The UAE’s impending federal corporate tax (CT) regime, which was first announced on 31st January 2022 amidst much speculation and uncertainty, is finally due to come into effect. But how will small and medium-sized enterprises (SMEs) be affected, and how can you best position your company to handle these changes?
The CT regime, which applies to Financial Years beginning on or after 1st June 2023, has been set at a standard rate of 9% and will be applied to taxable business profits exceeding AED 375,000. It applies to all businesses and commercial activities with a few exceptions. These include Government Entities, Government Controlled Entities, certain natural resources extraction businesses, certain non-extractive natural resource businesses, and non-residents who derive UAE-sourced income but do not have a permanent establishment in UAE.
For SMEs, assessing the impact of the new CT regime could be challenging due to the complexity and intricacies of the law and the natural variation in the income of many of these organisations. In addition, the new regime will involve significant compliance and reporting requirements and may also entail operational and structural changes. Therefore, the CT regime also includes certain types of reliefs, like small business relief, business restructuring relief or the preferential rate for qualifying free zone entities.
This article addresses SME owners’ concerns about ensuring complete tax filings and accurately predicting their tax liability.
Evaluating the Impact of CT on your business
The first step in preparing for the new CT regime is understanding your business’s requirements. There are several essential questions at this stage that you should be looking to answer:
- Does your business fall into one of the categories required to register?
- What is your business’s financial year?
- What is the deadline for you to file a CT return?
- How will CT affect your obligations and liabilities to your clients/customers and suppliers?
- What changes will you have to make to your business’s corporate structure to minimise liability?
- What company training or new hires will be necessary to manage this new obligation?
- What financial information and records will your business need to maintain to ensure effective management and compliance?
This list is by no means exhaustive, but it is a useful starting point towards better understanding your company’s obligations and preparing your business ahead of time.
Determining whether your business will be subject to CT
First and foremost, companies will be subject to a 0% rate up to taxable business profits of AED 375,000. Only the taxable business profits above AED 375,000 will be subject to a 9% rate.
In addition, businesses with revenue below AED 3,000,000 in a relevant tax period and previous tax periods will be eligible to claim ‘small business relief’, provided certain conditions are met. More information on this can be found at www.mof.gov.ae.
What other exemptions apply?
The primary exemptions to the CT regime are detailed below:
- A Government Entity
- A Government Controlled Entity
- Businesses involved in the extractive business that meet certain conditions.
- Businesses involved in the non-extractive natural resource business that meet certain conditions.
- Qualifying Entities established for public benefit
- Qualifying Investment funds (subject to meeting required conditions)
- Public or private pension or social security funds (subject to meeting certain conditions)
- Entities that are fully owned and controlled by exempted organisations
The income of foreign branches will not be taxed directly but will be included in the parent company’s taxable income. The exception is if the branch’s profits are already subject to tax in the foreign jurisdiction, in which case the tax paid can be adjusted with the company’s due corporate tax.
Free zone companies
All Free zone companies fall within the scope of CT and, as such, are required to register and file tax returns. However, the regime allows some benefits to honour the tax benefit agreements with the Free zones, provided certain conditions are met.
A Qualifying Free Zone Person, although subject to CT, may benefit from a preferential rate of 0% on its Qualifying Income, and any Non-Qualifying Income will be subject to a rate of 9%.
Two frequent questions that are asked are:
- What is a Qualifying Free Zone Person?
Any company or branch registered in the Free Zone meets the following criteria:
- Maintains adequate substance in the UAE
- Derives ‘Qualifying Income’
- Has not elected to be subject to Corporate Tax at the standard rates
- Complies with the transfer pricing requirements under the Corporate Tax Law
- Any other condition prescribed by the Ministry.
- What is Qualifying Income?
The Authorities are still to define Qualifying Income.
If you own a free zone company, you may have to evaluate where your business generates most of its profits and assess whether restructuring may be possible to avail the benefits available in the regime. While it is understandable that some information is still awaited on the matter and a final decision cannot be made yet, it is still better to assess the options available and be well-prepared when the information is announced.
Conversely, any mainland businesses dealing primarily outside UAE or with free zone organisations may want to consider moving operations to a free zone to minimise their tax burden.
Other sources of income, such as dividends and profit distributions, are also exempt from CT provided there is a 5% or greater participating interest in the capital or equity of the foreign entity and other conditions are met.
Determining your business’s Financial Year
The CT will be charged on an annual basis based on your company’s Financial Year. Most companies have a tax period from 1 January to 31 December, although some have different arrangements. Your company’s legal documents, like Articles of Association, usually mention your financial year.
How to calculate taxable business profits for UAE CT
A company’s taxable business profits are its net profits for the tax period after making any necessary adjustments for deductions or any applicable exempt income. These can include:
- Unrealised gains or losses
- Qualifying dividends and capital gains
- Income from inter-group billing and transfers
- Deductible expenses
- Transfer of tax losses within a group
- Any other incentives or tax reliefs as specified by the MoF
- Any other deductions as may be specified by the Ministry
What is the deadline to file a tax return?
You can register electronically through the FTA website, and this should be done before you file your first tax return. This is mandatory irrespective of your company’s operational status. The CT Return is to be filed, and dues should be settled within 9 months of the end of the relevant tax period.
How will CT affect my obligations and liabilities to clients/customers and suppliers?
CT is likely to result in higher costs for your business. This may mean that you need to consider raising the price of your services to meet these demands. However, this should always be balanced against the need to remain competitive in the market and to charge an amount that reasonably reflects the service you provide.
You should also consider how your tax obligations will impact your cash flow and financial resources since these may affect your ability to pay your suppliers on time and fulfil your obligations to your clients/customers. Ultimately, you need to find a way to manage your CT obligations effectively while ensuring your business maintains a good reputation and relationships with clients/customers and suppliers.
Managing your CT accounting obligations
The new CT regime will undoubtedly burden SMEs that do not have an established in-house finance team to manage these obligations. Implementing an automated accounting system can help handle the additional compliance and administrative requirements. It could be a better option than the expense of hiring new members of staff and the time and resources this would entail. Outsourcing this function to a reputable corporate services provider or a trusted accounting firm is another option that can help in the interim while your company adapts to the new compliance requirements, alleviating the burden of managing this function in-house.
While the additional compliance and financial costs of the new CT regime may seem an unnecessary burden to SMEs, it is ultimately a move that will benefit the UAE economy and, by extension, all businesses that operate within the country. The revenues generated by the new regime can be reinvested into improving the services available to small companies in the country and other projects, such as smart government initiatives, which will make doing business in the UAE much simpler and more streamlined. In the context of tax systems in other developed economies, the 9% rate represents one of the lowest corporate tax rates globally and is well below the average statutory rate of 23.37%. This reflects the UAE’s desire to continue to make the country an attractive investment proposition while adhering to international standards and best practices.