For many years, the United Arab Emirates (UAE) was a safe zone in terms of tax to the rest of the world, encouraging global businesses that had the attractive environment of zero income tax, and generally a pro-business landscape. The introduction of a federal corporate tax regime brings change to that. The federal corporate tax regime will be effective for financial years commencing on or after 1 June 2023, which is significant in the development of the UAE’s economy.
Key Highlights: Corporate Tax Rates in the UAE
- 0% corporate tax on profits up to AED 375,000. This encourages small businesses and startups.
- 9% corporate tax on profits above AED 375,000. This is the corporate tax rate for most companies.
- 15% minimum tax for large multinational groups, applies only to companies with global revenues over €750 million, under international tax rules (OECD Pillar Two).
Who Needs To Register Corporate Tax in UAE?
All businesses in the UAE must register for corporate tax, including:
- Mainland and companies in the free zones
- Branches of foreign companies
- Freelancers and sole proprietors (if your activity is considered business)
Even if your business is put into the 0% tax rate category, you will still need to register with the Federal Tax Authority (FTA).
Corporate Tax Compliance
- You must file an annual corporate tax return within 9 months following the end of your financial year.
- There are a few key items you must remember.
- Recordkeeping and documentation.
- Those dealing with related parties might also need to consider transfer pricing.
Penalties to Avoid
Late registration, late filing, or late payment all incur penalties by the FTA Penalties could include:
- An AED 10,000 penalty for not registering;
- AED 500 per month for late filing (up to AED 50,000);
- additional penalties for providing incorrect or false information.
Small Business Relief (SBR)
- If your annual revenue is AED 3 million or less, you may qualify for Small Business Relief.
- This means that you can be treated as not having any taxable income, even if your profits are above AED 375,000.
- The SBR is available until the end of 2026 (but subject to updates from the FTA).
Transfer Pricing Guidelines
When compiling corporate tax law, the UAE included transfer pricing regulations which stipulate that related party transactions be done on an arm’s length basis—i.e., as if they were unrelated.
Businesses Will need to:
- Complete a transfer pricing disclosure form with their annual tax return
- Submit Master File and Local File documentation (if thresholds are met)
- Explain how they have calculated their transfer prices
These guidelines will be particularly important for businesses that are part of international or group structures.
Filing and Compliance
Tax Registration:
All businesses (including free zone companies and exempt entities) must register for corporate tax with the Federal Tax Authority (FTA).
Tax Returns:
- Corporate tax returns must be filed within 9 months following the financial year end.
- There are no current requirements for advance or quarterly tax payments.
Group Taxation:
Companies under common ownership may form a tax group and can elect to be treated as a single taxable entity. Accordingly, transactions between members of the group will be disregarded for tax purposes which may assist with the optimization of the tax position.
How Businesses Can Prepare
- Understand Tax Obligations:Determine if your business will be taxable and at what rate or if you will have an exemption.
- Set Up Accounting System:Keep proper financial records with IFRS compliance. Many smaller businesses may have to enhance their accounting processes.
- Review Your Structure:Determine if your current structure (free zone, branch, mainland) will still be the best under the new tax regime.
- Train Your Team or Afford Qualified Professionals: You will need to train your team or use qualified professionals to ensure compliance.
What Are the Corporate Tax Implications for VAT-Registered Businesses?
VAT and corporate tax are separate systems, but VAT-registered businesses need to consider the implications of corporate tax on their businesses.
- Just because you are VAT-registered, it does not imply you are automatically registered with corporate tax – both VAT and corporate taxes need to be registered with the Federal Tax Authority (FTA).
- The VAT Records (invoice, return) can be used to underpin the details in your corporate tax return, particularly in relation to the verification of sales and expenses.
- Although non-recoverable VAT on business expenses may not be recoverable for VAT purposes, in some cases, it is deductible for corporate tax purposes and is dependent on the nature of the expense.
- It is best you align the way your accounts are systems record operate to be able to properly record VAT and corporate tax so you are compliant.
Conclusion
The introduction of corporate tax represents a significant change for businesses in the UAE. It will, of course, introduce new obligations for businesses, but overall, the corporate tax system is designed to be simple, transparent, and globally competitive. With the implementation of a low corporate tax rate, exemptions for small businesses, and the continued support of Free Zones, the UAE is still a very attractive destination for investors and entrepreneurs.