World
UAE businesses prepare for upcoming federal corporate tax as deadline looms
As the UAE braces for the introduction of the federal corporate tax this week, eligible businesses are gearing up to navigate the implications of the fiscal change.
The Ministry of Finance announced the federal Corporate Tax (CT) in January 2022. This corporate tax will take effect for any fiscal year starting on or after June 1, 2023, and is at a standard statutory rate of nine percent.
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Companies with an income surpassing $102,110 (Dh375,000) will fall within the taxable bracket.
Meanwhile, profits below this threshold will remain untaxed, maintaining a zero percent tax rate.
For a foreign entity with a Permanent Establishment (PE) and source of income in the UAE, as well as Freezone entities with a branch in the mainland, only their mainland income will be taxable under the new CT.
There are certain businesses which can be excluded from CT, or circumstances under which they may be required to pay it, and so it’s important for companies to contact a qualified tax advisor who can assess the eligibility of an exemption.
Nazar Musa, CEO, PRO Partner Group, told Al Arabiya English that companies need to be prepared for the fast-approaching deadline.
“For many businesses in the UAE, this means that a tax on the business’ net revenue will now need to be paid,” he said. “Companies with revenues streams in the UAE mainland, freezones and internationally will need to fully evaluate the implications in order to take appropriate measures for reducing the company’s tax burden.”
Why it is important
Musa explained that the UAE is a member of the Organization for Economic Co-operation and Development (OECD), and as such has committed to the guidance of Pillar II of the OECD’s Base Erosion and Profit Shifting Project (BEPS), intended to eliminate the ability for companies to move profits between nations to avoid taxation.
As well as being compliant with the OECD framework, the UAE will see benefit from the new tax regime in other ways, he said.
“An increase in tax revenue will see the UAE become more in-line with international taxation practices, and despite the introduction of the tax, at a rate of nine percent, it remains the lowest in the GCC and is considerably lower than the global 23.54 percent average. So, it remains to be seen, but the introduced tax may not dissuade foreign investment."
“It is essential for companies to ensure full compliance with their corporate tax liabilities, otherwise they may incur fines. Therefore, it’s important for businesses to understand how the new taxes will impact them.”
Penalties
Understanding the new corporate tax laws in the UAE, especially for those unfamiliar with UAE tax, can be complex. Should a company fail to comply, this can result in fines or the loss of license and the right to operate. Musa said it is highly recommended that businesses contact a professional UAE tax advisory firm to seek advice to gain an understanding of the impact the new tax law will have on their specific situation.
“Income generating businesses in the UAE need to gain an understanding of the newly imposed UAE corporate tax, in order to best equip themselves for the nearing introduction,” he said. “There is an opportunity for businesses to lower their tax burden through separate branch offices, which requires specific guidelines to be followed.”
“For example, for a Freezone business that may currently doing business within the UAE mainland, it may be prudent to set up a separate mainland branch office to separate business done in the mainland UAE from that done internationally and within the freezones. The company will need to take advice from a UAE tax professional about this to ensure there is a commercially viable reasoning behind this delineation of revenue.”
Currently, businesses in the UAE are awaiting the official definition for what will be classified as Qualifying Taxable income, and this together with anti-abuse guidelines will color the decision making for a lot of companies in the UAE to ensure they correctly register and pay their taxes in the UAE.
Musa said: “Companies whose year-end is 31st May 2023 will need to update their internal accounting and methods from 1st June 2023 to embrace the new UAE Corporate Tax guidelines. For those companies whose financial year ends 31st December 2023, corporate tax is applicable from 1st Jan 2024. All UAE companies are required to register, whether freezone or mainland, irrespective of the exemption status, and to file corporate tax returns.”
UAE businesses subject to corporate tax are required to register and obtain a tax registration number. Generally, the registration application must be submitted to the Federal Tax Authority.
Taxable businesses must file a tax return to the FTA no later than nine months after the end of the financial year.
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