Is every income of a trading company subject to Corporate Tax in the UAE?

Depending on where they are located and the legal standing of their clients, legal trading businesses may or may not be subject to corporation tax.

Unless they fulfill specified requirements for exemptions or carry on business as natural persons with an annual income of fewer than one million dirhams, trading businesses in the United Arab Emirates are subject to corporation tax legislation. These trading companies fall into two categories: resident trading companies and nonresident trading companies.

Resident trading companies encompass the following:

  • Companies engaged in judicial commerce, including those registered in free zones, are incorporated in the UAE.
  • Juridical trading companies are established outside the UAE but controlled and managed from within the UAE.
  • Anyone operating a solo establishment or a civil company that conducts business in the UAE.

Non-resident trading companies, on the other hand, include:

  • Permanent establishments (PE) of non-resident trading companies in the UAE.
  • UAE-sourced income of non-resident trading companies.
  • Instances where non-resident trading companies have a nexus in the UAE leading to UAE-sourced income.

All trading entities, including limited liability trading companies, public shareholding trading companies, public joint stock trading companies, sole proprietorships, civil companies, and others engaged in trading activities, are deemed to be taxable trading companies based on the aforementioned criteria. They are liable to taxation by the standards outlined in the legislation and relevant rulings.

Resident juridical trading firms are liable for Corporate Tax (CT) on their global taxable revenue, regardless of where they were formed—inside the UAE or outside—but where they were controlled and managed. On the other hand, sole establishments, civil companies, or individuals engaged in freelance businesses within the UAE are liable to pay CT only on their worldwide income linked to their UAE business activities.

When a sole establishment, civil company, or individual operates in a trading capacity, their tax liability remains uniform, irrespective of whether they operate within or outside of free zones. There is an exception, as such taxable entities are not required to pay corporate tax or even register if their income stays below one million dirhams. For taxable income exceeding three million dirhams, a zero percent corporate tax rate applies up to Dh375,000, and any income beyond this threshold is subject to a nine percent tax rate.

Free Zone Juridical Trading Companies

If it’s registered in a free zone, we label it as a free zone juridical trading company. When such a free zone entity meets the qualifying criteria, it becomes a “Qualifying Free Zone Trading Company” (QFZTC) with special provisions in the law.

According to MD 139/2023, if a QFZTC sells goods to another free zone entity (which may be an end-user, wholesaler, distributor, etc.), the income from this activity is considered “Qualifying Income” (QI) and is subject to a 0% tax rate, provided the de minimus criteria are met.

For instance, consider “Ltd,” a QFZTC, purchasing a machine from China and selling it to “Bltd,” a company registered in the free zone that uses the machine for manufacturing. Although Bltd is the end user, the income generated by Ltd from this transaction still qualifies as QI because the transaction involves another free zone entity.

When a QFZTC engages in transactions with non-free zone entities within or outside the UAE, the income generated from such activities is considered Q1, but only if the company is selling goods to wholesalers or retailers (not end users) and the de minimus test is met.

For example, “P Ltd,” a QFZTC, purchases goods from America and sells them to customers in Australia, who are not end users but wholesalers or retailers.

The revenue from a sale made by P Ltd to “Hiq Ltd,” a distributor on the UAE mainland (not an end user), is categorized as Q1 income if the products are carried via a designated zone and the de minimus requirements are met.

In both of the above examples, the income of the QFZTC is considered QI when goods are sold to distributors, not end users. Failure to meet the de minimus criteria results in the QFZTC losing its QFZTC status for the current and subsequent four tax periods.

Non Free Zone Juridical Trading Companies

Trading businesses that are not located in a free zone are not eligible for exemptions and must pay taxes on their worldwide earnings if they are regarded as resident firms. Take “Kcrips Ltd,” a trade business with a mainland UAE registration, as an illustration. Kcrips Ltd brings products from America to Australia and offers them to people there. The revenue received from the Australian client will be classified as Non-Qualified Income (NQI) since Kcrips Ltd does not fulfill the requirements of a qualified free zone person. In such transactions, the classification of income remains irrespective of the customer’s status (wholesaler, retailer, or end-user).

Companies that offer products to wholesalers or retailers and are based on the UAE mainland must take careful strategic steps to take advantage of the 0% Corporate Tax (CT) rate on Qualifying Income (QI).

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