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In the rapidly evolving business landscape of the United Arab Emirates (UAE), foreign-owned entities are confronting a new era of taxation. With the introduction of the federal corporate tax regime and heightened global tax transparency requirements, foreign-direct investment is now subject to distinct compliance responsibilities. Engaging experienced tax compliance and advisory services is essential for foreign-owned entities to navigate the regulatory terrain effectively.

Scope and applicability of the UAE corporate tax regime

The UAE’s federal corporate tax (CT) regime, enacted under Federal Decree‑Law No. 47 of 2022 (amended by Decree-Law No. 60 of 2023), applies to financial years starting on or after 1 June 2023 for many businesses. Generally, businesses with taxable income above AED 375,000 are subject to a standard 9 % tax rate.

Foreign entities must determine whether they fall within the scope of tax. A foreign juridical person may be considered a “resident person” if it is “effectively managed and controlled” in the UAE, or if it has a permanent establishment (PE) within the UAE, or if it derives UAE-sourced income.

For foreign-owned entities, this means that a branch or subsidiary operating in UAE through a fixed place of business, or with senior management decisions taking place in UAE, may trigger tax liability even if the parent entity is based abroad.

Foreign-owned entities therefore need to ensure that their corporate structure, decision-making locus and operational footprint are evaluated from a tax perspective. This underlines the importance of selecting robust tax compliance and advisory services early on.

Tax rate structure and exemptions relevant to foreign-owned entities

The standard corporate tax rate is 9 % for “Taxable Persons” with profits exceeding AED 375,000. Income up to AED 375,000 enjoys a 0 % rate for qualifying businesses. Free-zone entities meeting the criteria of a “Qualifying Free Zone Person” (QFZP) may enjoy a 0 % rate on qualifying income if they meet required substance and activity tests.

For foreign-owned entities, several implications arise:

• If the entity is a foreign juridical person resident in UAE (due to effective management), the standard regime applies, and the entity must prepare accounts, file returns, and meet the audit requirements.

• If the entity is non-resident but has a PE in UAE, then the taxable income attributable to the PE is subject to tax.

• If structured as a Free Zone entity, the entity must strictly meet the conditions for 0 % rate; otherwise the full tax rate applies even to free-zone income.

Given the nuances of structuring to benefit from exemptions, foreign-owned entities must engage specialist tax compliance and advisory services tied to UAE practices.

Residency, permanent establishment and foreign entity status

Understanding residency and PE classification is critical for foreign-owned entities operating in the UAE. According to tax guidance: a juridical person incorporated in UAE is a resident; a foreign juridical person may be treated as resident if its place of effective management is in UAE.

A non-resident entity may still be subject to UAE CT if it has a PE in UAE; guidelines align broadly with the Organisation for Economic Co‑operation and Development (OECD) Model Tax Convention definition.

Hence, foreign-owned entities must map key decision-making, board meetings, accounting, and oversight functions to assess whether they are treated as resident or hold a PE in UAE. Failure to do so may result in unexpected tax obligations. This highlights the need for tailored tax compliance and advisory services focused on foreign ownership and cross-border operations.

Foreign source income, participation and treaty relief

Foreign-owned entities with global operations must be mindful of how foreign source income is treated in the UAE under the CT regime. A detailed guide by the Federal Tax Authority (FTA) covers how foreign source income of resident persons or non-resident persons is taxed.

Key issues:

• Dividends received by a UAE resident from a non-resident subsidiary may be exempt if certain conditions (ownership minimum, holding period, foreign tax rate) are met (participation exemption).

• Foreign tax credits may be available for UAE resident persons, subject to limitations and whether the income is taxed abroad at a rate at least the UAE’s rate. 

• Treaty relief may be relevant where the foreign entity is in a jurisdiction with a double taxation agreement (DTA) with UAE.

Foreign-owned entities must carefully evaluate these aspects of international tax to avoid double taxation or tax leakage—again illustrating the value of high-quality tax compliance and advisory services specializing in the UAE.

Free-Zone entities, substance requirements and foreign ownership

Many foreign investors establish entities in UAE free zones to benefit from 100 % foreign ownership and preferential tax regimes. But under the CT law, such benefits are conditional. Free zone entities must qualify as QFZP to retain 0 % tax on qualifying income.

Furthermore, the Economic Substance Regulations (ESR) apply in the UAE and have particular relevance for foreign-owned companies in free zones and onshore.

Key substance tests include:

• Core Income Generating Activity (CIGA) test: core business functions must be performed in UAE.

• Directed & Managed test: decisions should be made in UAE.

• Adequacy test: adequate staff, operating expenditure, assets in UAE.

Foreign-owned entities in free zones must therefore monitor that their substance aligns with the requirements; failure may result in loss of benefit and tax exposure. A competent adviser providing tax compliance and advisory services is important to satisfy both CT and ESR frameworks.

Tax compliance, filing obligations and penalties

Compliance obligations are broad and must be addressed by foreign-owned entities operating in the UAE. Registration with the FTA is required for resident persons and qualifying non-residents with a PE.

Annual Corporate Tax Returns must be filed within nine months of the end of the tax period unless relief applies. Accounts must be prepared under recognized accounting standards (e.g., IFRS) and tax adjustments applied.

Penalties for non-compliance may include fines for late registration, late filing, under-payment of tax or failure to maintain records.

For foreign-owned entities, especially those operating cross-border, maintaining transfer pricing documentation, arm’s-length transactions and robust accounting are essential. Engaging credible tax compliance and advisory services is critical to ensure timely filings, minimise risk and maintain regulatory compliance.

International developments and implications for foreign-owned players

The UAE’s tax regime is increasingly aligned with global tax-transparency frameworks. For example, the UAE will implement a Domestic Minimum Top-up Tax (DMTT) of 15 % for large multinational enterprises with consolidated revenues exceeding EUR 750 million, effective January 2025.

Foreign-owned entities that are part of multinational groups must carefully consider the impact of such minimum tax rules, BEPS (Base Erosion & Profit Shifting) requirements, and compliance across jurisdictions. Identifying whether the entity is part of a large MNE group will be a key step in tax planning. Here again, specialised tax compliance and advisory services offer value in ensuring alignment with global minimum tax rules.

Strategic steps for foreign-owned entities entering the UAE

Foreign investors entering the UAE market should adopt a proactive tax strategy:

• Assess entity structure: Is the entity incorporated in a free zone or mainland? Does it have a PE or controlled decision-making in UAE?

• Map substance and operations: Ensure that decision-making, management and activities reflect the intended status (resident/non-resident, QFZP or not).

• Review ownership linkages: For participation exemptions and foreign source income, ensure ownership thresholds, tax rates abroad and holding periods are satisfied.

• Ensure regulatory registration and compliance: Register with the FTA, prepare timely accounts and tax returns, maintain documentation.

• Engage trusted professionals: Given the complexity of international tax, substance requirements, treaty relief and UAE specifics, foreign-owned entities should enlist expert tax compliance and advisory services to design tax-efficient structures and safeguard compliance.

• Monitor global developments: With minimum tax regimes and evolving OECD frameworks, foreign-owned entities must stay agile and responsive.

Foreign-owned entities establishing operations or changing structures in the UAE must carefully align with the federal corporate tax regime, residency rules, substance tests and international tax developments. With the right guidance and timely implementation of robust frameworks, these entities can navigate the tax implications effectively while safeguarding growth and reputation in the UAE market.

Also Read: Corporate Tax Penalties in UAE and How to Avoid Them