Recently, the UAE has undergone specific tax changes to moderate its tax system to collaborate it in line with international standards and practice and to diversify state revenue. We are here to discuss the UAE’s evolving tax environment and explore the chances of the future introduction of the federal corporate tax in the UAE.
What is corporate tax?
As per the new tax regime, corporate and other businesses with taxable profits exceeding Dh375, 000 would be compulsorily to pay a standard rate of 9%.
Who is enforced to pay corporate tax?
It applies to:
- UAE-incorporate entities;
- Foreign or resident, conducting any business or activity in the UAE;
- Foreign legal entities which have a permanent establishment in the UAE,
Impact of corporate tax on companies
Some of the companies covered under the corporate tax regime in the UAE:
- Domestic companies in the UAE mainland
- Free zone persons
- Foreign companies which have a permanent establishment in the UAE
Areas of the impact of corporate tax on companies
- Audit requirement: the taxable income must be computed based on the profits reported in the audited bank statements developed by internationally accepted accounting standards. Later, free zone companies need to have audited financial statements if they wanted to get benefits from 0% corporate tax UAE. Therefore, companies must mandatorily have their financial statements audited on time.
- Review of processes & systems: companies need to have to assess the accuracy of the current processes and the system regarding the accounting of expenditure and income, capital assets, inter-company transactions, inventory management, etc. and deliberate upon reconfiguring or updating these to meet the compliance and reporting requirements under the UAE corporate tax regime.
- Review of existing contacts with suppliers and customers: the direct impact of corporate taxes in the UAE is on the profit margins of companies. Companies are accordingly considering an increase in the selling price to maintain profit margins. Similarly, service providers and suppliers could consider the increased cost of goods to factor in the additional cost on account of tax outflows.
- Risk of the place of effective management of foreign companies in the UAE: UAE-headquartered Companies operating overseas via foreign subsidiaries holding companies would need to evaluate the POEM risks of the companies outside UAE. There may be implications for intra-group and cross-border transactions as discussed in the next point.
- Permanent establishment risk in the UAE of foreign companies: with the introduction of the concept of a permanent establishment in the proposed UAE corporate tax for business, foreign companies conducting business in the UAE, via any form of presence must, inter-alia, long-term agreements and contacts, evaluate the existing business models, intragroup and cross border transactions, etc. to assess the impact from a permanent establishment risk perspective and undertaking appropriate group level.
- Compliance need: companies which are within the scope of the regime of corporate tax in the UAE would need to undertake the required compliance:
- Maintain financial and other records which explain the information contained in the tax return.
- Pay tax liability and file the tax return within 9 months from the end of the relevant tax period.
Who is exempted from corporate tax?
Government-controlled entities, public and private pensions or social security funds; qualifying investments funds and qualifying public benefits entities are exempt. As per the presentation by the Ministry of Finance. Businesses engaged in the extraction of natural resources and non-extractive aspects of the natural resources value chain which are subject to emigrate-level taxation would be outside the scope of the UAE corporate tax regime.
Also, subsidiary companies are wholly owned by an exempt person. Those entities could apply with eth federal tax authority to be exempt from corporate tax.
Conclusion
Taxes were the main source of revenue for many countries globally. While taxes mostly helps governments to have additional revenue and fund public expenditure, there is quite a difference between corporate taxes under direct taxes and VAT under indirect taxes.