Preparing businesses for the new corporate tax in the UAE

By Christian Svendsen, Taki Tax and Finance Ltd

It has been known for some time that the United Arab Emirates (“UAE”) was intending to introduce a new corporation tax from 2023. On 9 December 2022 the UAE government issued The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses which provides the legal basis for the corporation tax that is being introduced.

The new tax rules take inspiration from best practices around the world and the language used and some of the principles introduced are closely aligned with elements of UK and other OECD tax principles. This is one of the benefits of creating a new tax system that the UAE has been in a position where they can set the principles from the beginning in a clear language.

So, what does the introduction of the new corporation tax in the UAE mean for businesses? And what are the steps that each business must take to be compliant with the new rules?

Who is affected by the new law?

The rules will affect the majority of persons (including legal persons) who are carrying out business activities in the UAE. In a simple version the affected persons are:

• Companies (and other legal persons) that are incorporated or effectively managed and controlled in the UAE;

• Natural persons (individuals) who conduct a Business or Business Activity in the UAE; and

• Non-resident juridical persons (foreign legal entities) that have a Permanent Establishment in the UAE.

Free Zones

It is important to mention that this also covers companies and other juridical persons established in a UAE Free Zone. Hence, even Free Zone persons will need to comply with the rules and register for corporation tax. However, qualifying free zone persons will continue to enjoy a corporation tax of 0% on their qualifying income.

What should also be noticed is that individuals who carry out business will be caught by the rules. Hence, a sole trader or entrepreneur will also need to register and comply with the tax rules.

Finally, foreign businesses may also need to comply if they have a permanent establishment in the UAE. Foreign businesses especially need to be careful about what constitutes a permanent establishment. This could particularly affect the e-commerce space depending on how their supply chain is set up.

Hence, the rules will affect almost anyone doing business in the UAE and therefore most persons will need to register to obtain a corporation tax number in order to file their corporation tax returns and pay their taxes.

When does it affect your business?

The new corporation tax will take effect from the first accounting period starting on or after the 1 June 2023 and as we have highlighted will affect almost anyone who does business in the UAE. As a consequence, affected persons will need to register for corporation taxes.

The deadline for registration varies depending on when the next accounting period starts. However, the general rule, you need to be registered by 9 months after the end of the first relevant accounting period.

The first relevant accounting period is the first accounting period that commences after the 1 June 2023. As an example, if your accounting period is 1 June to 31 May each year, then the first relevant period would be starting on 1 June 2023 and finish on 31 May 2024. You would then have 9 months after that, i.e. until 28 February 2025, to register.

Similarly, if your accounting year is the calendar year, then your first relevant accounting period would be the period commencing on 1 January 2024. As a result, your deadline for registering for corporate tax as well as filing your tax return and paying your tax bill would be the 30 September 2025.

However, there is no need to wait with the registration until the very last minute to protect yourself against any changes to the rules, but also to avoid breaching the deadlines for filing your tax return and paying the taxes. Therefore, it is advisable to register ahead of the tax return filing deadline to make sure that all the certificates and online access details are available.

What will be taxed and at what rate?

The element that most persons are concerned with is how much will they get taxed. This typically depends on two elements:

1) The rate of taxation and

2) The amount that the rate will be applied to.

The rate of taxation will be 9% on profits above AED 375,000 (approximately $102,000). Anything below this threshold is taxed at 0%. It is important to note that despite not owing any taxes, the person would still need to file his tax return to be compliant. This is especially relevant for persons in a free zone who will benefit from a 0% corporation tax rate instead of the general 9% rate.

The amount on which the tax will be assessed on the basis of the accounting profits for the period prepared in accordance with the accounting standards applicable in the state. There will then be adjustments made to the profits as allowed by the law. These changes include both certain income streams that are exempt – mainly dividend income, which will not form part of the tax base.

In terms of deductions of costs, the general rule is that most costs are allowable provided that they serve a business purpose. However, certain notable costs are restricted such as:

Client entertainment expenses (reduced deductibility – only 50% deductible) Interest expenses (reduced deductibility –max 30% of EBITDA)

In addition, in cases where you are dealing with connected parties, there is a requirement for any transactions to take place at an Arm’s Length price. Otherwise, an adjustment may be required under the transfer pricing rules. This is an area of great focus internationally and it would be expected that the UAE rules aligns closely with OECD recommendations in this respect.

Finally, an important point relates to the possible deduction of losses from previous years. The utilization of carried forward losses is limited to 75% of the taxable profit before the deduction of losses from previous accounting periods. Please note that the losses carried forward can only be for accounting started on or after the 1 June 2023.

What are the new challenges for businesses?

With any brand new set of rules there will always be challenges that businesses have to contend with, especially when the new rules introduce a whole new exposure to legislation and costs. The key immediate challenges are:

Challenge 1: Impact on investment projects

Each business will need to make considerations around the profitability of each investment, as introducing a new cost of 9% of profits will all else equal require a higher level of profit to achieve the same return on capital, compared to a situation where no tax was introduced.

The risk is that as a consequence some projects may no longer be viable. In such situations companies will need to turn to more innovative solutions on the financing front or go back and review the project itself to find other design options to remain profitable.

Challenge 2: Additional compliance burden, cost and risk

When a new system is introduced it automatically adds a new compliance burden on the business, especially when it comes to record keeping (now 7 years for corporation taxes) and documenting transactions. It often hits smaller businesses disproportionately, as the level of basic compliance is similar, but these businesses naturally have fewer resources available to them to deal with the added administration.

In addition to the pure administration, there is an increased risk of a tax investigation, which can be time and resource intensive. There may also be additional risk on the manager/directors in terms of their legal liability in case something is actually wrong.

Therefore, it may be wise for businesses to consult with their local advisor who can help your business become compliant and help support you through the transition.

What should a business do now?

With the rules coming into force soon, it is important that anyone doing business in the UAE familiarize themselves with the rules and their obligations. The UAE Ministry of Finance has produced a good overview of the rules https://mof.gov.ae/ corporate-tax/.

It is also advisable that you seek advise from a local tax advisor to make sure you are ready when the rules kick in. Finding the right advisor can be valuable as it can reduce the time you spend on administration which will allow you more time to run your business. After all, the value of your business is created by you selling your products and services, not doing tax compliance. But a lot of value can be lost if you are not compliant, so make sure you understand your obligations and your risk.

About the author

Christian Svendsen is a Chartered Tax Advisor and the managing director of Taki Tax and Finance Ltd., a UK based tax and M&A advisory firm located in London. Taki Tax and Finance Ltd. advises companies and individuals on their tax affairs in the UK and on international tax aspects, with a strong focus on setting the client up for maximizing his/hers wealth accumulation potential. We also support business owners and companies in relation to mergers and acquisitions.

Taki Tax and Finance Ltd is an ABCC member.

https://www.takitaxandfinance.com