UAE Corporate Tax: Understanding the macro view

Pankaj S. Jain
(Managing Director)
AskPankaj Tax Advisors

UAE Corporate Tax: Understanding the macro view

Much has already been spoken about the UAE corporate tax, a paradigm change for UAE hitherto tax-free. 

Taxation, though new for the country, is not a new concept. Corporate tax has been in place for ages in most of the countries. So also the transfer pricing - a relatively established concept now -  on which international jurisprudence has matured.
In all such discussions of technical details, the headline message often gets missed out. It is the headline message which is more important.

Don’t be anxious

My first message to all business owners – be it clients or otherwise - is not to be anxious about corporate tax. The experience of VAT implementation should not drive them to have misconceptions about corporate tax.

VAT is a transaction based taxation and required correct tax treatment for every transaction starting on or after 01/01/2018. Any VAT error could result not only in tax arrears and penalties but also the lost opportunity to recover the tax from the customers.

Unlike VAT, corporate tax is calculated on the net taxable income at the end of the tax period. Even from the end of the tax period/financial year, the taxpayers would have another 9 months to review their books of account, make corrections/reclassifications (wherever required), compute their tax liability, prepare their corporate tax return and deposit necessary tax.

Except for certain specific tax planning aspects, taxpayers should not be too anxious that business operations will suddenly change from the beginning of their financial year.

A proactive approach and immediate actions are required for specific scenarios such as free zone tax benefits, tax groups and year-end inter-company balances etc.

Free Zone Tax Benefits

Ministry of Finance (MoF) has stated that free zones are an integral part of the UAE economy that continue to play a critical role in driving economic growth and transformation both in the UAE and internationally. Considering the tax related commitments made while establishing free zones, Free Zone companies can benefit from 0% tax rate on qualifying income upon certain conditions. A specific number of activities have been categorised as ‘qualifying activities’ which could enjoy 0% tax rate. 

Maintaining adequate substance is an important condition to claim the tax benefit. Adequate substance requires free one companies to undertake core income-generating activities (CIGA) and maintain adequate assets, number of employees and incurring operating expenditure in the relevant free zone or designated zones. CIGA mainly consist of those significant functions that drive the business value and are not exclusively/mostly support activities.

For companies aiming to seek the preferential tax rate of 0%, a detailed and advanced planning is required as any failure in compliance would also result in loosing such benefit for next 4 years. A new cabinet decision and a corresponding ministerial decision - repealing the earlier decisions – have been recently issued with a retrospective effect from 01 June 2023. The updated decisions have introduced few new concepts and clarified pertinent issues.

Free zone companies should be careful to avoid creating any permanent establishment in the mainland or outside UAE.

Transfer pricing, focus on accounting and record keeping

It is the category of transactions, not each transaction, that are important for corporate tax review. The taxable income would be derived from the accounting profits for the financial year. The taxpayers need to focus on correct accounting and recording of the transactions as per its actual nature. The errors in identifying the nature of transactions could transition into errors in corporate tax computations. A robust accounting and record keeping will ensure smooth corporate tax compliance.

Even transfer pricing is examined for relevant categories of transactions. Periodic adjustments can be made in the books of account to ensure that the transactions during the year between related parties and/or connected persons are at arm's length. A common misconception exists that if each transaction is not at arm’s length or if excess salaries are paid to the owners, there would be penalties.

Small Business Relief

UAE SMEs, startups and individuals conducting business have many reasons to be cheerful. Tax relief in the form of Small Business Relief (SBR) has been provided in the early stages of the corporate tax regime. Under SBR, business owners:

  1. Not required to pay any corporate tax even if the net profits exceeds Dh 375,000.
  2. will benefit from a simplified tax return and record-keeping requirements.
  3. can opt to follow cash basis of accounting, and
  4. can undertake reduced transfer pricing compliance

SBR is available if the business’s annual revenue (not profits) does not exceed Dh3 million. For the following two tax years, the revenue of the respect tax year as well as of any past tax years should not exceed Dh3 Million. SBR aims to provide relief in the early stages of the corporate tax regime. Business owners have 3 years to benefit from SBR and prepare for comprehensive tax compliance thereafter.

Concluding remarks

MoF has stated that the corporate tax law has been kept simple and permissive. The general anti-abuse rules ensure that the tax law has to be voluminous and consider every possible way that taxpayers could seek to exploit the tax laws. As taxation is new to the country, business owners should remember to focus on correct understanding of the law and not be anxious of unknown penalties. Asking right questions is important to understand tax obligations as well as tax reliefs.

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