeds the de minimis threshold, it will lose its status as a QFZP. This means that the Free Zone Person will be considered a regular taxpayer and taxed accordingly. This implies that such Free Zone Person’s entire income will be considered taxable income, whereby income up to AED 375,000 will be taxable at 0% and any income exceeding AED 375,000 will be taxable at 9%.

Read our article on the de minimis rule here.

 

Audited financial statements – AED50 million

Under Ministerial Decision No. (82) of 2023, the following categories of taxable persons are required to prepare and maintain audited financial statements:

• Taxable Persons deriving revenue exceeding AED 50 million; and
• QFZPs.

 

Cash basis of accounting – AED3 million

The cash basis of accounting is a relatively straightforward and simplified accounting method where revenues and expenses are recognized only when cash is received or paid, respectively. This method is more commonly used by smaller businesses or taxpayers with lower revenue as it is easy to implement and understand.

The primary reason why only taxpayers with lower revenue can use the cash basis of accounting has to do with the financial complexity that comes with higher revenue levels. Larger businesses with higher revenues typically have more complex transactions that may not be accurately or effectively captured using the cash basis of accounting.

Under the UAE CIT regime, only taxpayers whose revenue does not exceed AED3 million may prepare financial statements using the cash basis of accounting. If a taxpayer’s revenue exceeds this threshold, they may - under exceptional circumstances - submit an application to the Federal Tax Authority to apply the tax basis of accounting.

 

International Financial Reporting Standards for small and medium-sized entities – AED 50 million

Ministerial Decision No. (114) of 2023 clarifies that taxpayers need to determine their taxable income and prepare financial statements in accordance with International Financial Reporting Standards (IFRS). Taxable Persons whose revenue does not surpass AED50 million are allowed to apply IFRS for small and medium-sized entities.

 

Transfer pricing documentation – AED200 million

According to Ministerial Decision No. (97) of 2023, a taxable person must maintain both a master file and a local file if they meet either of the following conditions:

• The taxable person is a constituent entity of a multinational enterprises group (MNE Group) with a total consolidated group revenue of AED 3.15 billion or more in the relevant tax period; or
• The taxable person's revenue in the relevant tax period is AED 200 million or more.

Businesses with a revenue below AED200 million will still need to ensure that any transactions or arrangements with related parties or connected parties meet the arm’s length principle.

Read our article on transfer pricing documentation here.

 

Revenue threshold for natural persons subject to CIT – AED1 million

Natural persons (i.e., individuals) who carry out a Business or Business Activity will in principle be subject to CIT, but only if the natural person’s revenue (i.e., gross income) exceeds AED1 million per calendar year. This includes freelancers, individuals operating as sole establishments, and partners in an unincorporated partnership. Certain income categories, such as income from employment, personal investments or real estate investments are not considered as income derived from Business or Business Activities.

 

Minimum acquisition cost participating interest – AED4 million

The main conditions to benefit from the participation exemption and for a shareholding to qualify as a Participating Interest are as follows:

• The parent entity must hold a shareholding of 5% or more in the subsidiary;
• The parent entity must hold the shares for at least 12 months;
• The subsidiary must be subject to tax at a minimum rate of 9 per cent; and
• Not more than 50% of the direct and indirect assets of the participation consist of ownership interests or entitlements that would not have qualified for an exemption from CIT under the participation exemption if held directly by the parent entity.

Ministerial Decision No. (116) of 2023 stipulates that the first condition will also be met where the aggregated acquisition cost of the ownership interests in the subsidiary is at least AED4 million (i.e., even where this does not represent a shareholding of 5% or more in the subsidiary).

Read our article on the participation exemption here.

 

Conclusion

The new CIT regime contains several thresholds. These thresholds play a crucial role in determining a taxpayer's tax obligations and overall tax position. Having a clear understanding of these thresholds can enable strategic planning, ensuring your business operates within the law while maximizing the benefits of the new tax regime.