Corporate tax (CT) is a form of direct tax levied on the net income or profit of corporations and other entities from their business. Corporate Tax is sometimes also referred to as “Corporate Income Tax (CIT)” or “Business Profits Tax” in other jurisdictions.
1. What rate applies to my entity and what is the impact on my business plans and after tax returns to shareholders post 1 June 2023?
The UAE CT will apply to all UAE businesses, with some exceptions. The law will apply for financial years starting on or after 1 June 2023.
The CT rate is a three-tier rate:
- 0% for businesses with taxable income not exceeding AED 375,000 or if treated as an eligible free zone person;
- 9% for businesses with taxable income exceeding AED 375,000; and
- A different rate (likely 15%) for members of multinational groups with revenue in excess of EUR 750m.
2. Would the difference in tax regimes for free zones and mainland UAE impact my current operating model? If my organization is a free zone entity, is it conducting its operations in line with the free zone regulations and will it maintain its tax-free status?
The UAE currently provides CT exemptions by way of 0% rate or a tax holiday to businesses set up in its free zones for periods of up to 50 years. These exemptions vary across the various free zones.
The law considers honouring the incentives provided business is not conducted with mainland UAE.
3. Are my existing related party transactions in compliance with the arm’s length TP requirements?
Related party transactions must reflect the taxable income that would have arisen if the transactions had been carried out in line with the arm's length principle (with a third party). Related party transactions between entities within different consolidated CT groups that have different tax profiles (such as loss making entities or entities subject to different effective tax rates) may generate more scrutiny from a Tax Authority as there could be a motive to shift profits to entities subject to a lower Tax Rate.
4. Will my internal organisation and systems be able to cope with a CT from 1 June 2023, and what changes are needed to build sustainable process around compliance and reporting?
A CT regime introduces several compliance concepts (transfer pricing, consolidation rules, finance cost deductibility limitations) and businesses need to ensure that its current systems are able to handle these requirements. The law will come into effect on 1 June 2023 with the first tax return filing to take place either in 2024 or 2025 (for financial year commencing after June 2023). Therefore, systems would need to be able to capture the required information from as early as 1 July 2023.
5. Will my organization’s entities in the UAE be able to be consolidated into one filing group and are there any benefits in doing so?
The key benefits of consolidated tax returns include:
- Reduced administrative burden for taxpayers; and
- The ability to share losses across all entities in a certain jurisdiction to lower the effective CT rate.
6. Have we evaluated our operations and existing structure (e.g. contracts or obligations that extend into 2023, cross border activities between mainland and free zone entities), and if impacted what planning and changes can be implemented prior to 1 June 2023?
The UAE law, when released, should contain transitional rules and restrictions.
7. Does my entity have a detailed fixed asset register that clearly distinguishes between depreciable fixed assets and capital items so we can maximize our depreciation allowance for CT?
In computing the taxable profit, expenses are deductible to the extent that they are incurred wholly and exclusively for the purposes of the trade. A key deduction is amortisation or depreciation.
8. What is my entity’s current and future loss profile, if any, from a CT perspective, and to the extent losses exist in the group, can I maximise the benefit of these?
In general, CT is payable on profits and therefore CT is typically not levied on loss-making taxable entities. Where a taxable entity makes losses, specific regulations exist within a CT regime providing how such losses can be utilized or carried forward for CT purposes.
9. Does my entity have an overall tax efficient financing structure considering limitations related to the deductibility of financial expenses?
Generally interest paid on external and internal debt is an allowable deduction subject to transfer pricing, withholding tax and limitation principles.
10. What conversations do I need to have within my organisation to ensure a no-surprise transition to operating within a corporate tax environment?
UAE businesses, with some exceptions, have historically been operating under a no domestic corporate tax regime and the introduction of the CT regime is a significant disruption to the status quo with far reaching financial and commercial implications. For business to be ready, the following are the main areas of focus:
- The current role of the Tax function in the boardroom/organization
- Legal structure, business model, and capital structure rationalization
- Adequate resources and capabilities within the finance function
- Systems and technology infrastructure used by finance that can be leveraged for tax and consideration for updates
- Polices and controls for governance, strategy, and reporting