The United Arab Emirates (UAE) comprises seven emirates and has been renowned for its appealing business environment and tax-free regime for numerous years. Nevertheless, as of January 31, 2022, the Ministry of Finance (MoF) declared the forthcoming introduction of a federal corporate tax (CT) on business profits, slated to take effect for financial years commencing on or after June 1, 2023. This constitutes a substantial modification that will impact all enterprises operating within the UAE, irrespective of their legal structure, ownership, or operational nature. Consequently, businesses must acquaint themselves with the new CT system and devise strategies accordingly to optimize their tax position while adhering to the new regulatory prerequisites.
What constitutes corporate tax planning?
Corporate tax planning encompasses the process of evaluating and structuring a business’s financial affairs to minimize its tax burden and enhance its post-tax earnings. Corporate tax planning can encompass diverse facets, including:
1. Selection of the most advantageous legal structure and jurisdiction for the business.
2. Apportioning income and expenses among different entities and countries.
3. Leveraging tax incentives and exemptions.
4. Mitigating tax-related risks and handling disputes.
5. Ensuring accurate reporting and documentation of tax transactions and positions.
What is the significance of corporate tax planning in the United Arab Emirates (UAE)?
The significance of corporate tax planning in the UAE lies in its ability to:
1. Enable businesses to maximize their tax advantages and reduce their tax obligations while operating within the UAE’s tax regulations.
2. Ensure businesses adhere to legal obligations, thereby steering clear of potential penalties linked to non-compliance.
3. Elevate the financial prowess and long-term viability of businesses by bolstering cash flow, profitability, and competitiveness.
What Does the UAE’s Corporate Tax (CT) Regime Entail?
The CT framework within the UAE adheres to Federal Decree-Law No. 47 of 2022, which governs the taxation of corporations and enterprises, along with its accompanying executive regulations and associated determinations. The CT legislation pertains to various entities known as taxable persons, who may fall into one of two categories: resident persons or non-resident persons, as per Article 11 of the Corporate Tax Law. The key groups of taxable persons include:
1. Juridical entities (such as corporations) established in the UAE or effectively managed and controlled by the UAE.
2. Non-resident juridical entities with a permanent establishment within the UAE.
3. Non-resident persons earning state-sourced income.
4. Non-resident juridical entities connected to the UAE through income generated from immovable property within the country.
5. Natural persons conducting business or business activities in the UAE with an annual turnover exceeding AED 1,000,000 as per the Gregorian calendar.
The corporate tax rate in the UAE stands at 9% for taxable income exceeding AED 375,000. This rate was introduced in 2022 and became effective for financial years commencing on or after June 1, 2023. Nevertheless, certain businesses and sectors either enjoy exemptions from corporate tax or are eligible for a zero percent rate.
Nonetheless, specific categories of businesses or business activities may be subject to varying CT rates, as determined by the Cabinet. For instance, the CT rate for activities related to oil and gas exploration and production is set at 55%.
Exemptions from UAE Corporate Tax Registration
The following categories of entities are exempt from registering for corporate tax with the authority:
1. A government entity.
2. A government-controlled entity.
3. An entity involved in an extractive business, meeting the conditions stipulated in Article 7 of the Corporate Tax Law.
4. An entity engaged in a non-extractive natural resource business, meeting the conditions outlined in Article 8 of the Corporate Tax Law.
5. A non-resident entity deriving exclusively state-sourced income under Article 13 of the Corporate Tax Law and lacking a permanent establishment within the State as per the provisions of the Corporate Tax Law.
Furthermore, the corporate tax law introduces several tax compliance and reporting obligations for these entities, including:
– Acquiring a tax registration number (TRN) from the Federal Tax Authority (FTA).
– Submitting an annual corporate tax (CT) return and ensuring settlement of the remaining corporate tax payable amount within nine months from the conclusion of the relevant tax period.
furnishing the FTA with any necessary information, documents, or records for the application and enforcement of the Corporate Tax Law. Such information, documents, or records must be provided either within the tax return or upon request by the FTA.
cooperating with and supplying information to the FTA as and when requested.
Qualifying Activities Carried Out by Qualifying Free Zone Entities
The UAE CT system applies to all businesses undertaking any qualifying activities within the UAE, as delineated by Ministerial Decision No. 265 of 2023. A Qualifying Free Zone Entity will be considered to be engaging in qualifying activities if it participates in any of the subsequent operations:
1. Manufacturing of goods or materials.
2. processing of goods or materials.
3. Trading of Qualifying Commodities.
4. holding of shares and other securities for investment purposes.
5. Ownership, management, and operation of ships.
6. Provision of reinsurance services.
7. Offering fund management services.
8. Providing wealth and investment management services.
9. Rendering headquarters services to related parties.
10. Supplying treasury and financing services to related parties.
11. Engaging in the financing and leasing of aircraft.
12. Distributing goods or materials within or from a designated zone.
13. Conducting logistics services.
14. Any ancillary activities (which serve no independent function) related to the aforementioned activities.
Activities Exempt from the UAE CT System
By Ministerial Decision No. 265 of 2023, the UAE CT system does not encompass certain exempted activities. The following activities fall under this exemption, unless explicitly stated otherwise:
1. Transactions involving natural persons, except in the case of specific qualifying activities.
2. Regulated activities in banking, insurance, finance, and leasing.
3. Ownership or utilization of immovable property in the UAE, excluding commercial property within a free zone in association with other free zone entities.
4. Ownership or utilization of intellectual property assets.
5. Activities that are supplementary to the aforementioned categories.
Strategies for Effective Corporate Tax Planning
With the recent introduction of the UAE CT system, businesses must reassess their current tax situation and consider the following approaches to enhance their tax position:
1. Evaluate the Impact: Analyze how the UAE CT system affects your business’s income, expenses, and cash flow. Develop a tax budget and forecast accordingly.
2. Register and Obtain TRN: Prioritize registration with the FTA and secure a Tax Registration Number (TRN) well before the deadline.
3. Review Accounting Practices: Examine your company’s accounting policies and systems, ensuring they align with UAE CT requirements and standards.
4. Income and Expense Segregation: Identify and separate income and expenses related to qualifying and excluded activities, allocating them correctly.
5. Maximize Deductions: Claim all allowable deductions and losses, maintaining accurate records and supporting documentation.
6. Utilize Foreign Tax Credits: Employ the foreign tax credit mechanism to prevent double taxation on the same income. Obtain tax certificates from foreign tax authorities.
You may also read UAE Tax Navigation: The Role of International Tax Attorneys
7. Monitor Compliance: Stay vigilant about tax compliance obligations and deadlines, filing tax returns, and making payments punctually.
8. Seek Expert Guidance: Rely on the expertise of tax professionals and consultants to navigate the UAE CT system’s latest developments and updates.
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If you require corporate tax planning services in the UAE, consider GA Lawyers, a law firm with a deep understanding of UAE tax laws, international tax standards, and treaties. Our tax consultants can assist you in optimizing your tax liability, ensuring legal compliance, and minimizing unnecessary risks. Whether you need guidance on selecting the most suitable legal structure for your business, leveraging the UAE’s double tax avoidance agreements, adhering to transfer pricing rules, implementing effective VAT strategies, preparing and submitting tax returns, or resolving tax audits and disputes, our team is ready to support your business objectives. Contact us today to explore how we can contribute to your success.