UAE corporate tax: Ministry explains 9 key aspects of new law — Here are some insights that were shared during the session:
The CT registration will be distinct and independent of the VAT registrations. All businesses (e.g. free zones, companies and individuals) would be required to register even if the taxable income is below the threshold of Dh375,000 or exempt.
Over the next six months, the Federal Tax Authority (FTA) will send out ‘invitation to register’ to select businesses. Businesses are not required to take any action as of now. No penalties relating to registration may be imposed if the businesses ensure to register at least before the due date for tax return submission (i.e. nine months from the end of the relevant financial year). Unlike VAT, and correctly so, there would be no concept of deregistration from CT.
2. Future laws & regulations:
The decree law for CT has already been issued. CT laws would not have a separate ‘executive regulations’ but various cabinet decisions would be issued from time to time containing details and guidance for implementing CT.
3. Free Zones:
The details of “Qualifying FZ” and “Qualifying income” will be published soon. It was emphasised again that the FZ business will need to maintain adequate substance in the UAE and meet other conditions to avail tax exemptions.
In our Tax Conversation column on December 10, 2022, we highlighted the expression ‘Corporate Tax (CT)’ is a misnomer as even individuals who are engaged in a business – such as social media influencers, freelancers, sole proprietorships or civil companies — could be subject to CT.
The session reaffirmed that individuals conducting business activities would be covered under CT. Individuals would be considered as ‘resident’ if he/she conducts business activities in the UAE. The details — about the businesses categories covered under CT — will be published soon.
5. Business having multiple entities in the UAE:
A formal approval from FTA would not be required to consider two or more UAE entities eligible to form a ‘qualifying group’, if the conditions are met. For a ‘qualifying group’, intra-group transactions could be disregarded for tax purposes. However, a formal application for FTA’s approval would be required to form a ‘tax group’. A ‘tax group’ can submit a single tax return for all members of the group.
The concept of tax groups under the VAT laws and the CT laws will be distinct. In other words, if you have formed a VAT tax group, it is not necessary to form a similar CT tax group or vice-versa.
6. Anti-abuse provisions:
In another Tax Conversation of December 17, 2022, we highlighted the significant impact of anti-abuse rules under the CT laws.
The session highlighted that the businesses should have commercial reasons for reorganisation. A reorganisation, without valid commercial reasons, aimed to gain tax benefits could be disregarded under anti-abuse rules.
7. Small business relief:
In addition to taxable threshold of Dh375,000, businesses eligible for ‘small business relief’ would be treated as having NIL taxable income. The details of the small business relief would be published soon.
8. Documentation and accounting:
Taxable income will be derived from the financial books of account of the businesses. Businesses do not need to prepare a separate set of books for tax purposes. Generally accepted accounting standards, such as IFRS, should be acceptable. For small businesses and others, simplified accounting methods may be permitted.
Businesses will need to maintain documents and records for at least seven years. Even if a business is not taxable, or claimed exemption, or did not pay tax in a particular year, the documentation requirements will still apply to facilitate future audits/assessments.
9. International tax aspects:
Place of effective management (PoEM) will be based on the location of key management personnel and/or board of directors, and of decision making. If a foreign company’s PoEM is in the UAE, it will be covered under CT. UAE is committed to OECD ‘Pillar 2’ (i.e. global minimum tax of 15 per cent) on MNCs and will make necessary announcements in due course.
The awareness session concluded by highlighting that the businesses will have sufficient time to prepare for CT. Almost a year back in Feb 2022, we also cautioned that businesses should avoid treating CT as a Y2K hysteria as there would be sufficient time to prepare for CT.