By Deepa Narwani
Content Manager, Informa Connect
Corporate tax (CT) is a concept that the UAE market is not quite familiar with. Businesses only started dealing with taxes in the country with the introduction of Value-Added Tax in 2018. However, with the recent announcement of the UAE CT Law that will come into effect in June 2023, businesses are starting to familiarise themselves with it, and thinking about how to plan for it.
In a recent webinar conducted by Informa Connect, Ahmed AlSwaiti, partner at Bestfolio Consulting Middle East, Dubai, who has been working in the tax industry for the past 12 years, explained what UAE CT is, how it works, what is taxable income, how this will be levied, what is the CT period and rate, will there be any exemptions and more. Below is a concise summary of the talk.
Introduction to UAE Corporate Tax Law
On 31 January 2021, the UAE Ministry of Finance (MOF) announced the introduction of a federal corporate tax in the UAE that will be effective for financial years starting on or after 1 June 2023. This means that any entity or business that has a CT calendar year after the first of June will be subject to CT from this day. Most companies follow the calendar year from 1 January, so they will be subject to CT from January 2024 onwards.
There are both direct and indirect types of taxes. For instance, the value-added tax is a form of indirect tax, while CT is a direct tax. Direct tax is a type of tax that is directly deducted from the business’s net profit. The net profit will be the main factor in calculating the taxable net income, which is subject to CT.
Who is required to pay corporate tax?
Businesses such as mainland free zone entities will be required to pay corporate tax. There will be some incentives to free zones, but they would need to register for CT and submit it regularly. Moreover, individuals undertaking commercial, industrial, or professional activities in the UAE will also be subject to it. For example, freelancers and individuals earning business income will be subject to CT. Also, foreign entities and individuals conducting trade in the UAE in an ongoing or regular manner will have to pay taxes. So, even if foreign branches are running a business in the UAE, they would also be subject to CT.
Additionally, a group of companies in the UAE can elect to form a tax group and be treated as a single taxable entity, provided certain conditions are met.
The UAE’s Federal Tax Authority (FTA), as assigned by the Ministry of Finance, will be the responsible institution for the administration, collection, and enforcement of the CT law. A single CT return should be submitted to the FTA on an annual basis after the end of the taxable year. These transactions are expected to be submitted on an electronic portal for the federal taxes.
What is the CT period and how do you calculate the rate?
The law will come into effect in June 2023, so businesses have over 14 months to prepare for it. If a company’s fiscal year starts from 1 January 2024, it will be subject to CT only after that. However, if the company’s financial year begins after 1 June 2023, it will be subject to CT from that date and will have to report it by the end of the year. The reporting will have to be done between three to four months after the year-end.
The CT rate is set at 9% for businesses whose income exceeds AED 375,000. To support small businesses and start-ups, companies that make less than AED 375,000 by the end of the financial year are not subject to CT. But they will be required to register for CT and can submit their tax return by the end of each financial year. Any net profit above this amount will be subject to the standard rate of 9%.
For example, if a business has earned a taxable income of AED400,000 in a financial year, then the first AED375,000 will be subject to 0% of CT. However, the additional AED25,000 will be subject to a 9% tax. So, the net tax amount on corporate tax would be AED2,250.
However, the Ministry of Finance has mentioned that there will be a different tax rate for large multinational entities and corporations subject to the global minimum tax. This is referred to as the Base Erosion and Profit Shifting (BEPS) Project, which involves several countries that have decided to set a global tax system to capture and control taxes worldwide. BEPS will play a key role in helping to reduce tax evasion by multinational entities. These corporations could reportedly be charged a higher tax rate, which has not been confirmed yet but could be set at 15%, which is in line with the global minimum tax rate set by the G20.
In the context of the global minimum effective tax rate under BEPS, large refers to a multinational corporation that has consolidated global revenues of more than €750 million or AED 3.15 billion. In this case, in each country that is implementing the tax, the company will have to report to the tax authority regarding their operations. So, for example, there will be Country-by-Country Reporting (CbCR). Therefore, the local branch of the multinational entity will have to report to the tax authority and tell them about their global operations, employees, total revenue, and expenses.
What is taxable income?
If a company has total sales of 10 million and total expenses of 7 million, then the balance of 3 million will be subject to 9% CT. But the law will accept taxable net income, which means income that is taxable after adjustments to expenses. For instance, if there are non-deductible expenses, these will be re-added to the 7 million, which could become seven and a half million, or be reduced from it. So, the taxable amount will be higher. But if there is exempt revenue, it will be reduced from the net profit. So, the tax rate will be below the net profit taxability. In general, expenses incurred in the ordinary course of business would be allowed as a tax deduction. However, there might be restrictions around expenses that are personal in nature, such as fines, penalties, dividends, interest, salaries paid to shareholders or partners or things that are paid without supporting documents, among others. All these expenses are non-deductible expenses.
Some expenses are considered as personal in nature and are not directly related to the business. As an example, there are some expenses for employees’ benefits, such as lunches or annual events, which are not directly related to the business and won’t be deductible because the tax law will accept only the actual business expenses.
When it comes to expenses such as medical insurance, companies need to provide it to employees by law. Therefore, when it comes to expenses imposed by law on the companies, these will be considered deductible expenses since these are incurred to run the business.
Individual taxable income
If you are an individual owning a building or real estate under your personal name, usually, this wouldn’t be subject to CT. However, if you have a real estate entity and if this company owns the business, it would be subject to CT at the standard rate. Personal investments are not taxable – if you are investing in the stock market or other smaller investments this will not be taxable individually. But freelance consulting and similar businesses are taxable and will be subject to CT.
Without any presence or base in the UAE, foreign entities that conduct temporary projects will not be subject to CT. Corporate tax will not be levied on a foreign investor’s income from dividends, capital gains, interest, royalties, and other investment returns. But foreign entities and individuals will be subject to CT only if they conduct a trade or business in the UAE in an ongoing or regular manner.
Will free zones be subject to corporate tax?
Free zone businesses will be subject to UAE’s CT. Still, the CT regime will continue to honour these companies’ CT incentives, especially if they are dealing as a free zone with another free zone entity. If the companies are still operating inside the free zone, they can continue to leverage the tax incentives in place. However, standard CT rules apply if they are operating with mainland companies or outside the free zone.
Corporate tax in different sectors
Oil and Gas Sector: Businesses engaged in the extraction of natural resources are already subject to taxation by the government and will be outside the scope of the UAE CT.
Banking Sector: The sector will be subject to CT.
Real estate sector: Businesses engaged in real estate management, construction, development, agency, and brokerage activities will be subject to CT unless individuals personally own it.
What is exempt income?
Exempt income is related to dividends and capital gains earned by a UAE business from its qualifying shareholdings, which will be exempt from CT. Qualifying shareholding refers to certain set conditions, such as having an ownership interest of at least 5% to 10% and having a holding period of 12 to 24 months.
Additionally, suppose there are qualifying intragroup transactions between entities owned by the same group. In that case, this will be considered out of the scope of corporate taxation and won’t appear in the consolidated financial statements.
Furthermore, CT is not applied to employment or any other income by individuals unless they carry out activities as a trade or business.
How to get ready to incorporate corporate tax into your business?
Finance teams should be ready to start conversations with different departments and stakeholders within the business to see how corporate tax will impact them. AlSwaiti suggests a four-phased
approach to achieve readiness.
Impact assessment – understanding what the assessed impact on the business is. This should be done before the issuance of the corporate tax law.
Detailed assessment – after the issuance of the tax law, corporations need to make a detailed assessment and design and plan for the tax methodologies that the business will use.
Implementation – make sure activities are carried out keeping the guidelines in mind.
Post-implementation – companies need to double-check that they have correctly submitted the first corporate tax return.