To Regularise Business Sector, UAE Government Announces Corporate Tax Compliance: Know About It

With the United Arab Emirates (UAE) government launching visas and reforms, more businesses and investors are heading to establish trade in the country, which has increased the revenue sources of UAE. Undoubtedly, the country is growing into an international business hub.

As a next step to regularise the business sector, the UAE government has announced a 9 per cent corporate tax from June 2023. Corporate tax is expected to affect the country's corporate world majorly. Based on the requirement, the corporate companies in UAE are expected to make provisions and submit all the accounting audit reports and file taxes to the UAE federal Tax authority.

The initial announcement regarding the UAE corporate tax of 9 per cent was on January 31, 2022, and the Corporate tax will be active from June 2023. This provides enough time for all businesses to make the required changes. Before getting to know how this will affect the country, you should have a look into the demographics of the UAE Business market.

Know About UAE Business Market

The UAE business market is bustling with new investments and opportunities, and the growth potential is higher than ever. In comparison with the previous years, UAE's national economic register data indicates a 1.9 per cent rise in the total number of active businesses as of July 2022. As per the data records, nearly 80 per cent of the licensed companies are in Abu Dhabi, Sharjah, and Dubai, out of which Dubai owns the lion's share of a whopping 46 per cent of the country's licensed businesses.

Subsequently, Sharjah accounts for 14 per cent, and Abu Dhabi entails 23 per cent of licensed businesses. As per the UAE national economic register data, 40 per cent of the businesses registered are limited liability companies, and individual companies contributed up to 33 per cent. Further, 80 to 85 per cent of the registered active companies in UAE are micro, small, and medium enterprises.

Eligibility For UAE Corporate Tax

• Companies generating more than AED 3,75,000 as net profit should pay the proposed 9 per cent corporate tax.
• Based on the announcement 9 per cent corporate tax will be applicable for all commercial activities apart from any form of natural resource extraction.
• Corporate tax is apt for all categories of profit equally, along with other income reported by International accounting standards.
• As per the Organisation for Economic Co-operation and Development (OECD) guidelines, multinational companies meeting the criteria are taxed higher.

Exemption For UAE Corporate Tax

• Small and midcap businesses with profits less than AED 3,75,000 are exempted.
• Multiple incentives offered along with the corporate tax to the free zones will still be in effect.
• Businesses not present in the mainland UAE will not be affected.
• Any dividends and capital gains received through shareholdings will not be levied any corporate tax.
• Intra-group transactions and restructures will not be subjected to corporate tax.

Effects On Cost Of Starting A Business

As previously discussed, the new headline Central Tax (CT) rate in the UAE is 9 per cent levied on companies making more than 3,75,000 UAE dirham ($102,000) taxable income. This excludes companies based in free zones that don't do business with the mainland. A different tax range will be provided for businesses functioning under multinational enterprises (MNEs) with global revenues above 750 million euros ($795 million).

In addition to these competitive prices, the government may also lower or eliminate fees associated with licenses and startup costs. It will undoubtedly lessen the tax's impact on profitable UAE businesses. UAE corporate taxation will shift the focus from the mainland towards the free zones to make them prosperous. As per the experts, this move will attract startups in the free zones.

Due to competition among free zones to draw in as many businesses as possible, this could lead to even the free zones drastically reducing fees like annual license fees.

How Should Companies Gear Up?

The parent company must combine the financial accounts of each subsidiary for the applicable tax period to calculate the tax group's taxable income and stop doing business with each member of the subsidiary group.

Companies rush to begin auditing as soon as the new UAE corporate tax law is published. As a result, most tax service providers will not be efficient enough to handle the sudden search in corporate tax filing. In light of the necessity of internal accounting and bookkeeping for external audit and taxation, private businesses should begin the consultation process and strengthen it.

Enterprises conducting offshore and onshore operations in the country should contact a tax consultant to ensure how this taxation will affect their cross-border transactions. It is also mandatory to ensure they comply with the new corporate tax regime.

Experts say most UAE businesses are not ready to face the 9 per cent corporate tax. Many legal aspects, paperwork, accounting, and auditing should be completed. Sometimes adapting to all these changes for a big firm may be time-consuming and complex. You can always get in touch with our tax experts to resolve all your queries.

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