Understanding Corporate Tax in the UAE: What New Business Owners Should Know

The United Arab Emirates (UAE) has long been regarded as a tax-friendly jurisdiction for international entrepreneurs and businesses. With no personal income tax and previously no federal corporate tax, the region became a hub for global investment and start-up activity. However, this landscape began shifting in response to international tax reform initiatives and economic diversification goals. As of June 1, 2023, the UAE has implemented a federal corporate tax UAE regime for the first time.

This move aligns with international standards set by the OECD and reflects the country’s commitment to greater financial transparency and sustainability. For new business owners, understanding the UAE corporate tax 2025 framework is essential. This article serves as a comprehensive guide, breaking down eligibility, tax rates, exemptions, and compliance requirements, with tailored insights for start-ups and Free Zone entities. 

What Is Corporate Tax in the UAE? 

Corporate Tax (CT) is a direct tax on the net income or profit of corporations and businesses. Until recently, the UAE maintained a near-zero tax policy for most sectors. The introduction of Corporate tax UAE  represents a shift towards compliance with OECD Base Erosion and Profit Shifting (BEPS) Pillar Two rules, aimed at creating a global minimum tax rate and deterring tax avoidance. 

The UAE CT applies to taxable profits, not revenue, and adheres to internationally recognised accounting principles. While it may seem like a challenge for start-ups, the regime is designed with progressive reliefs to support early-stage businesses. This transformation also helps protect the UAE’s reputation as a responsible global player and prevents the country from being blacklisted by other jurisdictions. 

Who Is Subject to Corporate Tax in the UAE? 

Understanding who must pay corporate tax is critical. The CT law applies to: 

• UAE-incorporated companies operating in the mainland. 
• Free Zone entities, depending on the nature of their income (qualifying or non-qualifying). 
• Foreign entities with a permanent establishment or UAE-sourced income. 
• Individuals (natural persons) conducting commercial activities under a license and whose annual turnover exceeds AED 1 million. 

Even if exempt from paying tax, registration with the Federal Tax Authority (FTA) is mandatory. Failure to register or comply may result in administrative penalties, which could impact the company’s ability to operate legally in the UAE.

What Is the Corporate Tax Rate? 

The 9% tax rate is globally competitive, particularly when compared with jurisdictions such as the UK (25%) or Germany (30% or higher). It allows Dubai-based companies to remain attractive while ensuring fiscal responsibility. The UAE’s corporate tax regime is relatively straightforward: 

Tax Exemptions and Reliefs 

The corporate tax framework in the UAE has been carefully structured to support growth and economic diversification, particularly for SMEs and startups. Several exemptions and relief mechanisms have been introduced to ease the transition burden for businesses and maintain Dubai’s competitiveness as a global business hub. The UAE corporate tax law includes several vital exemptions and reliefs: 

Free Zone Entities

Qualifying Free Zone Persons (QFZPs) can still benefit from a 0% corporate tax rate on qualifying income. This includes income derived from transactions with other Free Zone businesses, foreign customers, and passive income such as dividends, capital gains, and royalties. However, if these entities conduct business with the mainland, non-qualifying income may be taxed at the standard 9% rate. Maintaining clear records and substance requirements is essential to retain this benefit.

Dividends and Capital Gains

Dividends and capital gains earned by a UAE or foreign subsidiary are exempt from corporate tax, provided the parent company holds a minimum ownership threshold (typically 5%) and meets specific participation requirements. This encourages reinvestment and holding company structures in the UAE.

Intra-Group Transfers

Transfers of assets and liabilities between UAE-resident group companies are tax-neutral under certain conditions. This relief allows corporate groups to restructure, consolidate, or expand without incurring immediate tax liabilities. The relief applies as long as both parties remain within the group for at least two years after the transfer.

Slight Business Relief

Under the UAE corporate tax regime, small businesses with annual revenues of AED 3 million or less are eligible for Small Business Relief, which allows them to be treated as having no taxable income and thus benefit from a 0% corporate tax rate. This relief is available until at least December 31, 2026, and is designed to support startups and micro-enterprises during their initial growth phase. However, it is not available to companies that are part of multinational groups or large corporate structures. Proper registration and adherence to FTA guidelines are still required to claim this relief. For tailored assistance in optimising your setup, explore support from our advisory team. 

Key Compliance Requirements 

Compliance under the corporate tax regime involves several steps: 

• Register with the FTA: All businesses must register for CT, even if exempt. 
• Choose a Financial Year: Align your business calendar for accurate reporting. 
• Maintain Accounting Records: Keep audited financial statements for a minimum of 7 years. 
• File Annual Tax Returns: Due within 9 months after the financial year-end. 
• Avoid Penalties: Late filing can lead to fines starting from AED 10,000. 

How Does Corporate Tax Affect Free Zone Companies? 

Free Zones have traditionally offered 0% tax benefits, and the new rules preserve this under specific conditions: 

• Qualifying Income: Includes income from foreign clients, other Free Zone entities, and passive income (e.g., dividends). This type of income continues to enjoy a 0% corporate tax rate under the UAE CT regime.
  Businesses must ensure that their transactions are documented and meet FTA criteria for qualifying status.

• Non-Qualifying Income: Revenue from UAE mainland clients is taxed at a rate of 9%. Engaging in mainland trade without a proper license or structure may result in tax liabilities. Companies must carefully segregate qualifying and non-qualifying income in their accounting.

• Substance Requirements: Free Zone companies are required to maintain physical offices and demonstrate core income-generating activities within the zone. This includes having adequate staff, covering operating expenses, and ensuring decision-making functions are located in the Free Zone. Failure to demonstrate substantial activities may result in loss of 0% tax status and trigger penalties.
  

Failure to meet these conditions results in the loss of preferential rates. For help selecting the correct zone and activity, refer to the information on our Free Zone business page for a better understanding.

Corporate Tax vs. VAT in the UAE 

Many new business owners confuse Corporate Tax with Value-Added Tax (VAT). Here’s how they differ:  

Both taxes may apply to your business. For a combined understanding, please read the guide on VAT and tax compliance. 

Preparing Your Business for Corporate Tax 

To avoid future penalties or non-compliance, every business should begin early preparation: 

• Implement Accounting Software: Use tools to track income, expenses, and profits. 
• Review Legal Structure: Certain Free Zones offer more tax advantages than others. 
• Analyse Revenue Streams: Determine which income qualifies for tax exemptions. 
• Train Staff or Hire Professionals: Corporate tax is new; ensure your team is informed. 
• Schedule a Consultation: Our experts offer free tax assessments to evaluate your risk and obligations. 

Common Misconceptions About Corporate Tax 

Despite the clarity of the new corporate tax regulations in the UAE, several widespread misconceptions continue to mislead business owners, especially startups, freelancers, and Free Zone companies. Understanding the truth behind these myths is crucial for remaining compliant and avoiding penalties.

Free Zones are always tax-free

This belief stems from the historic 0% tax model offered by Free Zones. However, under the new UAE corporate tax regime, only qualifying income remains tax-exempt. If your Free Zone company earns revenue through transactions with the UAE mainland or engages in non-qualifying activities, it will be subject to the standard corporate tax rate of 9%. To maintain the 0% rate, businesses must meet strict substance requirements, ensure accurate income classification, and comply with the guidelines of the Federal Tax Authority (FTA).

Freelancers don’t need to register

Many solo entrepreneurs assume that working independently exempts them from tax registration. However, under the corporate tax law, any natural person conducting commercial activities in the UAE with annual revenue exceeding AED 1 million must register for corporate tax. This includes freelancers offering services under professional licenses, even if they work alone or on a small scale. Failing to register can result in substantial fines and loss of legal standing.

I don’t need to register if exempt 

This is a critical misunderstanding. Even if your business qualifies for exemptions (such as under Small Business Relief or due to qualifying Free Zone income), corporate tax registration is still mandatory. The UAE’s regulatory framework requires all eligible businesses to be registered with the FTA, ensuring transparency and accurate reporting. Registration helps maintain your compliance record and is essential if your business grows beyond the exemption thresholds in future years.

By clarifying these common myths, new and existing businesses can take proactive steps toward compliance. For individual evaluation and support with registration, consider booking a free tax consultation with our experts.

How We Help New Business Owners Navigate UAE Corporate Tax? 

At OpenADubaiCompany.com, we specialise in guiding new businesses through the evolving regulatory environment: 

• Tax Registration & Filing: We handle your CT registration and ensure timely submissions. 
• Entity Structuring: Optimise Your Business Setup to Minimise Tax Exposure. 
• Bookkeeping & Compliance: Monthly accounting and audit-ready records. 
• Free Zone Advisory: We help you select zones with maximum tax advantages. 

Conclusion 

The introduction of the corporate tax guide for the UAE is a transformative step in the country’s business landscape. While the change introduces new obligations, it also brings greater legitimacy, financial discipline, and long-term benefits. New business owners should focus on understanding the nuances of the business tax environment in Dubai, leveraging available exemptions, and implementing proper systems for compliance. With the right guidance, adapting to the UAE’s corporate tax in 2025 is not only achievable, it’s a smart strategic move. Book a consultation with our tax advisors today and ensure your business is ready for the new era of accountability.