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

The application of the corporate tax on juridical trading companies depends upon their location and the status of their customers.

The corporate tax law (the law) in the UAE applies to trading companies unless they qualify for exemptions or operate as natural persons with an annual income below one million dirhams. These trading companies can be categorized as either resident trading companies or nonresident trading companies.

The resident trading companies include (i) the juridical trading companies incorporated in the UAE, including the companies registered in the free zones, (ii) the juridical trading companies established out of the UAE but controlled and managed from the UAE, (iii) any sole establishment, and civil companies who conduct a trading business or business activity in the UAE. The non-resident trading companies comprise (i) the permanent establishment (PE) of the non-resident trading company in the UAE, (ii) UAE-sourced income of the non-resident trading companies, and (iii) nexus in the UAE of the non-resident trading companies to drive UAE-sourced income. Based on these criteria, all limited liabilities trading companies, public shareholding trading companies, public joint stock trading companies, sole establishments, civil companies, etc. involved in trading, fall under the definition of taxable trading companies, and they are subject to tax based on the criteria given in the law and related decisions.

The resident juridical trading companies, established in the UAE or established out of the UAE but controlled and managed from UAE, are subject to CT on their worldwide taxable income, while a sole establishment, civil company, or individual having a freelance business in the UAE is liable to pay CT on their worldwide income related to their UAE business only.

Whereas sole establishment, civil company, or individual in its capacity (natural person) is involved in trading, their taxability is the same, and it does not matter whether they are in the free zone or out of the free zone. As an exception, such taxable persons are not liable to pay corporate tax and they are not even liable to register if their income is up to one million dirhams. If their income is up to three million dirhams, like a juridical person they are exempt from corporate tax till the end of 2026. If their income is more than Dh3 million, for taxable income of Dh375,000, zero percent corporate tax is applicable and any income beyond Dh375,000, is subject to tax at nine percent.

The application of the corporate tax on the juridical trading companies depends upon their location (freezone or out of the freezones) and the status of their customers (end users or not end users). For better understanding, we can classify them as “free zone juridical trading companies” and “non-free zone juridical trading companies”.

Free Zone Juridical Trading Companies

If any trading company is registered as a limited liability company, public joint stock company, etc. we can call it a juridical trading company, and where such a company is registered in the free zone, we can name it a free zone juridical trading company. If such a free zone person meets the criteria of qualifying free zone person, we can name it as “Qualifying Free Zone Trading Companies (QFZTC) and there are special provisions in the law for the QFZTC. It has been given in the MD 139/2023, if the QFZTC is selling goods to another free zone person which can be an end-user or wholesaler or distributor etc. then the income of QFZTC from such activity will be considered Qualifying Income (QI) and it will be subject to tax at 0% provided de minimus criteria is met.

For example, A Ltd, a qualified free zone trading company (QFZTC), is buying a machine from China, and selling it to B Ltd, a company registered in the free zone which is using this machine for manufacturing purposes. Even though B Ltd is the end user, still income of A Ltd from this activity is qualifying income (QI) as A Ltd has made a transaction with another free zone person.

Where the QFZTC is making any transaction with the non-free zone person in the UAE or out of the UAE, then income from such activity is QI if the company is selling the goods to the wholesaler or retailer (not the end-user) and the company is meeting the de minimus test.

Let's say there's a company called P Ltd, which is a QFZTC. P Ltd is purchasing goods from America and selling them to customers in Australia. However, it's important to note that the Australian customers are not end users, but rather wholesalers or retailers. Even though the goods are being transported directly from America to Australia, P Ltd's income from this transaction is categorized.

If P Ltd sells goods to Hiq Ltd, a distributor in the UAE mainland (not an end user), the income generated by P Ltd from this transaction will be classified as QI, given that the goods are being transported through a designated zone and the de minimus criteria are satisfied.

In both above examples, the income of the QFZTC is considered as QI because goods are being sold to the distributor not to the end user.

Where de minimus criteria are not met, QFZTC ceases to be a QFZTC from the beginning of the relevant tax period and for the subsequent four tax periods.

Non-Free Zone Juridical Trading Companies

Non-free zone trading companies are not eligible for exemptions and will be liable for taxes on their global income if they are considered resident entities. For instance, let's consider Kcrips Ltd, a trading company registered in the UAE mainland. Kcrips Ltd purchases goods from America and sells them to customers in Australia. Since Kcrips Ltd does not meet the criteria of a qualified free zone person, the income derived from the Australian customer will be classified as Non-Qualified Income (NQI). In such transactions, the status of the customer (wholesaler, retailer, or end-user) does not affect the classification of the income.

The companies which are involved in supplying goods to wholesalers or retailers and registered in the UAE mainland, need to position themselves properly, to get the benefit of zero percent CT on the QI.

News Source: Khaleej Times