On 09 December 2022, the United Arab Emirates (“UAE”) issued Decree-Law No. (47) of 2022 regarding the taxation of corporations and businesses.
As of 1 June 2023, a Federal Corporate Tax (“Corporate Tax”) will be introduced and implemented in the UAE under the Corporate Tax Law.
As part of its strategic initiatives, the UAE is introducing Corporate Tax to accelerate its development and transformation. As a leading jurisdiction for investment and business, the UAE will cement its position by implementing an internationally competitive corporate tax regime in concert with an extensive network of double tax treaties.
Since the UAE is a global financial center and a hub for international business, its corporate tax regime draws upon international best practices. As a result, the UAE Corporate Tax regime will be readily understood and its implications will be clear.
The Ministry of Finance held an awareness session to explain key aspects of the upcoming corporate tax regime in the UAE for tax professionals, business owners, and other experts.
Insights from the session include:
CT registrations will be distinct from VAT registrations. All businesses (e.g. free zones, corporations, individuals) are required to register regardless of their taxable earnings. Select businesses will receive ‘invitations to register’ from the Federal Tax Authority (FTA) over the next six months. As of now, businesses do not need to take any action. Businesses can avoid penalties related to registration if they ensure to register at least nine months before the due date for submitting tax returns. In contrast to VAT, there is no concept of deregistration in CT.
CT’s decree-law has already been approved. As part of CT laws, there would not be a separate ‘executive regulation’, but various cabinet decisions providing details and guidelines for CT implementation would be issued periodically.
“Qualifying FZ” and “Qualifying income” will be published shortly. In order to qualify for tax exemptions, FZ businesses must maintain adequate substance and meet other requirements.
‘Corporate Tax (CT)’ is a misnomer as even individuals engaging in business – such as social media influencers, freelancers, sole proprietorships, or civil businesses – are subject to CT.
Participants in the session reaffirmed that CT would apply to individuals who conduct business activities. If an individual conducts business in the UAE, he/she is considered to be a ‘resident’. CT will soon publish details about the business categories it covers.
Formal approval from FTA would not be required if two or more UAE entities meet the conditions to form a ‘qualifying group’. The tax implications of intra-group transactions could be disregarded for a ‘qualifying group’. However, the formation of a tax group would require formal approval from the FTA. A ‘tax group’ can submit a single tax return for all members of the group. There will be a difference between tax groups under VAT and CT laws. In either case, VAT tax groups are not required to have their counterparts in CT tax groups.
Another Tax Conversation of December 17, 2022 emphasized the substantial impact of anti-abuse rules. Business reorganizations should be driven by commercial reasons. Anti-abuse rules could disallow reorganizations aimed at obtaining tax benefits if they lack valid commercial reasons.
Additionally, businesses that qualify for ‘small business relief’ would be treated as having NIL taxable income in addition to the Dh375,000 taxable threshold. Small businesses will soon be able to learn more about relief.
Taxable income is determined by the books of accounts of a business. The preparation of tax books is not a separate requirement for businesses. IFRS, for example, are generally accepted accounting standards. Accounting methods that simplify accounting may be allowed for small businesses and others.
Records and documents must be maintained for a minimum of seven years. Documentation requirements remain even if a business isn’t taxable, claims exemptions, or doesn’t pay tax for that particular year.
Considering key management personnel and/or board members as well as decision-making, the place of effective management (PoEM) will be determined. It will be covered under CT if a foreign company has its PoEM in the UAE. As soon as possible, the UAE will announce its commitment to OECD “Pillar 2” (the global minimum tax of 15 percent) on multinational companies. Businesses were informed during the awareness session that it would be possible to prepare for CT in plenty of time. It was almost a year ago, in Feb 2022, that we cautioned businesses to avoid treating CT like Y2K hysteria as there would be sufficient time to prepare.
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