Corporate Income Tax UAE 2023: The Ultimate Guide to Navigate the New UAE CT Tax Regime
Your dream of growing your business in the UAE can quickly turn into a nightmare if you don’t know how to prepare for the upcoming corporate tax in the UAE.
In January 2022, the UAE announced its plans to come up with a new structure to levy corporate taxes. In fact, this move has been in the making for a while so UAE can position itself as a thriving global business hub. In order to get there, it has had to carry out multiple federal tax reforms so it is aligned with the best international practices on taxation.
With the latest announcement of the Federal Law No. 47 of 2022 in December 2022, under the new regime, UAE businesses become subject to corporate tax in their first financial year that starts on or after June 1, 2023 at a rate of 9%.
However, if you are a startup you are likely to receive an income threshold exemption of Dh 375,000 in all UAE jurisdictions. This applies to all UAE companies irrespective of the business activity, nationality or citizenship of the founders and owners.
This is no way means you take the new law lightly and skip on your preparation for corporate tax in UAE for the year 2023.
Let’s dive deep and explore with the help of expert corporate tax compliance services in UAE at Horizon Biz on just how to get the planning for corporate tax right.
How to Prepare for the Corporate Tax in the UAE?
Most businesses across UAE jurisdictions will now need a careful submission of necessary financial accounts or professionally audited accounts. It is ideal to set up these processes and evaluation much before June 1, 2023 to avoid heavy penalties.
In addition, undertaking this task earlier ensures all stake holders in your company across departments are aligned on how to approach daily transactions well in time.
Here are some quick steps you can take to ensure you are all prepped up before the D-day:
Fix your Financial Year
If your business has the financial year beginning 1st January, 2023 and ending 31st December 2023, the UAE CT regime will become effective from the immediate next fiscal year onwards which begins on 1st January 2024.
On the other hand, if your business has financial year beginning on 1st July 2023 and ends the fiscal year on 30th June, 2024, the UAE CT regime becomes effective from 1st July 2023 onwards itself, since it falls after 1st June, 2023, which is the date UAE CT regime is to be effective across the emirates.
In fact, if you are planning for new business setup in Dubai or any of the emirates, it is imperative to consult expert business consultants to help you finalize the nitty gritty of the corporate taxation structure right from the scratch.
To ascertain, how you can go about planning you can get in touch with expert tax consultants for a free consultation here.
Get your Number Finalized
The federal corporate tax in UAE will need to be paid in addition to paying other emirates taxes or perhaps VAT and excise. In fact, if your company is registered for VAT, only then are you liable for Corporate Tax.
The status of how much Corporate Tax you need to pay will be fully clear once the cabinet decision to finalize additional matters is released.
However, this is what we know so far. Certain businesses or business activity irrespective of the nationality and residence of the founders or owners are subject to the new UAE CT regime. Since, it is Federal Tax, it is applicable across all the Emirates. The Emirate level taxes you pay bear no effect on the corporate tax amount you are liable to pay.
If you are worried about double taxation, don’t be. The UAE CT regime recognizes all In-force International agreements (including international agreements for the avoidance of double taxation). When there is a conflict between the Corporate Tax Law and an international agreement with respect to the right to tax a certain item of income, the relevant international agreement may limit the application of UAE CT.
That’s why it is crucial you get your number finalized so you have enough time to employ resources to pay up your corporate taxes timely, while ensuring your other taxes and planning does not get affected.
Structure your Books of Accounts
If you are not operating a UAE corporate bank account and haven’t met the VAT threshold as yet, chances are you may not be an FTA client. And, if you are not an FTA client already, the process of becoming one under the new Corporate Tax regime maybe hassle-prone.
Therefore, it is important to accurately structure your books of accounts so you stay compliant with the upcoming corporate tax laws and regulations. In addition, the process of filing your taxes will be less time consuming and hassle-free. Here are a few steps you can take to structure your books of accounts:
- Maintain a log of all your accounts: Ensure you operate a fully functional UAE corporate bank account for daily business transactions and not a personal account.
List and chart all your existing accounts documenting different types of financial transactions that your business conducts. This can include accounts for income, expenses, assets, liabilities, and equity. Make sure your chart of accounts is comprehensive and covers all the necessary accounts.
In addition, it is important to check whether your business qualifies for exemptions. On the flip side, it is imperative to check how much other taxes you are paying and structure your cash flows accordingly.
Furthermore, all transactions must be carefully logged and maintained which is where an accounting software comes in handy making compliance and internal audits easier.
- Use accounting software: If you are using an accounting software, it will be easier to prepare your financial statements. Keep accurate and detailed records, as well as to generate financial statements and reports. Maintain detailed invoices, receipts, and other documentation for all transactions.If you need assistance setting up an operational UAE corporate account and maintaining an accounting software for your business, you can get in touch with our experts for a free consultation.
- Segregate personal and business transactions: Make sure to keep separate books of accounts for personal and business transactions. This will make it easier to track and report business income and expenses for tax purposes.
- Review and reconcile regularly: Review and reconcile your books of accounts regularly, such as at the end of the month and at the end of the financial year. This will help you detect and correct any errors or discrepancies, and ensure that your financial records are accurate and up-to-date.
- Be compliant with accounting standards: Make sure that your financial records comply with the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) that apply in the UAE, or the accounting standards of your home country if you’re operating a branch office.
By following these steps, you can structure your books of accounts in a manner that will help you stay compliant with corporate tax laws and regulations, as well as make it easier for you to manage your finances and prepare for tax filing.
The most important advice ahead of the changes will be based on your future 1-5 year commercial strategy. No one plans on not reaching their growth targets and this should be coupled with proactive corporate structuring and internal policies from now, rather than reactive measures which will in turn be more expensive coupled with longer procedures by not getting it right from the start.
Identify your Qualifying Income
Qualifying Income is interpreted only in the context of the Free Zone entity as the income received by the Free Zone entity.
Article 18 of the Corporate Tax Law suggests a Free Zone company should be viewed as a Qualifying Free Zone Person (eligible for the 0% tax rate) if it has adequate substance in the UAE, derives Qualifying Income and complies with the UAE transfer pricing requirements.
Maintenance of adequate substances requires meeting the tests of Economic substance regulations – entity directed and managed in UAE with adequate manpower, assets, and income-generating activities in the UAE
In addition, a Free Zone Person (Qualifying Free Zone Person) can benefit from a preferential Corporate Tax rate of 0% on their “Qualifying Income” only.
In order to be considered a Qualifying Free Zone Person, the Free Zone Person must:
- maintain adequate substance in the UAE;
- derive ‘Qualifying Income’;
- not have made an election to be subject to Corporate Tax at the standard rates; and
- comply with the transfer pricing requirements under the Corporate Tax Law.
The qualifying income needs to be carefully arrived at; therefore, it is imperative that you work alongside expert FC Consultants who can walk you through these steps for accurate calculations.
However, the jury is still out on this one, figuratively speaking, as we patiently wait for the supplementary cabinet decision who may or may not provide restrictions on this income which is currently eligible for the 0% tax rate in place of the flat 9% rate.
The 0% tax rate will apply to the income earned by the Free zone Entity located in the designated free zone for VAT from the sales of goods to UAE mainland businesses that import these goods.
The transactions between free zone entities and these group entities located in the mainland UAE are subjected to 0% tax. This payment wouldn’t be applicable for transactions between the UAE mainland entities and the UAE mainland branch of a Free zone entity.
Free zone companies will now need robust accounting records with complete transparency for allocating expenses and determining the net income – all of this while maintaining adequate substance.
When a Qualifying Free Zone Person does not meet any of the conditions or voluntarily chooses to be subject to the regular Corporate Tax regime, they will be subject to the standard rates of Corporate Tax from the beginning of the Tax Period where they failed to meet the conditions.
Horizon Business Consultants can help you identify your qualifying income. Remember that laws and regulations may change, so it’s important to keep yourself updated and to consult professionals if you have any doubts.
Become Tax Efficient with Corporate Tax Compliance Services with Horizon
The new corporate tax regime brings new compliance requirements and changes to the way businesses operate. At Horizon Business Consultants, we understand the complexities of the new tax laws and regulations and have the corporate tax implementation dubai expertise and experience to help companies like yours make a smooth transition.
Our team of tax experts has a deep understanding of the new tax laws and regulations and can provide guidance on how to comply with the new requirements. We can help you identify which types of income are subject to tax and advice on how to structure your books of accounts to ensure compliance.
In addition, we can provide assistance in developing tax-efficient strategies, such as identifying tax incentives and deductions that may be available to your business. We can also provide support in preparing for tax filing, including reviewing and reconciling financial records, and ensuring that all deadlines are met.
By working with Horizon Business Consultants, you can have peace of mind knowing that your business is in compliance with the new tax laws and regulations and that you’re making the most of any available tax incentives. Let us help you navigate the new tax landscape and make a smooth transition to the new corporate tax regime in the UAE
Get in touch with us for corporate tax compliance and advisory consultation today.