How businesses can be prepared for UAE Corporate Tax

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It is important to understand the implications of the new corporate tax being introduced by the United Arab Emirates (UAE) and how businesses can prepare themselves for this change. In addition, it is crucial to consider the existing Value Added Tax (VAT) regulations and provide advice on how to plan and manage both VAT and Corporate Tax.

Firstly, it is important to note that the UAE has announced a 9% corporate tax rate, which will be applicable to all companies, including Free Zones, operating within the country. This tax will be introduced from June 2023.

Broadly, Corporate Tax applies to the following “Taxable Persons”:

  • UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE;
  • Natural persons (individuals) who conduct a Business or Business Activity in the UAE as specified in a Cabinet Decision to be issued in due course; and
  • Non-resident juridical persons (foreign legal entities) that have a Permanent Establishment in the UAE (which is explained under [Section 8]).

How businesses can be prepared for UAE Corporate Tax ?

Juridical persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons” and will need to comply with the requirements set out in the Corporate Tax Law. However, a Free Zone Person that meets the conditions to be considered a Qualifying Free Zone Person can benefit from a Corporate Tax rate of 0% on their Qualifying Income (the conditions are included in [Section 14]).

Non-resident persons that do not have a Permanent Establishment in the UAE or that earn UAE sourced income that is not related to their Permanent Establishment may be subject to Withholding Tax (at the rate of 0%). Withholding tax is a form of Corporate Tax collected at source by the payer on behalf of the recipient of the income. Withholding taxes exist in many tax systems and typically apply to the cross-border payment of dividends, interest, royalties and other types of income.

Corporate Tax will be levied at a headline rate of 9% on Taxable Income exceeding AED 375,000. Taxable Income below this threshold will be subject to a 0% rate of Corporate Tax.

Businesses need to start preparing for this change immediately.

One of the first steps that businesses should take is to conduct an internal review of their operations and assess their tax liabilities. This involves reviewing their financial records and determining the tax implications of their business activities. Businesses should also ensure that their financial records are up-to-date and accurate to avoid any potential issues with the tax authorities.

Businesses should also seek professional advice from tax experts who can help them understand the implications of the new tax and provide guidance on how to comply with the new regulations. This is especially important for small and medium-sized enterprises (SMEs) who may not have the resources to hire a full-time tax expert.

In addition to the corporate tax, businesses also need to comply with the existing VAT regulations. The UAE implemented a VAT system in 2018, which requires businesses to register for VAT if their annual taxable turnover exceeds AED 375,000. Businesses need to ensure that they are properly registered for VAT and are complying with all the relevant regulations.

To manage both VAT and Corporate Tax effectively, businesses need to have robust financial systems in place. This includes implementing effective accounting and bookkeeping procedures, as well as investing in appropriate tax software. These systems will help businesses to accurately calculate and report their tax liabilities and ensure compliance with the regulations.

Another important consideration for businesses is to maintain accurate records of their transactions. This includes keeping track of all invoices, receipts, and other financial documents. By maintaining accurate records, businesses can easily identify any discrepancies and resolve them before they become an issue with the tax authorities.

Finally, it is important for businesses to stay up-to-date with the latest developments in the tax regulations. The UAE government may make changes to the tax laws, and businesses need to be aware of these changes and adapt their operations accordingly.

In conclusion, the introduction of the corporate tax in the UAE is a significant development that businesses need to prepare for. By conducting an internal review of their operations, seeking professional advice, and implementing robust financial systems, businesses can ensure compliance with the new regulations. It is also important for businesses to manage their VAT obligations effectively and stay up-to-date with the latest developments in the tax regulations.