You should bear these things in mind with regard to corporation tax in 2024

You should bear these things in mind with regard to corporation tax in 2024

The corporate income tax has been in force in the UAE since June 1, 2023. 

This is levied on the taxable income (net profit) of companies based in the United Arab Emirates. Below you will find everything you need to know about corporate income tax and what you need to bear in mind so that you are optimally prepared for the new tax changes.

Is corporation tax the same as VAT?

The short answer to this question is no. But when the UAE government first announced the Corporate Tax (CT), many companies mistakenly thought it was a similar tax to the Value Added Tax (VAT). However, these two taxes are very different:

Corporate income tax is mandatory for every company in the UAE, while VAT only applies to those companies that exceed a certain profit limit or, under certain conditions, a turnover limit.

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 income tax, on the other hand, is levied on the taxable income of companies.

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

Corporation tax, on the other hand, is paid directly to the state and calculated on the basis of the net income of the respective company. It is therefore not calculated on the basis of total revenue or sales volume.

How high is the corporate income tax in the UAE?

With regard to corporate income tax, the UAE government has developed a total of two levels of taxation, namely:

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

Who is subject to corporate income tax in the UAE?

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

According to the UAE Ministry of Finance (MOF), the following individuals and legal entities are subject to corporate income tax

• Natural persons who carry 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 that are domiciled in the UAE or have their head office and operations in the UAE.

However, there are some exceptions to this rule. The MOF has exempted certain establishments from this. As a company, you therefore do not have to submit a tax return or pay corporation tax if you maintain one of these facilities:

• All state or public institutions
• Real estate and other regulated investment funds 
• Companies involved in the extraction or mining of natural resources in the UAE. 
• All organizations that support 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 corporation tax. However, this no longer applies if an annual turnover of AED 1 million is reached. 

Registration for Corporate Tax

To register for CT in the UAE, you must first go to the website of the Federal Tax Authority (FTA). There you can then fill out all the necessary forms and submit the required documents.

These documents to be submitted include

• Emirates ID
• Trade license
• Passport
• Financial documents
• Information on business activities and corporate structure

Once you have submitted these forms and documents, the authorities will review your application and, if approved, will assign your company a tax registration number (TRN), which identifies the official registration.

You can expect successful registration within 20 days. However, if the authorities require further information, it may take up to 20 more days.

You then have nine months after the end of a financial year to submit your tax returns and financial reports and pay corporation tax.

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

And even though the corporate tax regime has been in place for some time, there are still many things to consider when integrating corporate tax into your business. These include the impact of CT on your legal, financial and operational profile, as well as the forward planning of processes and systems required to comply with the new tax regime. In the following, we therefore provide you with 7 helpful tips that you should definitely consider with regard to corporation tax:

1. operational readiness

To ensure that you can properly comply with the new CT obligations of the UAE, the structures in your company should be clearly visible:

• This means that you should be able to prepare separate financial statements for each of your companies. This is because CT law requires separate and distinct financial statements for each entity in most cases. Exceptions to this include Limited Liability Partnerships (LLPs), or Unincorporated Partnerships, such as General Partnerships and Joint Ventures (JVs).
• Also review your company's figures to get a better feel for tax issues. Therefore, focus on tax-exempt income and distinguish between income that belongs to the Qualified Freezone Persons (QFZP) and income that does not. Also pay attention to non-deductible expenses and necessary adjustments to transfer prices (TP). 
• It is also important that the tasks within your company are clearly distributed and that each team member remains up to date with regard to changes in the law.

2. consider options

Corporate tax legislation opens up various options and entitlements for you to optimize your tax burden:

• You should therefore consider whether you should make use of transitional rules to mitigate the taxation of profits from the period before the change in the law.
• Also check whether you meet the requirements for CT grouping, i.e. the sharing of tax losses and other reliefs.

3. rethink your Freezone presence

As a company in the free zones (FC), you have the opportunity to benefit from a corporation tax rate of 0%. To do so, however, you must be a so-called qualified free zone person (QFZP). However, the requirements profile for a QFZP is very complex. You should therefore check whether your company meets these requirements:

• In this context, analyze the advantages and disadvantages of qualifying versus remaining in the normal 9% CT regime, including the practical requirements to meet and maintain QFZP status.
• Also check if any updates are required to transactions, pricing, intercompany agreements, documentation, etc. to ensure you meet all conditions.

4. check your financial profile

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

• In this context, check your accounting policies that could have an impact on the key areas of tax, such as items recognized in other comprehensive income, provisions, depreciation, revaluations and amortization.
• Also check your main expenses to ensure that they meet the tax deduction requirements. Especially those that are specifically regulated in the tax legislation (interest, entertainment, tax-free expenses, etc.).
• Also clarify whether deferred taxes need to be recognized in the 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. Specifically, however, it is a question of whether you can make use of certain options such as group formation or tax incidence for certain income such as dividends and profits:

• Therefore, consider whether your current group structure could cause you difficulties with CT, for example because it restricts the possibility of CT grouping.
• You should also check the financing structure and whether this results in opportunities or risks, e.g. restrictions on interest deductions or non-deductible capital.
• Also determine all necessary updates based on the above explanations and carry them out.

6. check the profile of foreign companies

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

• Therefore, identify any foreign directors or officers who can effectively manage your business from the UAE. The same applies to the main commercial activities of your foreign companies that are carried out in the UAE by employees or related parties based in the UAE.
• Also update your board composition, 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) rules and regulations is a key requirement of the CT regime. This affects not only your company's effective tax rate, but also the way in which you can allocate, book and document income within your group in a sustainable and justifiable way: 

• Therefore, make sure that the transaction design matches the value creation within your group.
• Develop transfer pricing strategies that comply with the arm's length principle and can be implemented throughout the 2024 financial year. You can do this by making the transfer pricing adjustments before closing the annual financial statements or by making transfer pricing adjustments in the CT declaration.