UAE CORPORATE TAX COMPLIANCE AND PLANNING

WHAT IS MEANT BY CORPORATE TAX?

Businesses are subject to a type of tax known as corporate tax, which they must pay to the nation’s finance ministry in relation to their taxable revenue for the relevant fiscal year. Corporate tax is normally calculated by deducting the cost of goods and services sold (COGS), general and administrative (G&A) expenses, selling and marketing, research and development, amortization, and other operational costs from the total income. 

A corporate tax, also referred to as a corporation tax or business tax, is a type of direct tax assessed against the profits or assets of companies and other similar legit entities. Corporate taxation is imposed in a large number of nations worldwide. If any of those nations do not specifically have a corporation tax code, they may still have a comparable tax structure at the state or municipal levels. Corporate tax rates vary widely amongst nations, with some having incredibly low rates and earning the title of “tax havens.” UAE is also one of the ‘tax haven’ nations that will have a notably low corporate tax rate.

INTRODUCTION OF CORPORATE TAX IN UAE

In the last several years, the UAE underwent significant tax reforms in an effort to diversify its state revenue sources, modernize its tax legislation, and bring it into compliance with global best practices. The UAE has undergone a number of tax reforms in the last few years to bring it into line with international markets and diversify its revenue, starting with the implementation of Value Added Tax (VAT) in January 2018 and continuing with the introduction of economic substance rules (ESR) and Country-by-Country Reporting (CbCR) regulations in April 2019.

A federal level corporate tax would be levied in the United Arab Emirates beginning on or after June 1, 2023, the Ministry of Finance said on January 31, 2022. The revelation might have a big impact on how companies are organized in Dubai and the other United Arab Emirates. Most businesses in the UAE don’t actually pay corporation taxes. Businesses operating in free zones often have access to a 50-year, renewable freeze on corporate taxes. However, starting of 1 June 2023, all UAE businesses would have to pay corporate income taxes, subject to exceptions.

WHAT ARE THE RATES STATED BY THE FEDERAL TAX AUTHORITY FOR CORPORATE TAX IN UAE?

The recently announced UAE Corporate Tax regime offers a three-tiered tariff structure:

• Every taxable profit made each year that is less than AED 375,000 is subject to a rate of 0%.
• A 9% rate will apply to all taxable profits over AED 375,000 per year.
• The OECD Base Erosion and Profit-Sharing rules will apply to ALL MNEs that are covered by Pillar 2 of the BEPS 2.0 framework (i.e., have combined global revenues exceeding of AED 3.15 billion).

Accounting profits that have been adjusted are taxable profits.

WHAT IS THE SCOPE OF CORPORATE TAX IN UAE?

All companies and commercial ventures taking place within the seven emirates of the UAE are subject to the federal tax system that the United Arab Emirates has put in place. There are a few exceptions, though:

• Organizations engaged in the extraction of natural resources will carry on reflecting the tax decrees issued by each emirate they operate in.
• Individuals receiving revenue in their personal capacity (such as salaries or investment income) so long as the income-generating activity does not call for a commercial license.
• Businesses that are registered in free trade zones and do not do business with the mainland of the UAE, providing they adhere to all regulatory requirements

It is noteworthy that the international banking industry, which once fell under the jurisdiction of the Emirate-level Bank Tax Decree, would now be governed by the Federal Tax Law of the UAE. In due course, the effect of Corporate Tax on the banking tax decree at the Emirate level will also be announced. This will mark a significant change for both international bank branches that must adapt to the new Law and local banks that, like other firms, will now be liable to corporate tax.

HOW CAN BUSINESS PREPARE FOR COMPLIANCE AND PLANNING WITH REGARD TO CORPORATE TAX IN UAE?

Under the new regime, businesses will have to register with the Federal Tax Authority (FTA) within a predetermined timeframe; specifics of the registration process and ongoing compliance requirements have not yet been released.

For each tax period, only one Corporate Tax return needs to be electronically submitted, and any Corporate Tax that is owed needs to be paid within nine months of when the tax period ends. Failure to comply will result in penalties. A single consolidated return can be submitted by UAE group firms for the whole tax group. For small and medium-sized firms, reporting will likely be simplified.

While the current Ministry of Finance will continue to be the “competent authority” in terms of foreign tax agreements and the transfer of information for tax reasons, the FTA will be in charge of administering, collecting, and enforcing UAE Corporate Tax.

CONCLUDING THOUGHTS

Since the Corporate Tax system is founded on widely accepted and applied international standards, businesses subject to similar regimes in other countries will find the cost and implementation procedure to be relatively efficient. The law appears to also protect several of the most distinctive tax advantages of the UAE, such as the tax advantages granted to firms established in free zones. Once the new system is in place, several companies may want to review their company structures in order to take advantage of the possible tax advantages.