Reframing Business for Corporate Tax in UAE

UAE has decided to introduce corporate tax on taxable income with effect from financial year commencing on or after 1st June 2023. Corporate tax will be applicable at a rate of 9% for taxable income exceeding AED 375, 000.

It’s clear that UAE has no intention to bring small business enterprises into corporate tax brackets. Although the introduction of corporate tax was really shocking and surprising, it was quite expected because MOF has already introduced VAT, Excise duty, ESR etc recently.

As of now, UAE has corporate tax regime having:

  • 20 % tax on foreign banks
  • Up to 55 % tax for business entities engaged in oil production and explorations

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    Why corporate tax in UAE?

    Through the introduction of corporate tax UAE intends to achieve the following.

    • Cement the UAE’s position as a leading global hub for business
    • Accelerate the UAE’s development and transformation to achieve its strategic objectives.
    • Reaffirm the UAE’s commitment to meeting international standards for tax transparency and prevent harmful tax practices.

    We are already familiar with the corporate tax updates published by MOF (Ministry of finance). Every business entity should assess themselves, whether they have sufficient infrastructure before implementation of corporate tax. It is expected that UAE CT decree-law and executive regulation will be announced soon but taxpayers should keep businesses ready for final implementation so that the entity has time to conduct implementation and adapt to the changes.

    This article provides you the basic review that an entity should consider before Implementation.

    Business and finance Impact assessment

    Firstly, every business entity should conduct impact assessment, whether they come under the brackets of UAE CT or not. If an entity falls within the brackets, then they need to consider how they are going to be affected and what are the changes and updates required in current business structure, accounting system and transfer pricing policy etc.

    Business Level Impact

    This is the initial stage before the implementation of corporate tax. Taxpayers will have to estimate their potential future tax based on estimated profits after considering the relevant factors such as exemptions, adjustments, and deductions etc. Finance impact analysis will help taxpayers to conduct financial planning and estimate cash outflows.

    Financial statement level impact

    UAE CT has an accounting impact on financial statements and auditors need to consider the same. For eg: recognition, measurement, and disclosures of taxes on income (IAS 12 -Income taxes) and IAS 37 Provisions, Contingent Liabilities and Contingent Assets as per applicable financial reporting standards will have to be considered.

    Finance and tax teams shall coordinate with other departments as well as external auditors to have clear picture about the impact.

    Planning and Designing

    Business model restructuring

    As per the current information from MOF, freezone entities come under purview of corporate tax. Freezones are required to register and file return, but the UAE CT regime will continue to honour the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE. So, it’s possible for free zone entities that conduct mainland transactions to be taxed. Hence, enterprises should reconsider their existing business structure and review how the taxpayer can reap benefits as tax incentive.

    Why Tax grouping under UAE corporate tax?

    Enterprises have the option to register as tax groups just like VAT tax groups, but we expect that groups will not be same as VAT Tax groups, so that entity will have an option to register as tax group in corporate tax separately. Administrative expense can be minimised to some extent as only one return is required to be filed annually for one tax group. Moreover, tax loss of one company is eligible for set-off against taxable income of another company in same group, as corporate tax rate is applied on consolidated basis.

    As per the information, tax losses from one Group Company may be used to offset taxable income of another group company provided certain conditions are met. While taking the decision regarding the tax groups, current and estimated financial results must be considered as it has short term as well long-term impact.

    Are offshore companies subject to UAE CT?

    There is no information related to taxability of offshore companies. Hence, we expect that offshore companies come under purview of UAE CT.

    Accounting and process re-structuring

    A well-equipped accounting platform that supports to generate corporate tax reports is mandatory for the smooth functioning because corporate tax is levied on taxable profit, not on the accounting profit. Accounting profit is the amount reported in the financial statements prepared under internationally accepted accounting standards.

    The taxable income will be the accounting net profit of a business after adjusting certain items to be specified under the UAE CT law. Hence the accounting system should have capability to identify those transactions.

    Non-Deductible expenses expected generally include:

    • Fines and penalties
    • Expenses related to violation of law
    • Capital expenditure
    • Personal expenditure
    • Managerial remuneration (more than limits specified under law)

    Further, if a freezone entity is conducting business in freezone as well as mainland, accounting system should have the ability to apportion the transaction of mainland and freezone and obtain financial results out of it. So, business enterprise should have the resources including human and IT environment that will cope with requirements of UAE CT law.

    Transactions outside the scope of UAE CT

    Certain transactions are outside the purview of UAE the same transactions should be excluded while computing taxable profits. These include:

    • Dividends and capital gains earned by a UAE business from its qualifying shareholdings.
    • Qualifying intra-group transactions and reorganizations, provided the necessary conditions are met.
    • Foreign investor’s income from dividends, capital gains, interest, royalties, and other investment returns.
    • Businesses engaged in the extraction of natural resources will remain subject to Emirate level corporate taxation.

    As per current information from MOF, banking operation will be subject to UAE CT, so further details regarding emirates level taxation will be provided in due course.

    Documentation apart from books of accounts

    When it comes to documentation, apart from maintaining the books of accounts, entity should maintain appropriate documents in relation to computation of tax liability, related party transactions, and determination of arm’s length prices etc. As of now it remains uncertain regarding the supporting documents required.

    Remodelling Transfer pricing policy

    Transfer pricing has a significant impact in corporate tax regime (i.e., fixation of arm’s length price and its documentation etc). The arm’s length price for a controlled transaction can be determined by selecting and applying the most appropriate transfer pricing method. The regulations will specify the methods and may also provide an option to use methods other than approved Transfer Pricing methods which have sufficient documentations as per law.

    As per the news published by Ministry of finance, businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.

    Three Tier Model under OECD Guidelines

    As per the OECD guidelines on transfer pricing, jurisdiction basically adopt a three tired approach to transfer pricing documentation consisting of;

    • Master file – containing standardised information of all MNE group members.
    • Local file – material transactions of local taxpayers.
    • Country by country report– global allocation of the MNE groups income and tax paid.

    It is expected that transfer pricing rules and regulation will be published as a part of UAE CT law. Business entity having related party transaction should keep information and documents as per the laws and regulations and restructure the transfer pricing policy in line with UAE CT Law.

    Availability of resources

    Every business entity should assess the current human resource in finance team, whether business has an in house or outsourced tax specialist having knowledge about international taxation and transfer pricing rule, to handle the implementation of corporate tax.

    Implementation and ongoing

    Every enterprise must register and file the returns on an annual basis unless specifically exempted under UAE CT law. So, no provisional return or advance tax payment is required.

    As of now, taxpayers have enough time to plan and implement changes in ongoing business and should be prepared to adapt these changes in the current system.

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