New corporate tax in the UAE: answers to the 10 most frequently asked questions

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The United Arab Emirates’ Ministry of Finance announced on Monday a federal corporate income tax from June 1, 2023.

Below are the top ten questions raised by businesses across the country:

Responnse : All activities undertaken by the law firm will be considered “business activities”; therefore, any such income will attract CT. However, dividends and capital gains earned by a UAE company on its qualifying holdings will be exempt from UAE corporate tax. We have to wait for more details on eligible entries.

Q2. Has FTA announced slab rates based on revenue? Are profits likely to be taxed on slab rates in the future?

Responnse : Currently, with the exception of large multinational companies, all other companies will be subject to a unified flat tax rate – 0% applicable on taxable income up to MAD 375,000 and 9% on taxable income above MAD 375,000 Dh during an exercise. However, certain sectors like the extraction of natural resources – oil and gas, etc., will continue to be subject to corporate tax at the Emirates level. Defining different slab rates in the future is the prerogative of the UAE government.

Q3. The government has announced that CT’s financial year will start on June 1, 2023, our business year is the calendar year; should we modify our exercise to align it with the tax system?

Responnse : There is no prescribed requirement to change the fiscal year to fiscal year from June to May; however, many entities are likely to change their fiscal year to better align with the fiscal year.

Q4. We are a free zone registered entity; a small portion of our business is with companies in the UAE mainland. Will we still be exempt from CT?

Responnse : Free zone companies will be subject to the UAE TC, but the UAE TC regime will continue to honor the TC incentives currently offered to free zone companies that comply with all regulatory requirements and do not do business with the mainland UAE. We need clarification from FTA as to whether even a small portion of business with the mainland UAE entity will disqualify the entity from the exemption or whether a pro rata will be considered.

Q5. We are a group; transactions between group entities very frequently take place on mutually agreed terms. Should we take precautions against such RP transactions?

Responnse : Qualifying transactions between group entities are exempt provided they meet the prescribed criteria. Entities should consider arm’s length transactions and transfer pricing, as these are likely to be among the prescribed criteria.

Q6. Will FTA allow all kinds of business expenses as deductible or are there criteria for such deductions?

Responnse : The taxable income will be the accounting net profit/income of a business after making adjustments for certain items to be specified later under the UAE CT Law. It is likely that certain expenses like depreciation, amortization, allowances, etc. would have a defined threshold.

Q7. Will the company be allowed to carry forward losses? If yes, for how many years?

Responnse : The UAE CT regime will allow a company to use losses incurred (from the date of entry into force of the UAE CT) to offset taxable income in subsequent financial periods. Excess tax losses can be carried forward and deducted from taxable income in future years, under certain conditions. Clarifications and additional guidelines on deferral criteria are awaited.

Q8. Can a group of companies register as a single tax entity?

Responnse : A group of UAE companies can choose to form a tax group and be treated as a single taxable person, provided certain conditions are met. A UAE tax group will only be required to file one tax return for the entire group.

Q9. What is the deadline within which the legal person is supposed to file the returns and pay the taxes?

Responnse: The filing of the CT declaration is annual. Filing deadlines and other conditions are yet to be defined by the UAE authorities.

Q10. What are the penalties for deviation or compliance for CT?

Responnse : Sanctions and other compliance procedures are expected to be clarified by the authority.

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