How to Calculate Gratuity in UAE: Your Ultimate Guide to End-of-Service Benefits
16/12/2025
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The fiscal landscape of the United Arab Emirates (UAE) underwent a significant transformation with the introduction of the federal corporate tax, a direct tax levied on the net income or profit of corporations and other entities, effective for financial years commencing on or after 1 June 2023. This move, overseen by the Ministry of Finance, aligns the nation with international tax practices and standards, notably the OECD's Pillar framework to combat harmful tax practices.
This guide provides an updated overview of the UAE CT regime and compliance requirements, particularly relevant for the tax year 2025.
Corporate tax in the UAE is a tax levied on a company’s taxable income. This marks a departure from the country’s traditional tax-free status and is designed to bring the UAE in line with international tax standards while maintaining its competitive edge. The corporate tax rate is set at 9% on taxable income exceeding AED 375,000. For taxable income below this threshold, businesses are exempt from paying corporate tax.
This tax regime, applicable from June 1, 2023, affects a broad spectrum of businesses, both resident and non-resident. However, there are exceptions and incentives for specific types of companies, such as those operating within Free Zones. The new structure aims to promote economic diversification and create a clearer framework for companies of all sizes.
The UAE CT Law (Federal Decree-Law No. 47 of 2022 and subsequent tax decrees) applies to a broad scope of resident and non-resident persons:
• Resident Persons (Juridical Entities): All companies and partnerships, such as Limited Liability Companies (LLCs) incorporated in the UAE, are subject to the corporate tax law.
• Natural Persons (Individuals): Subject to CT only on income derived from business or business activities, with the AED 375,000 threshold applying to their business profits.
• Non-Resident Persons: Taxable if they have a Permanent Establishment (PE) in the UAE or derive specific State-Sourced Income
• Free Zone Persons: Generally qualify for a 0% tax rate on their Qualifying Income, provided they meet specific criteria, including maintaining substance in the Free Zone. Crucially, even with a 0% rate, Free Zone Persons must still register and comply with all tax regulations.
The UAE's shift to a new corporate tax regime makes a wide range of entities subject to corporate tax. This federal corporate tax effective from June 1, 2023, is a direct tax—specifically, a form of direct tax levied on the net income, replacing the previous lack of a comprehensive profits tax. As per the UAE corporate tax law (Federal Decree-Law No. 60 of 2023), this corporate income tax or business profits tax applies to virtually all resident juridical persons, including companies and local branches of foreign entities. Non-resident persons are also subject to corporate tax if they have a Permanent Establishment (PE) in the UAE or derive specific UAE-sourced income tax. While the standard rate is 9%, large multinational enterprises are subject to corporate tax at an effective tax rate of 15% under the global minimum tax rules, emphasizing tax transparency. This new system requires proactive tax management, including carrying forward tax losses and managing compliance for current and previous tax periods.
To support local enterprises, small UAE businesses with annual revenues of AED 3 million or less benefit from a 0% tax rate until the end of the tax period that ends on or before 31 December 2026. Certain entities, such as government bodies and public benefit organizations, may be exempt.
The UAE's adoption of the OECD's Pillar framework introduces specific obligations for large multinational enterprises (MNEs).
• Pillar Two: This framework seeks to ensure MNEs pay a minimum effective tax rate of 15% on their global profits.
• Domestic Minimum Top-Up Tax (DMTT): Effective from 2025, the DMTT applies to MNEs with consolidated global revenues exceeding €750 million. These entities will be subject to a minimum effective tax rate of 15% in the UAE. This tax levied on the net income ensures the MNEs’ tax liability meets the minimum tax threshold.
The FTA has announced a significant, limited-time relief measure: the AED 10,000 late registration penalty will be waived or refunded for any business that missed its registration deadline, provided the business files its first Corporate Tax Return or Annual Declaration within seven months of the end of its first tax period.
Action Window: For companies with a first tax period ending December 31, 2024, they must file their return by July 31, 2025 to benefit from this penalty waiver.
The UAE has adopted comprehensive Transfer Pricing rules based on the Arm’s Length Principle. This ensures that transactions between related parties are priced as if they were conducted between independent entities.
• Documentation: Businesses with annual revenues exceeding AED 200 million (or MNEs with global consolidated revenues over €3.15 billion) must maintain detailed Transfer Pricing documentation, including a Master File and a Local File.
• Advance Pricing Agreements (APA): An APA system, allowing businesses to agree on a Transfer Pricing methodology with the FTA in advance, is expected to be fully introduced.
The corporate tax rate structure in the UAE is designed to be competitive while ensuring that businesses contribute fairly to the country’s economy. Here’s a detailed breakdown of how the rates work:
1. Tax Rate for Taxable Income Above AED 375,000
The standard tax rate for taxable income exceeding AED 375,000 is 9%. This rate is applicable to most businesses, including those that generate income within the UAE and those with a PE in the country.
2. Tax Rate for Income Below AED 375,000
For businesses with taxable income below AED 375,000, the tax rate is 0%. This makes the UAE an attractive option for smaller businesses and startups, allowing them to focus on growth without the burden of corporate taxes.
3. Small Business Relief
Small businesses with annual revenues of AED 3 million or less will benefit from a 0% tax rate until the end of 2026. This small business relief provides much-needed support to new and emerging businesses, enabling them to grow without the financial strain of tax obligations in the early stages of operation.
4. Free Zone Tax Incentives
Companies that operate in UAE Free Zones are eligible for a 0% tax rate on their qualifying income. However, Free Zone companies must meet specific conditions, such as having substantial operations in the Free Zone, generating qualifying income, and adhering to other regulations.
The Domestic Minimum Top-Up Tax (DMTT) is an important measure for large multinational enterprises (MNEs) that generate significant global revenue. This measure, which comes into effect in 2025, applies to companies with a global revenue exceeding €750 million.
MNEs that fall within this category will be subject to a 15% tax rate on their taxable income in the UAE. This tax ensures that MNEs contribute fairly to the country’s tax system and is part of the UAE’s alignment with international tax rules, particularly the OECD’s global tax framework.
The corporate tax is a direct tax levied at a tiered rate structure. The standard rate of 9% applies to taxable income that exceeds AED 375,000, while a 0% rate applies to taxable income up to this threshold. This competitive structure supports small businesses. However, in a major move towards international tax transparency, large Multinational Enterprises (MNEs) with global consolidated revenues exceeding €750 million are subject to a tax of 15%—specifically, a Domestic Minimum Top-Up Tax (DMTT)—to meet the global minimum effective tax rate of 15%. For most UAE businesses, this means the tax is a direct tax at 0% or 9%, while the higher rate applies only to the largest global corporations.
The corporate taxation system covers a wide range of entities operating within the UAE:
Resident Persons (Juridical Entities): All companies and partnerships incorporated in the UAE (e.g., LLCs) are subject to the corporate tax law.
Natural Persons (Individuals): Subject to CT on income from business activities, with the AED 375,000 threshold applying to their business profits.
Non-Resident Persons: Taxable if they have a Permanent Establishment (PE) in the UAE or derive specific State-Sourced Income.
Free Zone Persons: While benefiting from a potential 0% tax rate, they must still register and comply with all tax regulations.
Certain entities, such as government bodies and public benefit organizations, may be exempt from corporate tax provided they meet specific criteria outlined in the federal decree law.
Compliance is mandatory for all taxable persons, irrespective of their tax decrees or exemptions.
• Registration: Taxable persons must register with the FTA. For those with a financial year starting on 1 January 2024 and ending on 31 December 2024, registration deadlines applied throughout 2024.
• Tax Period: The relevant tax period (the financial year) determines the filing deadlines.
• Filing & Payment: Annual corporate tax returns must be filed, and the tax payment is due, within nine months after the end of the tax period ends.
• Example: For a tax period ends on 31 December 2024, the filing deadline is September 30, 2025.
One of the critical aspects of the corporate tax system is how taxable income is calculated. Taxable income is determined by starting with accounting profit and then making necessary adjustments based on the regulations.
Businesses are allowed to carry forward losses and offset them against future taxable income. However, losses can only offset up to 75% of taxable income in a given year. There is no provision for carrying losses back to offset taxable income in previous years, so it’s essential for businesses to manage their losses carefully.
The definition of Permanent Establishment (PE) is crucial for non-resident businesses. A PE refers to a fixed place of business or a dependent agent that conducts business in the UAE. Companies that are deemed to have a PE in the UAE are required to register for corporate tax and pay tax on their UAE-sourced income.
State-Sourced Income
State-sourced income refers to income generated within the UAE. This includes income from the sale of goods or services in the UAE, income from UAE property, and interest earned on UAE-based assets. Businesses must carefully determine if their income is UAE-sourced and subject to tax.
To comply with the new tax regime, businesses must complete several registration and filing steps with the Federal Tax Authority (FTA).
1. Registration Deadlines
Businesses that are resident juridical persons must register with the FTA by March 1, 2024. Non-resident businesses must register within 6-9 months of their fiscal year-end.
2. Filing and Payment
Tax returns must be filed within 9 months after the end of the fiscal year, and payment is due at the same time. Businesses that fail to meet these deadlines will face penalties, including a fine of up to AED 10,000 for late registration.
With the introduction of a 15% direct tax on businesses, implementing corporate tax in the UAE can be complex. At Young & Right, we simplify this process and ensure your business stays compliant with tax regulations.
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The introduction of corporate tax in the UAE marks a significant shift in the country’s tax landscape. While this new tax regime offers several incentives, including tax relief for small businesses and Free Zone companies, it also introduces new compliance requirements that businesses must understand and navigate. Whether you are a resident or non-resident business, understanding the tax rate structure, transfer pricing rules, and compliance obligations is essential for ensuring your business remains in good standing with the Federal Tax Authority (FTA).
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