How to Calculate Gratuity in UAE: Your Ultimate Guide to End-of-Service Benefits
16/12/2025
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For decades, the tax landscape in the United Arab Emirates was characterised by a minimal tax burden on corporate entities. That era has passed. With the UAE introduced a federal corporate tax regime, every serious business conducting business in the uae—from sole proprietors to large multinational groups—must now treat corporate tax in the uae as a primary compliance and strategic planning matter. The new federal corporate tax effective from 2023 is a reality that reshapes the financial future of the arab emirates corporate tax rate.
This article provides a practical guide on navigating the new corporate taxation framework, ensuring your business in the uae maintains compliance with tax laws.
Corporate income tax in Abu Dhabi is governed by a federal corporate tax law that applies across all emirates. At a high level:
• It is a tax on net business profits of companies and other taxable persons.
• It applies for financial years beginning on or after 1 June 2023.
• It uses a tiered rate structure:
• 0% on taxable income up to AED 375,000
• 9% on taxable income above AED 375,000
The law applies to both mainland Abu Dhabi entities and free zone entities, with additional rules for those that qualify for special regimes (such as Qualifying Free Zone Persons).
The result is clear: every Abu Dhabi business now needs a structured approach to corporate tax, just as it already has for VAT, accounting and regulatory compliance.
The United Arab Emirates (UAE) operates a highly competitive and evolving tax system that primarily relies on indirect taxes for revenue, although direct taxes have been recently introduced for businesses. The main types of taxation include the Value Added Tax (VAT), a broad-based consumption tax set at a standard 5%; Excise Tax on specific products deemed harmful like tobacco and sugary drinks; and the newly implemented Corporate Tax (CT), a direct tax on business profits over a certain threshold (9% on income above AED 375,000). While there is generally no personal income tax levied on individuals, other local fees like municipal taxes and tourism fees also form part of the overall fiscal landscape.
The corporate tax applies across all Emirates, including Abu Dhabi, as a direct tax levied on the net income (profits tax) of companies and other taxable persons. Corporate tax is a direct tax that is replacing the historical non-tax environment.
• Implementation: The law became effective for tax year financial periods commencing on or after 1 June 2023. UAE will implement this new regime universally.
• Tiered Tax Rate: The corporate tax rate is 9% on taxable income that exceeds the threshold of AED 375,000, with a 0% rate applied to the first AED 375,000 of income. This tax rate in the uae is competitive on a global tax scale.
• Oversight: The Federal Tax Authority (FTA) is the body that monitors compliance with tax laws and manages the regime.
The United Arab Emirates maintains a standard, highly competitive corporate tax rate structure in 2025: 0% on taxable income up to AED 375,000, and 9% on income exceeding this threshold. However, reflecting its commitment to international tax standards (Pillar Two), the UAE has implemented a Domestic Minimum Top-Up Tax (DMTT), effective from January 1, 2025. This ensures that large multinational enterprises (MNEs) with global revenues exceeding €750 million pay a minimum effective tax rate of 15% on their UAE profits. Free Zone companies that qualify for the 0% rate on qualifying income must still assess their potential exposure to this 15% minimum rate if they are part of a qualifying MNE group.
The uae corporate tax law distinguishes between resident and non-resident persons, defining the scope of tax liabilities.
Resident Taxable Persons
A person is generally considered a resident taxable person if the entity is incorporated in the uae or if the foreign entity is effectively managed and controlled in the uae. Entities incorporated in the uae are deemed residents. Corporate tax is also levied on individuals if they are carrying on a business in the uae and exceed the prescribed turnover threshold. The focus is on corporate tax on business profits, not personal income.
Non-Resident Taxable Persons
Non-residents become subject to corporate tax if they have a permanent establishment in the uae (e.g., a branch, office, or project site) or derive certain UAE-sourced income (e.g., rental income from Abu Dhabi real estate, service fees). Only profits attributable to the UAE link are taxed. This ensures the local tax base is protected.
The calculation of Corporate Tax (CT) in the UAE is a structured process that starts with a company's financial statements. To determine the Taxable Income, a business first uses its accounting net profit (as per IFRS or IFRS for SMEs) as the base. This accounting profit is then subjected to specific tax adjustments mandated by the CT Law, primarily involving adding back non-deductible expenses (like fines or restricted entertainment costs) and excluding exempt income (such as qualifying dividends or certain Free Zone income). The final Taxable Income is then multiplied by the tiered rates: 0% on the first AED 375,000 and 9% on the excess, resulting in the final CT payable.
Permanent Establishment (PE)
A permanent establishment in Abu Dhabi generally exists if a non-resident has:
• A fixed place of business (office, branch, warehouse, plant, workshop), or
• A dependent agent who habitually concludes contracts in the UAE on behalf of the non-resident.
Certain activities that are purely preparatory or auxiliary — such as limited marketing or information gathering — may not create a PE, unless they form part of a cohesive main business operation.
Where a PE exists, the profits attributable to that PE are subject to corporate income tax under the 0%/9% rate structure.
State-Sourced Income
Even without a PE, some income may still be treated as UAE-sourced, such as:
• Fees for services performed in the UAE or used by UAE clients
• Rental income from real estate located in Abu Dhabi
• Gains from selling shares in UAE companies
• Royalties and IP income where the IP is exploited in the UAE
• Certain interest and insurance income tied to UAE assets or risks
This ensures that business profits connected to the local market are taxed fairly, regardless of legal form or group structure.
The uae corporate tax law includes provisions to support specific economic sectors and small businesses.
Free Zones and Qualifying Income
Free Zone entities may qualify for a special regime as a Qualifying Free Zone Person (QFZP).
• Condition: To be exempt from corporate tax on their qualifying income, the entity must maintain adequate economic substance and only earn specific types of qualifying revenue, amongst other requirements.
• Tax Rate: Qualifying income is taxed at 0%. Any non-qualifying income will be taxed at the standard 9% corporate tax rate.
• Electing: If the conditions are not met, the Free Zone entity is treated like any other resident person, subject to the full corporate tax framework.
Small Business Relief
To reduce the tax burden for small businesses, an optional Small Business Relief allows a resident taxable person whose revenue is below a specific cap (e.g., AED 3 million) to be treated as having zero taxable income for that period, meaning no tax due. This is a great benefit for small firms starting to conduct business in the UAE.
Whatever your sector, the calculation of taxable income follows a clear sequence:
Start with accounting profit before tax
Based on financial statements prepared under IFRS or IFRS for SMEs.
Apply tax adjustments
Add back non-deductible expenses (certain fines, penalties, non-business costs, restricted entertainment).
Exclude exempt income (such as qualifying dividends or certain foreign branch profits).
Apply reliefs, such as group relief or Small Business Relief, where applicable.
Arrive at taxable income
This is the figure to which the corporate tax rates apply.
Apply the rate structure
0% on the first AED 375,000
9% on anything above that amount
Consider foreign tax credits or special regimes
For example, to avoid double taxation on profits already taxed abroad, or to reflect QFZP status.
This reinforces why strong financial reporting and a clear bridge between accounting and tax are essential for every Abu Dhabi business.
Group Relief and Tax Groups
Subject to strict conditions, companies under common ownership can form a tax group or use group relief mechanisms. Benefits include:
• Simplified consolidated tax calculations
• Ability to transfer certain tax losses within the group
Conditions broadly relate to shareholding thresholds (often 95% or more), tax residence, common financial year and compatible regimes.
Tax Losses and Carry-Forward
When allowable deductions exceed income, the resulting tax loss can usually be carried forward and used to offset future taxable profits, often up to a set percentage per year (for example, 75% of taxable income). There are restrictions where ownership or business activities change significantly.
Domestic Minimum Top-Up Tax (for Very Large Groups)
For multinational enterprise groups with very high global revenues, a domestic minimum top-up tax can apply to ensure an effective tax rate of at least 15% on UAE profits. This is a complex area linked to global minimum tax rules and requires specialist modelling and planning.
The calculation of corporate income tax or business profits tax follows a structured process:
Start: The basis is the accounting profit derived from financial statements.
Adjustments: Tax adjustments are applied, such as adding back non-deductible expenses and subtracting exempt from corporate income.
Result: This leads to the tax levied on the net income—the taxable income figure.
The UAE's corporate tax regime, introduced to align with international tax standards, applies a tiered rate structure that maintains global competitiveness. A 0% rate applies to taxable income up to AED 375,000, and a 9% rate applies to amounts above this threshold. Critically, the tax applies to all UAE mainland businesses and free zone entities, meaning it applies to all UAE businesses that must register with the Federal Tax Authority. This system, which is distinct from the consumption-based Value Added Tax (VAT), also includes provisions for a minimum effective tax rate of 15% for large multinational enterprises, reflecting the nation's commitment to modern international tax standards.
Tax compliance is mandatory. Every in-scope business must register for corporate tax with the Federal Tax Authority (FTA) to receive its corporate tax registration number.
• Tax Obligations: Businesses must register and comply with corporate tax regulations. They have strict tax obligations.
• Tax Filing: They must file an annual corporate tax return within nine months of the end of the tax period. This means submitting the annual corporate tax return detailing the corporate tax on business profits.
• Documentation: Robust record-keeping is essential, as the fta monitors compliance with tax laws. Penalties can be significant for late tax filing or failure to submit the tax return within nine months.
Managing corporate income tax in Abu Dhabi is no longer just about filing a return once a year. With the evolving UAE tax framework, global minimum tax rules, and ongoing Federal Tax Authority (FTA) updates, businesses need a partner who understands both the law and the practical realities on the ground. That is where Young & Right Accounting & Tax Consultancy comes in.
We help you understand how corporate tax in UAE applies to your specific business model—whether you are a mainland company, a free zone entity, or part of a multinational group with a nexus in the UAE. Our team reviews your corporate structure, contracts, and revenue streams to determine when you are treated as persons incorporated in the UAE and when you may have a taxable presence because of your operational footprint, management, or permanent establishment in the country.
Under the current United Arab Emirates corporate tax regime, the headline corporate tax rate is 9 on taxable income above the basic threshold, while certain free zone entities may enjoy a 0% tax rate on qualifying income if they meet strict conditions. For large multinational groups, we also advise on situations where an effective tax rate of 15 may be required under global minimum tax rules, ensuring that your group-level tax strategy remains compliant and efficient.
Corporate tax in Abu Dhabi is no longer just a compliance topic—it’s a strategic reality that shapes how you structure your business and plan for growth. Understanding who is subject to corporate tax and how to leverage reliefs like Small Business Relief and the QFZP status is critical to protecting your net profits. The tax strategies you adopt now will define your future profitability.
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