Things to consider with regard to corporate income tax in 2024

Things to consider with regard to corporate income tax in 2024

Corporate income tax has been in force in the UAE since June 1, 2023.

This is charged on the taxable income (net profit) of companies based in the United Arab Emirates. In the following, you will find out everything you need to know about corporate income tax and what you need to know about it so that you are optimally prepared for the new tax changes.

Is corporate income tax the same as value added tax?

The short answer to that question is no. But when the UAE government first announced corporate tax (CT), many companies mistakenly thought it was a tax similar to value added tax (VAT). But these two taxes differ significantly from each other:

Corporation tax is mandatory for every company in the UAE, while value added tax only applies to those companies that exceed a certain profit limit or, under certain conditions, turnover limit.

The latter is also an excise tax that is levied on the sale of goods and services. The customer therefore pays them at the time of purchase. Corporation tax, on the other hand, is levied on the taxable income of companies.

Companies must pay corporation tax on their annual net profits. Companies collect VAT from customers when they sell a product or service and then pay it to the tax office.

Corporation tax, in turn, is paid directly to the state and calculated on the basis of the net income of the respective company. It is therefore not calculated based on total income or sales volume.

What is the corporate tax rate in the UAE?

With regard to corporate income tax, the UAE government has developed a total of two levels of taxation, namely:

• 0%: For the portion of taxable income that does not exceed AED 375,000 annually.
• 9%: For the portion of taxable income that exceeds AED 375,000

Who is subject to corporate income tax in the UAE?

In principle, every company in the UAE is subject to corporate income tax, including those in the freezones.

Thus, according to the UAE Ministry of Finance (MOF), the following natural and legal persons are subject to corporate income tax

• Natural persons carrying on a business or business activity in the UAE.
• Foreign legal entities that maintain a permanent branch in the UAE.
• Companies and other legal entities based in the UAE or carrying out their head office and activity in the UAE.

However, there are a few exceptions to this rule. The MOF has in fact exempted certain institutions from this. As a company, you therefore do not have to file a tax return or pay corporation tax if you maintain one of these institutions:

• All government or public institutions
• Real estate and other regulated investment funds
• Companies engaged in extracting or extracting natural resources in the UAE.
• All organizations that work for charitable and social causes.
• All UAE companies that are fully owned and controlled by the UAE government
• Public or private pension or social security funds.

Freelancers are also exempt from corporate income tax. However, this is no longer true when an annual turnover of AED 1 million is reached.

Corporate Tax Registration

In order to register for CT in the UAE, you must first go to the Federal Tax Authority (FTA) website. There, you can then fill out all required forms and submit the necessary documents.

These documents to be submitted include:

• Emirates ID
• Business license
• passport
• financial records
• Information on business activities and corporate structure

After you submit these forms and documents, the authority will review your application and, if approved, will issue a tax registration number (TRN) to your company, which marks the official registration.

You can expect successful registration within 20 days. However, should the authority require further information, it may take up to 20 more days.

After that, after the end of a fiscal year, you have nine months to file your tax returns and financial reports and to pay corporate income tax.

In summary, the introduction of corporate tax is therefore irrevocably accompanied by a ordinary bookkeeping , which is new territory for many entrepreneurs. That's where we from Extent come in. As an experienced corporate service provider, we understand your current situation and what changes it entails. That is why we not only handle the timely processing of your CT registration for you, but also take care of your accounting and tax return so that you are well positioned not only from a tax perspective but also in business terms.

And even though the corporate tax regulation has been in force for some time, there are still many things to consider regarding the integration of corporation tax into your company. These include the impact of CT on your legal, financial and operational profile as well as the advance planning of processes and systems required to comply with the new tax regulations. We therefore provide you with 7 helpful tips below, which you should definitely follow with regard to corporate income tax:

1. Operational readiness

So that you can properly comply with the UAE's new CT obligations, the structures in your company should be clear:

• This includes being able to create separate balance sheets for each of your companies. This is because in most cases, the CT Act requires separate and independent financial statements for every company. Exceptions include limited liability partnerships (LLPs), or unincorporated partnerships, such as general partnerships and joint ventures (JVs).
• Also review your company's figures to get a better sense of tax issues. Therefore, focus on tax-exempt income and differentiate between income that belongs to that of the Qualified Freezone Persons (QFZP) and which does not. Also pay attention to non-deductible expenses and necessary adjustments to transfer pricing (TP).
• It is also important that tasks within your company are clearly distributed and that every team member stays up to date with legislative changes.

2. Consider choices

Corporate tax legislation gives you various options and claims to optimize your tax burden:

• So think about whether you should make use of transitional rules to mitigate the taxation of profits made before the legislative change.
• Also check whether you meet the requirements for so-called CT grouping, i.e. the distribution of tax losses and other reductions.

3. Rethink your freezone presence

As a company in the free zones (FZ), you have the option of benefiting from a corporate income tax rate of 0%. However, you must be a so-called qualified freezone person (QFZP). However, the requirement profile for a QFZP is very complex. You should therefore verify that your company meets these requirements:

• In this context, analyze the advantages and disadvantages of qualification versus remaining in the normal 9% CT regime, including the practical requirements to meet and maintain QFZP status.
• Also check whether updates to transactions, pricing, intra-group agreements, documentation, etc. are required to ensure that you meet all conditions.

4. Review your financial profile

The CT profile of every taxpayer in the UAE is primarily determined by the financial profile of the companies. Accounting policies, transactions and disclaimers that are not carefully reviewed can therefore potentially lead to unwanted tax results:

• In this context, review your accounting policies, which could have an impact on key areas of tax, such as items included in other comprehensive income, provisions, depreciation, revaluations, and amortization.
• Also review your major expenses to make sure they meet tax deduction requirements. In particular, those that are specifically regulated in tax legislation (interest, catering, tax-free expenses, etc.).
• Also clarify whether deferred taxes must be shown in the annual financial statements for FY 2023.

5. Review your group structure

The holding, financing, investment and operating structure of your group can have a decisive impact on its tax profile. More specifically, however, it is a question of whether you can make use of certain options, such as group formation or the tax incidence rate for specific income, such as dividends and profits:

• Therefore, consider whether your current corporate structure could cause you difficulties with CT, for example because it limits the possibility of CT grouping.
• Also review the financing structure and whether this results in opportunities or risks, such as restrictions on interest deductions or non-deductible capital.
• Based on the above, identify and implement any required updates as well.

6. Check the profile of foreign companies

Companies that you have established outside the UAE may still be subject to tax liability due to their actual or assumed presence in the UAE. The activities of certain managers, employees, dependent agents, projects, etc. may therefore result in future tax liabilities:

• Therefore, identify any foreign managing directors or senior executives who can effectively manage your company from the UAE. The same applies to the main commercial activities of your foreign companies carried out in the UAE by employees or related parties based in the UAE.
• Also update the composition of your board of directors, delegation of authority, governance procedures, and operating models so that you can manage and mitigate potential unintended tax consequences.

7. Plan a transfer pricing profile

Compliance with transfer pricing (TP) and regulations is a key requirement of CT regulation. This not only affects your company's effective tax rate, but also the way you can allocate, record and document income within your group in a sustainable and justifiable way:

• Therefore, make sure that the transaction design is consistent with the value creation within your group.
• Develop transfer pricing strategies that comply with the external settlement principle and can be implemented throughout fiscal year 2024. You can do this by making transfer pricing adjustments before closing the annual financial statements or by making transfer price adjustments in the CT declaration.