UAE Corporate Tax Law for Freelancers and Small Businesses

The United Arab Emirates (UAE) has always welcomed business owners as well as freelancers in UAE, with their taxes in its economic landscape. But, under the Corporate Tax Law (Federal Decree-Law No. 47 of 2022), a brand new page of this story began its first day on June 1, 2023. This is one of the first actions which render for freelancers and small businesses to adhere to corporate tax, although the final version is still under consideration. Now, let’s discuss corporate tax law for freelancers and small businesses.

Who Gets Taxed and Who Doesn’t?

The core principle is that income generated from “business or business activities” falls under the scope of corporate tax. This applies to freelancers and independent business owners whose work constitutes a commercial activity. 

The good news?  

The UAE provides a 0% tax rate on profits up to AED 375,000. This translates to a tax-free zone for most small businesses and a sizable chunk of a freelancer’s earnings. However, if your annual taxable income exceeds AED 375,000, the 9% corporation tax rate applies. Here’s the fundamental distinction: taxable income is your gross profits minus permitted company expenses. So, even if your revenue exceeds the threshold, you will only be taxed on the portion of your net profit that exceeds AED 375,000.

Who will be Subject to the Tax?

The corporate tax will apply to all UAE-based businesses and commercial platforms, except natural resource extraction, which will continue to be taxed at the emirate level.

As a result:

• All operations carried out by a legal entity are considered “business activities” and hence subject to corporate tax.
• Individuals who hold (or are needed to get) a license or permit to conduct relevant commercial, industrial, or professional activities in the UAE will also be liable to corporation tax. This covers freelance workers who operate under a business license or permission.
• Foreign firms and individuals that conduct trade or commerce in the UAE “on an ongoing or regular basis” will be liable to corporate tax.

Is Corporate Tax Payable by Freelancers?

In the UAE, freelancers may have to pay corporate tax, but it depends on a few factors:

• Income level: If your annual profit is over 375,000 AED, you’ll likely need to pay corporate tax. There’s a 0% tax rate for profits below this amount to support small businesses.
• Freelance license: Self-employed people who enjoy the benefits of a freelance license, might also have to pay the corporate tax.
• Employment vs. freelance: If you get paid a salary by a company, you won’t pay corporate tax on that income. The company that pays you handles that tax.

If you’re freelancing like a one-person business and making a good amount of money, you might need to pay corporate tax. But note that it’s always best to consult with a professional for specific tax advice.

Some Important Exemptions to Consider

The UAE recognizes that a flexible freelance and small business ecosystem is a must for its economic growth. Here are some exemptions that can benefit you:

• Personal Income: Income from employment, personal investments like stocks or bonds, and rental income from properties are not subject to corporate tax.
• Free Zone Businesses: Businesses operating within designated Free Zones may enjoy tax exemptions depending on the specific Free Zone regulations.

The Importance of Free Zones

There’s more to the significance of free zones than just the initial benefits they offer. Here are some additional insights to consider:

• Strategic Location: Free zones are often located near major transportation hubs like airports and seaports. This proximity simplifies logistics and grants businesses easier access to international markets.
• Focus on Specific Industries: Many free zones cater to specific industries, creating a cluster effect. This attracts businesses that can benefit from a concentration of relevant expertise, suppliers, and potential customers within the zone.
• Government Support: Free zones are frequently established with government backing. This translates to potential benefits like streamlined bureaucracy, support programs, and tax incentives beyond basic corporate tax breaks.
• Innovation and Development: Free zones can act as breeding grounds for innovation and development. They may provide relaxed regulations, availing research and development facilities and high-tech startups.

Challenges to Consider

While free zones offer significant advantages, there are also challenges to keep in mind. Complexities around regulations and visa requirements can arise. Additionally, depending on the zone’s location, there might be limitations on selling goods or services domestically. Overall, free zones can be a powerful tool for businesses looking to expand their global reach, reduce operational costs, and benefit from a supportive environment.

Defining Free Zone Persons

The comprehensive Corporate Tax in UAE Free Zones distinguishes between two major groups of persons: natural persons and juridical persons. This distinction is critical for understanding the tax requirements and benefits available to firms operating in UAE Free Zones.

• Natural Persons are persons who run their own businesses, such as freelancers, sole proprietorships, and civil corporations. Even if these individuals operate their enterprises in a Free Zone, they are not considered Free Zone Persons under UAE corporate tax legislation.
• Juridical Persons are corporate entities, such as Limited Liability Companies. These entities can become Free Zone Persons if they are incorporated within a Free Zone.

Corporate Tax Rates for Free Zone Persons

1. A Qualifying Free Zone Person (QFZP): may be entitled to special tax incentives, such as a 0% tax rate.
2. Non-Qualifying Free Zone Person (NQFZP): NQFZPs do not match the requirements for QFZP status, hence they may not be eligible for the same tax benefits.

Understanding Your Obligations

While the tax-free threshold offers significant relief, familiarizing yourself with your obligations under the new law is important:

• Record Keeping: As a freelancer or small business owner, you’ll need to maintain proper records of your income and expenses. This will be crucial for calculating your taxable income and filing tax returns.
• Tax Registration: If your taxable income exceeds AED 375,000, you’ll need to register for corporate tax with the Federal Tax Authority (FTA).
• Tax Returns: Once registered, you’ll be required to file tax returns within the stipulated deadlines set by the FTA.

Planning and Proactive Steps

Here are some steps for freelancers in UAE can take  to ensure a smooth transition under the tax regime:

• Estimate Your Taxable Income: Analyze your income and expenses to project your taxable income for the year. This will help you determine if you fall under the tax-free bracket or need to register for tax.
• Seek Professional Guidance: Consulting with a tax advisor or accountant familiar with the UAE corporate tax law can provide valuable insights and ensure compliance.
• Invest in Accounting Software: Implementing accounting software can streamline your record keeping and simplify tax filing processes.

The Road Ahead

While freelancers and small businesses need to adapt, the generous tax-free threshold and exemptions offer significant support. By understanding your obligations, planning effectively, and seeking professional guidance, you can confidently kickstart your freelancing in UAE. 

By taking the necessary steps, you can make sure that your freelance or small business continues to flourish under the new UAE corporate tax regime!