UAE Corporate Tax: Detailed Laws Awaited on Key Free Zone Issues


Very rarely, we witness a real “paradigm shift”. For tax professionals accustomed to attending tax reforms, witnessing the introduction of a tax system may be the opportunity of a lifetime.

Since the announcement of the UAE (CT) corporate tax, companies and individuals also have a natural curiosity to understand its implications. But companies should avoid treating CT as Y2K hysteria and wait for detailed laws and regulations.

Should companies rush to change fiscal years?

9 percent CT will be effective for fiscal years (FY) on or after 06/01/2023. The start date may vary, for example if the fiscal year is from June to May, the effective start date would be June 1, 2023; The January to December date would be January 1, 2024; and the April to March date would be April 01, 2024.

The possible option of postponing CT for 3 to 10 months by changing the fiscal year to April-March might seem tempting for companies. We have to wait for the detailed laws to see if a transitional provision prevents such a tax deferral by not taking into account recent changes in the fiscal year.

Tax exemptions in free zones

CT incentives currently offered to free zone companies, which (a) comply with all regulatory requirements and (b) do not do business with the mainland UAE, will be honored.

Detailed laws should address the following issues:

a) Will the technical disqualification i.e. conducting business with mainland UAE be limited to supplies/sales to mainland customers?

If the procurement of goods/services from the mainland UAE is also treated as a business activity with the mainland UAE, businesses will have to significantly realign their operations.

b) Do CT incentives continue at the entity level or at the revenue stream level?

At the entity level, companies with revenues from both mainland UAE and inside/outside the UAE would not be eligible for the CT incentive on all of their profits.

However, at the revenue stream level, the revenues and corresponding costs will need to be split into different streams. The net profit corresponding to operations inside/outside the UAE should be eligible for CT incentives. Such a scenario will require strong accounting and record keeping.

c) Will shipments to a third port / offshore transactions be eligible for CT incentives?

Third port shipments refer to a purchase of goods from suppliers outside the UAE for resale to customers outside the UAE, with foreign suppliers delivering the goods directly to foreign customers. It should be recalled that these transactions were expressly covered by the Economic Substance Regulation (ESR) through an amendment. Given the focus on these transactions, it remains to be seen whether the CT incentives will cover these transactions.

d) Grandfather clause: does the CT incentive cease to apply to new companies incorporated in free zones after 06/01/2023?

If so, free zones could see a sudden rush of new businesses before this grandfather clause kicks in.

e) Salary of owners: A good number of enterprises in the free zone could be 100% owned by a single individual/owner.

Since personal pay is outside the scope of CT, many owners consider raising company salaries to save CT.

Under the KSA corporation tax, amounts paid or benefits offered in the form of wages/salaries to a shareholder/partner or their relatives are apparently not permitted as a deduction from taxable income under the corporation tax. KSA corporation tax.

Before raising wages for oneself, business owners should wait to see if UAE CT adopts these features of the KSA corporate tax.

Preparing for CT is not about preparing for the unknown. The unknown should be known within the next 6 months. Companies will have enough time for the implementation of corporate tax.

The author is the Managing Director of AskPankaj Tax Consultants. The opinions expressed are his own and do not reflect the policy of the newspaper.

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