5 Things To Know About UAE Corporate Tax

Tally Solutions | Updated on: June 15, 2023

UAE corporate tax defined

The UAE corporate tax applies to the taxable income of a taxable person during the tax period. It is imposed annually, and the taxpayer must calculate how much he owes to the government through self-assessment. All this is performed by filing corporate tax returns through the Federal Tax Authority website, whereby the owed amount can be calculated correctly and paid timely. The corporate tax calculation depends on the taxable income, which is the net profit or loss before tax and can be found on the financial statement generated by the taxpayer. Adjustments need to be made before the taxable income is calculated for the tax period.

How is Corporate Tax in UAE Calculated?

Corporate Tax Limit and Applicability in UAE

Registration for UAE corporate tax

Every taxable person, including those under the Free Zone Persons category, needs to register for corporate tax. In certain cases, the FTA may also ask exempt people to register for corporate tax, which is subject to the Authority’s discretion. Once the registration step is completed, they will receive a corporate tax registration number. This will be used to file the corporate tax return for every tax period and must be done within 9 months starting from the end of the relevant tax period. If any corporate tax is due, you must pay for it within that time, and failure to do so can incur penalties. 

5 UAE corporate tax facts you must know

1. Availability of small business tax relief

A small business can avail of tax relief as per the UAE corporate tax law. This provision applies on top of the 0% CT rate for businesses with a taxable income of up to or equal to AED 375,000. Small businesses need revenue below a certain threshold to qualify for this small business tax relief. The threshold amount is yet to be announced by the Authority. The tax relief includes simpler compliance obligations, and their taxable income is not considered taxable during the tax period. Businesses must make an election to the FTA to be eligible for the small business tax relief. 

Who can claim it?

Small business tax relief can be claimed by any individual as specified by the government or any UAE resident juridical person as long as all the conditions are met. Only after approval can the small business tax relief be provided to the business. Note that revenue is calculated by including expenditure.

Group relief

Apart from this, group relief is available for transfers between group companies. But this is only applicable when the companies are a qualifying group. The transfers must be carried out without changes in the loss or gain for corporate tax purposes. In order to become a qualifying group, you must not be a member of an exempt person category nor a qualifying free zone person. You must own 75% or more of the other company, or the third party should own 75% or more of the entities involved. All the members must prepare their financial statements using the same accounting standards and have the same financial year. They must also be juridical persons who are permanently residing in the UAE.

2. Tax exemptions to Free Zone Persons (FZPs)

A qualifying Free Zone Person (FZP) has a 0% applicable CT rate on the qualifying income and a 9% CT rate on taxable income, which doesn’t fall under the qualifying income definition by the Authority. Note that the benefit is only applicable to the qualifying income. A taxpayer is considered an FZP when he has a qualifying income, has adequate substance in the UAE, is not subject to the standard rate of UAE corporate tax (and has not elected for the same), and is compliant with the transfer pricing requirements as per the corporate tax law. This is not an exhaustive list, as the Minister can put forward additional conditions that must be met for a taxpayer to become an FZP.

Election to be subject to regular tax rates

There may be conditions that a taxpayer has elected, so he is subject to the regular corporate tax regime, which will prevent him from becoming a Free Zone Person. If any of the conditions above are not met, the taxpayer will not be qualified as a Free Zone Person, and the standard corporate tax will apply. This will occur from the start of the tax period after the conditions are not met. Every Free Zone entity must register and file its corporate tax return even if they are not a qualifying Free Zone Person. The UAE CT regime treats all Free Zone entities as the same, and the same rate is applied to all.

3. Financial records and permission to maintain unaudited statements

The corporate tax states that every taxpayer needs to prepare financial statements and maintain them to calculate applicable taxable income. He must also maintain records that are used to file the corporate tax return or any related filing required by the Authority. Even if your business is part of the exempt group or persons, you must maintain all records that prove your exemption status and clearly show why you are exempted. As per the Authority, all related records and documents must be stored for at least seven years, starting from the end of the tax period. 

Tax group

If you have applied and have been approved to form a tax group as per the UAE corporate tax law, then you can use consolidated financial statements to prepare the corporate tax returns. This applies to the UAE resident entities only. Only businesses that meet the following criteria are eligible to apply for tax group in CT; the parent company holds a minimum of 95% of share capital and voting rights of every company. If your business is not part of a tax group, the business needs to prepare individual financial statements as per the corporate tax law.

Who does auditing apply to?

It is not mandatory for every entity subjected to corporate tax to have its financial statements audited. Only those listed in the Minister’s decision will need to prepare audited financial statements for corporate tax and maintain these records as the corporate tax law specified. Unaudited financial statements are enough for the rest of the businesses and should be maintained for as long as required. If the Federal Tax Authority requests, financial statements may need to be submitted at the time of return filing.

4. Anti-avoidance provisions

Specific anti-avoidance provisions have not yet been stated in the corporate tax regime but the general anti-avoidance provisions have been included in it. The tax authority has a window of seven years to perform audits and apply anti-avoidance provisions. If any discrepancies and problems are found at this time by the tax authority, penalties will be applied to the businesses depending on the level of deviance from reality. These are generally in the form of interest payments and other fees that the business will need to pay during a particular time frame.

Significance of anti-avoidance provisions

Anti-avoidance or anti-abuse provisions/rules (AAR) are put in place to ensure businesses don’t take advantage of a particular tax regime. It prevents businesses from showing their financial position as different from what it is, in reality, to use the law in an unintended way. For example, businesses can try to get their tax reduced, avoid withholding tax compliance, increase tax refund, or defer corporate tax for an unfair advantage over other taxpayers. All of these are prevented with the AAR in place and even though it is fairly new in the UAE tax regime, it has already come into effect.

How does the Authority implement AAR?

A host of factors are considered when determining whether a business is involved in unfair practices to gain tax-related advantages. The Authority will determine when the transaction was done and the nature of operations. For instance, if the operations changed suddenly, it would come under the radar of the AAR. Another example is if the business owner starts to withdraw or transfer money from the business account to his personal account, the AAR has the right to question him about his actions, especially if such actions were not performed earlier.

5. Provisions for influencers, freelancers, and individuals doing business

An individual is referred to as a natural person in the UAE corporate tax regime. Individuals engaged in business activity are subject to the corporate tax as per the UAE rules based on the Cabinet Decision. Individuals who don’t fall into this category are not subject to the corporate tax regime. An entity will be under the natural person category if it is engaged in certain business activities and is allowed to form a civil company or sole proprietorship. If an individual is engaged in more than one business activity, he needs to file just one corporate tax return that covers all the business activities which are within the CT scope.

What is considered taxable income?

The CT will not apply to an individual's salary or any other employment income, for that matter. This includes income that is received when the individual is working in the private sector or the public sector. The taxable income includes what the individual earns from outside the UAE as long as the business activity was completely conducted in the UAE. The taxable income is simply all the income that the individual earns when he is running that business in the UAE. The interest that an individual earns and any personal investments he makes are not subject to corporate tax. The returns on investments are also not subject to corporate tax. 

Provisions for freelancers and influencers

Freelancers and influencers are considered self-employed individuals. They are subject to the UAE corporate tax only if they are engaged in a taxable business or a business activity that has been specified by the Cabinet Decision. The details are yet to be revealed about the business activity particulars which would subject these individuals to corporate tax. Self-employed individuals can apply for small business relief if they meet the conditions set out by the Authority. More information will be provided by the FTA in due course.

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