What You Should Consider Regarding Corporate Tax in 2024

What You Should Consider Regarding Corporate Tax in 2024

Corporate tax has been in force in the UAE since 1 June 2023.

It is levied on the taxable income (net profit) of companies based in the United Arab Emirates. In the following, you will learn everything you need to know about corporate tax and what you should be aware of so that you are optimally prepared for the new tax changes.

Is Corporate Tax the Same as Value Added Tax?

The short answer to this question is no. However, when the UAE government first announced Corporate Tax (CT), many companies mistakenly assumed it was a tax similar to Value Added Tax (VAT). Yet these two taxes differ significantly from one another:

Corporate tax is mandatory for every company in the UAE, whereas value added tax applies only to those companies that exceed a certain profit threshold or, under certain conditions, a turnover threshold.

The latter is also a consumption tax levied on the sale of goods and services. The customer therefore pays it at the time of purchase. Corporate tax, by contrast, is levied on the taxable income of companies.

Companies must pay corporate tax on their annual net profits. Companies collect VAT from customers when they sell a product or service and then remit it to the tax authority.

Corporate tax, in turn, is paid directly to the state and is calculated on the basis of the net income of the respective company. It is therefore not calculated on the basis of total income or sales volume.

What Is the Corporate Tax Rate in the UAE?

With regard to corporate tax, the UAE government has established a total of two tax tiers, namely:

• 0%: For the portion of taxable income that does not exceed AED 375,000 annually.
• 9%: For the portion of taxable income that exceeds AED 375,000

Who Is Subject to Corporate Tax in the UAE?

In principle, every company in the UAE is subject to corporate tax, including those in the freezones.

Thus, according to the UAE Ministry of Finance (MOF), the following natural and legal persons are subject to corporate tax:

• Natural persons carrying on a business or business activity in the UAE.
• Foreign legal entities that maintain a permanent establishment in the UAE.
• Companies and other legal entities based in the UAE or with their head office and activity in the UAE.

However, there are a few exceptions to this rule. The MOF has in fact exempted certain entities from it. As a company, you therefore do not have to file a tax return or pay corporate tax if you operate one of these entities:

• All governmental or public institutions
• Real estate and other regulated investment funds
• Companies engaged in the extraction of natural resources in the UAE.
• All organisations that work for charitable and social causes.
• All UAE companies that are wholly owned and controlled by the UAE government
• Public or private pension or social security funds.

Freelancers are also exempt from corporate tax. However, this no longer applies once an annual turnover of AED 1 million is reached.

Corporate Tax Registration

In order to register for CT in the UAE, you must first visit the website of the Federal Tax Authority (FTA). There, you can then complete all required forms and submit the necessary documents.

These documents to be submitted include:

• Emirates ID
• Business licence
• passport
• financial records
• Information on business activities and corporate structure

After you submit these forms and documents, the authority will review your application and, if approved, will issue a Tax Registration Number (TRN) to your company, which marks the official registration.

You can expect successful registration within 20 days. However, should the authority require further information, it may take up to 20 additional days.

After that, following the end of a fiscal year, you have nine months to file your tax returns and financial reports and to pay corporate tax.

In summary, the introduction of corporate tax is therefore irrevocably accompanied by proper bookkeeping , which is uncharted territory for many entrepreneurs. This is where we at Danho & Partner come in. As an experienced corporate service provider, we understand your current situation and the changes it entails. That is why we not only handle the timely processing of your CT registration for you, but also take care of your accounting and tax return, so that you are well positioned not only from a tax perspective but also in business terms.

And even though the corporate tax regulation has been in force for some time, there are still many things to consider regarding the integration of corporate tax into your company. These include the impact of CT on your legal, financial and operational profile as well as the advance planning of the processes and systems required to comply with the new tax regulations. We therefore provide you with 7 helpful tips below, which you should definitely follow with regard to corporate tax:

1. Operational readiness

So that you can properly comply with the UAE's new CT obligations, the structures within your company should be clear:

• This includes being able to prepare separate balance sheets for each of your companies. This is because, in most cases, the CT Act requires separate and independent financial statements for every company. Exceptions include limited liability partnerships (LLPs), or unincorporated partnerships, such as general partnerships and joint ventures (JVs).
• Also review your company's figures to gain a better understanding of tax matters. Focus therefore on tax-exempt income and distinguish between income that belongs to that of the Qualified Freezone Persons (QFZP) and income that does not. Also pay attention to non-deductible expenses and necessary transfer pricing (TP) adjustments.
• It is also important that tasks within your company are clearly allocated and that every team member stays up to date with legislative changes.

2. Consider available elections

Corporate tax legislation grants you various options and elections to optimise your tax burden:

• Consider therefore whether you should make use of transitional rules to mitigate the taxation of profits generated before the legislative change.
• Also check whether you meet the requirements for so-called CT grouping, i.e. the allocation of tax losses and other reductions.

3. Rethink your freezone presence

As a company in the free zones (FZ), you have the option of benefiting from a corporate tax rate of 0%. However, you must be a so-called Qualified Freezone Person (QFZP). The requirement profile for a QFZP is very complex. You should therefore verify that your company meets these requirements:

• In this context, analyse the advantages and disadvantages of qualification versus remaining under the standard 9% CT regime, including the practical requirements to attain and maintain QFZP status.
• Also check whether updates to transactions, pricing, intra-group agreements, documentation, etc. are required to ensure that you meet all conditions.

4. Review your financial profile

The CT profile of every taxpayer in the UAE is primarily determined by the financial profile of the companies. Accounting policies, transactions and disclosures that are not carefully reviewed can therefore potentially lead to unwanted tax outcomes:

• In this context, review your accounting policies, which could have an impact on key areas of taxation, such as items included in other comprehensive income, provisions, depreciation, revaluations, and amortisation.
• Also review your major expenses to ensure they meet tax deduction requirements. In particular, those that are specifically regulated in tax legislation (interest, entertainment, tax-exempt expenses, etc.).
• Also clarify whether deferred taxes must be recognised in the annual financial statements for FY 2023.

5. Review your group structure

The holding, financing, investment and operating structure of your group can have a decisive impact on its tax profile. More specifically, however, the question is whether you can make use of certain options, such as group formation or the tax treatment of specific income, such as dividends and profits:

• Consider therefore whether your current corporate structure could cause you difficulties with CT, for example because it limits the possibility of CT grouping.
• Also review the financing structure and whether it gives rise to opportunities or risks, such as restrictions on interest deductions or non-deductible capital.
• Based on the above, identify and implement any required updates as well.

6. Review the profile of foreign companies

Companies that you have established outside the UAE may still be subject to tax liability due to their actual or deemed presence in the UAE. The activities of certain managers, employees, dependent agents, projects, etc. may therefore give rise to future tax liabilities:

• Identify therefore any foreign managing directors or senior executives who can effectively manage your company from the UAE. The same applies to the main commercial activities of your foreign companies carried out in the UAE by employees or related parties based in the UAE.
• Also update the composition of your board of directors, delegation of authority, governance procedures, and operating models so that you can manage and mitigate potential unintended tax consequences.

7. Plan a transfer pricing profile

Compliance with transfer pricing (TP) and its regulations is a key requirement of the CT regulation. This affects not only your company's effective tax rate, but also the way you can allocate, record and document income within your group in a sustainable and defensible manner:

• Ensure therefore that the transaction structure is consistent with the value creation within your group.
• Develop transfer pricing strategies that comply with the arm's length principle and can be implemented throughout fiscal year 2024. You can do this by making transfer pricing adjustments before closing the annual financial statements or by making transfer pricing adjustments in the CT return.