UAE Corporate Income Tax 2023: Guide to Navigate the New UAE CT Tax Regime
To successfully grow your business in the UAE, it is essential to prepare for the upcoming corporate tax, or risk facing consequences.
The UAE has been working towards becoming a global business hub by aligning its taxation practices with international standards. In December 2022, the Federal Law No. 47 of 2022 was announced, stating that businesses in the UAE will be subject to a corporate tax rate of 9% starting from their first financial year after June 1, 2023.
Startups will have an income threshold exemption of Dh 375,000 in all UAE jurisdictions, regardless of the business activity or nationality of the founders and owners. However, it is crucial to not take this new law lightly and ensure that proper preparation for corporate tax in the UAE is carried out. Expert corporate tax compliance services, such as NSRM Taxation & Accounting, can provide guidance on how to plan for corporate tax compliance in the UAE.
What steps should you take to get ready for the corporate tax in the UAE?
To avoid severe penalties, it is crucial for businesses operating in UAE jurisdictions to submit their financial accounts or professionally audited accounts meticulously. It is advisable to establish these processes and evaluations well in advance of June 1, 2023. Undertaking this task earlier will ensure all stakeholders in the company are on the same page regarding the handling of daily transactions. Here are some quick steps to ensure that you are adequately prepared before the deadline:
Set your financial year in place
If your business's financial year begins on January 1, 2023, and ends on December 31, 2023, the UAE CT regime will be effective from the next fiscal year starting on January 1, 2024. However, if your business's financial year starts on July 1, 2023, and ends on June 30, 2024, the UAE CT regime will be effective from July 1, 2023, as it falls after the implementation date of June 1, 2023.
For those planning to set up a new business in Dubai or any other emirate, it is crucial to seek guidance from expert business consultants to determine the intricacies of the corporate taxation structure from the very beginning. To learn more about how to plan for this, you can consult expert tax consultants for a free consultation.
Finalized your Number
In addition to other emirate taxes and possibly VAT and excise taxes, businesses in the UAE will also need to pay the federal corporate tax. However, only companies registered for VAT will be liable for corporate tax. The exact amount of corporate tax that needs to be paid will be clarified once the cabinet decision is released.
Regardless of the nationality and residence of the founders or owners, certain businesses or activities are subject to the new UAE CT regime, which is a federal tax applicable across all emirates. The amount of emirate level taxes paid has no effect on the corporate tax amount owed.
There is no need to worry about double taxation as the UAE CT regime recognizes all international agreements for the avoidance of double taxation. If there is a conflict between the corporate tax law and an international agreement regarding the right to tax a particular income item, the relevant international agreement may limit the application of UAE CT.
It is important to finalize your corporate tax amount in a timely manner and allocate the necessary resources to pay it, while ensuring that other taxes and planning are not affected.
Structure your Books of Accounts
If you don't have a corporate bank account in UAE or haven't reached the VAT threshold yet, it's possible that you're not a client of the Federal Tax Authority (FTA). If you're not an FTA client yet, it could be difficult to become one under the new Corporate Tax regime. Therefore, it's crucial to ensure that your financial records are accurately organized, so that you comply with the upcoming corporate tax laws and regulations, which will make the tax filing process smoother and less time-consuming. Here are some steps you can take to organize your financial records:
- To ensure compliance with the upcoming corporate tax laws and regulations, it is crucial to maintain accurate records of all financial transactions conducted by your business. This can be achieved by operating a UAE corporate bank account for daily business transactions and creating a comprehensive chart of accounts that includes all relevant categories such as income, expenses, assets, liabilities, and equity.
- It is also important to check if your business is eligible for tax exemptions and to structure your cash flows accordingly. Using accounting software can help you maintain accurate records and make compliance and internal audits easier by carefully logging and tracking all transactions.
- Employing accounting software can simplify the process of creating financial statements and generating reports. Ensure to maintain detailed and precise records of invoices, receipts, and other documentation for all financial transactions. If you require support in establishing a functional UAE corporate account and handling accounting software for your business, you can consult our specialists for free guidance.
- It's important to maintain separate records for your personal and business transactions to simplify the process of tracking and reporting business income and expenses for tax purposes. This means keeping a clear distinction between personal and business finances and maintaining separate accounts and records for each.
- It is important to review and reconcile your financial records on a regular basis, preferably at the end of each month and financial year. This helps to identify any inconsistencies or errors in your books of accounts, and ensures that your financial statements are accurate and current.
- Ensure that your financial records are prepared in accordance with the accounting standards prescribed by the UAE such as the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), or the accounting standards applicable to your home country if you have a branch office there. This will ensure that your financial statements are accurate, reliable, and compliant with the applicable regulations.
By following the aforementioned steps, you can ensure that your business complies with corporate tax laws and regulations, and effectively manage your finances to prepare for tax filing. However, it is important to also consider your business's future commercial strategy for the next 1-5 years.
Taking proactive measures to structure your business and establish internal policies from the outset can prevent potential issues and expenses that may arise from reactive measures later on. Planning ahead is crucial to reaching your growth targets and avoiding longer procedures in the future.
Identify your Qualifying Income
The concept of Qualifying Income pertains solely to the Free Zone entity and refers to the income earned by that entity. As per Article 18 of the Corporate Tax Law, a Free Zone company can be recognized as a Qualifying Free Zone Person entitled to a 0% tax rate if it satisfies certain criteria. This includes having sufficient substance in the UAE, generating Qualifying Income, and complying with transfer pricing requirements. Meeting the requirements of the Economic Substance Regulations entails ensuring that the entity is managed and directed within the UAE, has adequate personnel, assets, and income-generating activities in the UAE. Moreover, a Free Zone Person can avail a preferential tax rate of 0% only on their Qualifying Income.
To qualify as a Qualifying Free Zone Person, the Free Zone entity is required to meet certain conditions:
- To be considered eligible for certain tax benefits, a business operating in the UAE's free zone must have sufficient presence in the UAE.
- Express the income earned that qualifies for a preferential tax rate.
- To qualify for the 0% tax rate, the Free Zone Person must not have chosen to be taxed at the regular rates applicable to companies in the UAE.
- Reworded: To qualify as a Qualifying Free Zone Person, the Free Zone Person must also adhere to the transfer pricing regulations specified under the Corporate Tax Law.
It is crucial to collaborate with experienced FC Consultants to accurately determine the qualifying income, as the calculation process requires great care.
However, there is still some uncertainty regarding this matter as we await a potential decision from the cabinet, which may impose restrictions on the income currently eligible for the 0% tax rate in lieu of the standard 9% rate.
The income generated by a Free Zone Entity situated in a designated free zone for VAT from the sale of goods to businesses in the UAE mainland importing these goods will be subject to a 0% tax rate.
Transactions between entities located in free zones and those in the mainland UAE are exempt from taxes, but this exemption does not apply to transactions between mainland UAE entities and free zone entities' mainland branches. Free zone companies must maintain transparent accounting records to allocate expenses and determine net income while also ensuring sufficient substance.
If a Qualifying Free Zone Person fails to meet the conditions or chooses to be subject to the regular Corporate Tax regime, they will be subject to standard Corporate Tax rates from the beginning of the Tax Period when they fail to meet the conditions.
To determine qualifying income, seek assistance from NSRM Taxation & Accounting Consultants. It is crucial to stay updated on changes in laws and regulations and consult with professionals if any doubts arise.
Become Tax Efficient with Corporate Tax Compliance Services with NSRM Taxation & Accounting
With the implementation of the new corporate tax regime, businesses must adhere to new compliance requirements and adapt their operations accordingly. At NSRM Taxation & Accounting Business Consultants, we possess the necessary expertise and experience to assist companies in making a seamless transition.
Our team of tax experts possesses an in-depth understanding of the new tax laws and regulations, enabling us to provide comprehensive guidance on compliance requirements. We can aid in identifying taxable income and recommend effective bookkeeping strategies to ensure compliance.
Moreover, we can offer support in developing tax-efficient approaches, including identifying available tax deductions and incentives. Additionally, our team can assist in preparing for tax filing, reviewing financial records, and ensuring deadlines are met.
Partnering with NSRM Taxation & Accounting can provide peace of mind, knowing that your business is in full compliance with the new tax laws while maximizing tax benefits. Allow us to help navigate the evolving tax landscape and ensure a smooth transition to the new corporate tax regime in the UAE.