What Is a Corporate Income Tax? Corporate income tax (CT) is a type of direct tax levied on net income or net income from the business of a company or other entity. Corporate income tax (CIT) is levied on corporate profits by the federal and state governments. In other jurisdictions, corporate income tax is sometimes referred to as “corporate income tax (CIT)” or “Business Profits Tax.”
1- What are the tax rates applied to my business? Also, how does this tax rates affect my business plans and shareholder post-tax returns after June 1, 2023?
With some exceptions, UAE CT applies to all companies within the UAE. This law applies to fiscal years beginning on or after June 1, 2023.
The Corporate tax rate is a three-tier rate:
- 0% if taxable income is AED 375,000 or less, or treated as a qualified free zone person.
- Companies having income above AED 375,000, tax rate is 9%
- Members of multinational corporations with revenues of over € 750 million have different rates (probably 15%).
2- Will the current operating model of my business be affected by the different tax regimes for free zones and mainland UAE? Is it operating business in accordance with the free zone regulations and maintain tax exemption status? if my organization is in the free zone.
At present UAE grants corporate tax exemption in the form of a 0% tax rate or tax exemption to companies in the Free Zone for up to 50 years. The exemption for Corporate Tax is different for various free zones.
The law intends to grant incentives only if there is no transaction with the entities based in UAE mainland.
3- Are my existing related party transactions in compliance with the arm’s length Tax Payer requirements?
Transactions with related parties must reflect the taxable income that would have been generated if the transaction had been made (with a third party) on the basis of the arm’s length principle.
Related party transactions between entities in different integrated CT groups with different tax profiles may generate more scrutiny from a Tax Authority. The reason behind this scrutiny is profits can be shifted to entities who are subjected to a lower Tax Rate.
4- Will my internal organisation and systems be able to manage with a CT from 1 June 2023? And what changes do you need to make to build a sustainable process for compliance and reporting?
Numerous compliance concepts were introduced by the CT regime such as consolidation rules, transfer pricing, finance cost deductibility limitations and companies need to confirm that their current system meet these requirements. The first tax return will be filed in 2024 or 2025 (fiscal years beginning after June 2023) as the law will come into effect on June 1, 2023. So, the system should already be able to collect the desired information from 1 July 2023. However, companies may need to evaluate and strengthen its bookkeeping system.
5- In UAE, my organization’s entities will be able to be consolidated into one filing group and are there any benefits in doing so?
The main advantages of consolidated tax filing are:
- For taxpayers, compliance burden reduces
- The capability to share losses among all companies in a particular jurisdiction and reduce the effective CT rate is another advantage of consolidation
6- Have you evaluated your business and its existing structure (contracts and commitments by 2023, cross-border activities between mainland and free zone entities, etc.)? And if affected, what plans and changes can be implemented by June 1, 2023?
United Arab Emirates corporate tax are expected to include transition rules and restrictions at the time of release.
7- Does my company need to maintain a detailed fixed asset ledger that makes a clear distinction between depreciable fixed assets and capital goods so that CT depreciation can be maximized?
Expenses are deductible in calculating taxable profit to the extent that they are incurred wholly and exclusively for the purposes of the trade. For fixed asset, maintaining a fixed asset ledger and depreciation schedule is very important. In absence of sufficient basis, those deductions may be disallowed.
8- What is my company’s current and future loss profile from a CT perspective, and if there are losses within the group, can I maximize the profits from them?
CT is usually not charged to loss making taxable entities, CT is paid for profits. If a taxable entity suffers a loss, there are specific rules within the CT system that determine how to use or carry forward such loss for CT purposes.
9- Does my company have an overall tax-effective financing structure, taking into account the deduction limit of financial expense?
Interest paid on external and internal debt is generally deductible, subject to transfer pricing, withholding tax, and limitation rules. Thus, companies also need to rationalize their interest-bearing borrowing, especially from related parties.
10- What discussions do I need to have within my organisation to ensure a smooth transition to a corporate tax environment?
With a few exceptions, UAE companies have historically not operated under a domestic corporate tax system, and the introduction of a CT system is a major change to the status quo with widespread financial and commercial implications. To get your business ready, the focus should be on:
- Current role of tax functions in the organizations
- Rationalization of legal system, business model and capital structure
- Appropriate resources and skills within the finance department (or to be hired externals)
- Financial systems and technology infrastructure used by Finance Deparemnt that can be leveraged for tax and consideration for its updates
- policies and controls for governance, strategy, and reporting
Internal Audit and its role with organization to avoid a failed FTA audit.
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Disclaimer: Above information is subject to change and represent the views of the author. It is shared for educational purposes only. Readers are advised to use their own judgement and seek specific professional advice before making any decision. Finnection is not liable for any actions taken by reader based on the information shared in this article. You may consult with us before using this information for any purpose.