Top Myths About UAE Corporate Tax, Busted!

As the UAE continues implementing its Corporate Tax framework, we at Arzonell, your trusted tax advisors, have come across several common misconceptions circulating about “UAE Corporate Tax.”Misunderstanding these rules can lead to missed opportunities, compliance issues, or even penalties.

In this article, we clear up the most frequent myths businesses encounter:

1. “There’s No Corporate Tax in Dubai”

Many still believe that Dubai doesn’t impose corporate tax. While this was true previously, the Corporate Tax regime officially came into effect on 1 June 2023 under Federal Decree-Law No. 47 of 2022.

Corporate Tax (also referred to as Business Profits Tax or Corporate Income Tax) applies to the net profit of a business. Under the UAE’s framework, a 9% tax rate applies to taxable income above AED 375,000, with smaller profits taxed at 0%.

The goal of this reform is to bring the UAE in line with international tax standards and enhance transparency. Businesses across sectors, except those involved in oil and gas, must now comply with these new regulations.

2. “Corporate Tax Is Too Complicated to Handle”

Many assume that filing and compliance are overly complex. However, the UAE’s Corporate Tax system is designed to be digital, transparent, and business-friendly.Returns are filed electronically via the Federal Tax Authority (FTA) portal, and there’s no requirement for provisional filings or advance payments.

With proper guidance, the compliance process is straightforward, allowing businesses to focus on growth while staying fully aligned with the law.

3. “Corporate Tax Applies to All Personal Income”

That’s not true. Employment income, whether from public or private sector jobs, is not subject to Corporate Tax.

Corporate Tax only applies to income derived from commercial or business activities.However, natural persons (such as freelancers or sole proprietors) holding a business license are required to register and pay Corporate Tax if their annual turnover exceeds AED 1 million during the calendar year (1 January to 31 December).

4. “Free Zone Companies Are Completely Exempt”

A common misconception. All free zone companies fall under the UAE Corporate Tax framework, but some may qualify for a 0% rate if they meet the conditions of a Qualifying Free Zone Person (QFZP).

To qualify, a company must:

• Maintain substantial presence in the UAE

• Earn Qualifying Income as defined by the FTA

• Prepare audited financial statements

• Comply with transfer pricing rules

• Meet ongoing reporting and record-keeping obligations

Failure to meet even one condition removes eligibility, and the entire taxable income becomes subject to 9%.

5. “Free Zone Companies Don’t Need to Register or File Returns”

Every Free Zone company, regardless of size or activity, must register with the FTA and file an annual Corporate Tax return. Even if a business qualifies for a 0% rate, it still must submit a declaration proving eligibility.

As per Federal Decree-Law No. 47 of 2022, returns must be filed within 9 months of the end of the financial year.For example, a company with a year-end of 31 December 2024 must submit its first return by 30 September 2025.

Failure to register or file on time can result in administrative penalties and even suspension of trade licenses.

6. “Inactive or Non-Revenue Companies Don’t Need to Register”

Registration is mandatory for all entities holding a UAE trade license, even if the company is dormant, has no income, or no operations.This includes offshore and free zone branches.

Natural persons conducting business under a license must also register if their turnover exceeds AED 1 million during a calendar year.

7. “All Free Zone Trading Companies Get 0% Tax”

Location alone doesn’t guarantee a 0% tax rate.A trading company must earn Qualifying Income, for example from transactions with entities outside the UAE or within the same free zone.

Income from mainland clients is considered non-qualifying and taxed at 9%. Businesses should carefully assess their income sources to determine eligibility.

8. “We Can Combine Our Mainland and Free Zone Entities Under One Tax Group”

Only non-qualifying Free Zone companies taxed at 9% can form a tax group with mainland entities.A Qualifying Free Zone Person (enjoying the 0% rate) cannot join a tax group.

• If a free zone company opts for the 0% corporate tax regime, it cannot form a tax group with a mainland entity.

• Tax grouping is only allowed if the free zone company gives up its 0% tax benefit and shares at least 75% common ownership with the mainland company.

This makes tax grouping a strategic decision, and businesses must weigh the benefits carefully.

9. “Transfer Pricing Doesn’t Apply to 0% Entities”

Even 0%-taxed companies must follow transfer pricing and arm’s length principles.This means transactions between related parties must reflect market value to prevent profit shifting or misuse of exemptions.

Proper documentation and record-keeping are key to avoiding audit issues.

10. “Audit Is Only Required Above AED 50 Million Turnover”

For mainland entities, yes. But all Qualifying Free Zone Persons, regardless of turnover, must prepare and submit audited financial statements to maintain 0% eligibility.Thus, for example, even a small Qualifying Freezone Entity must comply with the audit requirement if they wish to retain their tax-free status.

11. “Free Zone Property Rentals Are Automatically Tax-Free”

Not necessarily.Rental income qualifies for 0% Corporate Tax only if the property is commercial and leased to another free zone entity.Otherwise, it becomes taxable at 9% or falls under de minimis non-qualifying income thresholds.

12. “Being in a VAT Group Means a Single Corporate Tax Return”

VAT and Corporate Tax are separate tax regimes.A VAT group does not automatically become a Corporate Tax group. Each entity must register and file separately, unless a tax group is formally approved by the FTA.

13. “Mainland Consulting Income Is Exempt for Free Zone Companies”

Services provided by free zone entities to mainland clients are considered non-qualifying and taxed at 9%.

However, small non-qualifying income amounts may fall within the de minimis threshold, where:

• Non-qualifying revenue ≤ AED 5 million, or

• ≤ 5% of total revenue

If within limits, the company may retain 0% eligibility.

14. “All Small Businesses Are Fully Exempt”

The Small Business Relief scheme under Article 21 of Federal Decree-Law No. 47 of 2022 allows UAE-resident businesses (including Free Zone entities) with revenues ≤ AED 3 million during relevant tax periods ending on or before 31 December 2026 to elect for relief.

However, these businesses must still register and file simplified Corporate Tax returns.Entities that are part of a multinational group, Qualifying Free Zone Persons, or those that artificially split their business to meet thresholds cannot claim this relief.

Key Takeaways

The UAE’s Corporate Tax regime has transformed how businesses, especially in Free Zones, operate.

Here’s what every company should remember:

• Every entity must register and file, even if exempt.

• Only Qualifying Free Zone Persons enjoy the 0% rate.

• Mainland-linked income is taxed at 9%.

• Compliance includes audited accounts, proper documentation, and transfer pricing adherence.

At Arzonell, we help businesses navigate these new laws with clarity and confidence, ensuring compliance while optimizing for tax efficiency.

Reach out to us: info@arzonell.com | +971 52 191 5973