The United Arab Emirates (UAE) has long been a hub for businesses and investors due to its tax-friendly regime. Nonetheless, recent years have witnessed a number of UAE corporate tax regulations paradigms aimed at meeting global standards and diversifying revenue streams. The most salient innovation in this respect is corporate tax.

The Corporate Tax would cover the whole of implementation, training, and compliance with the required bureaucracy, and it would be right considering the simplicity of the UAE tax system. These will definitely boost the demand for tax experts as companies will seek tax planning pathways to cushion the effect of CT on their bottom lines. An overview of the UAE Corporate Tax laws update will primarily be focused on the corporate tax legislation, compliances, and its amendments.

Background

Before 2022, the UAE was a tax-free zone for businesses apart from some banks and oil and gas companies. However, with the growing necessity of diversifying revenues and the need to comply with international tax standards, the UAE introduced a federal corporate tax (CT) regime. The new regime will provide a competitive and attractive environment for business and at the same time, ensure that the UAE is compliant with its international obligations.

Effects of Corporate Tax in UAE

• The shareholders will continue with their share of profits as long as they can transfer the consequences of CT on sales prices to end users, whose end users will be a little costlier, which will adversely impact their purchasing power.
• Having less money would lead to reduced demand for products and services and the trickle-down effect would be on business production and sales, which would negatively impact economic growth in the near run.
• UAE Corporate Tax would have tremendous implications on Foreign Direct Investment (‘FDI’) decisions. We establish a difference between the pretax and post-tax returns on FDI. Investors always want to know about direct taxes on the country of their investment and profit repatriation.
• Moreover as mentioned earlier, the corporations will, most likely, pass on the Corporate tax implication to individuals by way of increasing the cost of their products and hence reducing the purchasing power of the consumers. Workers would request a wage increase to preserve their purchasing power. On the whole, goods and services are marginally more expensive for end users.
• Because of its competitive nature, UAE Corporate Tax would have a negligible effect on corporate savings and FDI, marking a hit in the short term on the economy of the nation. It would still be a long-term confidence boost for investors and a positive for growth. All of which, when combined, CT was designed to encourage investment and remain open to global standards, thus giving a stable society where its future-proof businesses have things to gain and put value into and grow the economy.

Updated UAE Corporate Tax Law

The UAE corporate tax law is a new law introduced by Federal Decree-Law No. 47 of 2022. The law applies to all UAE businesses, including free zone companies, except those in extractive industries. Here are the major provisions of the new law:

Tax Registration

• Compulsory Registration: All entities must register with the Federal Tax Authority (FTA) for corporate tax.
• Business must be registered in a specified creditable timeline, usually, the business should be registered within 30 days from the date of commencement of business.

Tax Filing

• Tax return submission: Corporate taxpayers should submit the corporate tax return to the FTA no later than 9 months from the end of the tax period.
• The tax period is normally common to 12 months but must be shorter, depending on the business’s fiscal year.

Tax Payment

• Deadline For Payment of Tax: Tax payments should also be made alongside the filing of tax.

Rates

• Default Tax Rate: 9% standard corporate tax rate.
• Zero Tax Rate: 0% corporate tax on taxable profits not exceeding 375,000 AED (approx. USD 102,000).

Taxable Income

• Profits from the Business: Profits generated from business activities, whether it is trade, manufacture, and maybe services.
• Capital Gains: Capital gains from the sale of assets for example property or shares. Dividends: Income from other companies via dividends.

Deductions and Exemptions

• Business Expenditures: Businesses are allowed to deduct expenditures that are incurred during business operations like salaries, rent, and utility bills.
• Depreciation: Businesses are allowed to depreciate assets over their useful love. Exclusions: Corporate tax does not apply to some operations as extractive trades.

Transfer Pricing

• Arm’s Length Principle: The arm’s length principle needs to be adopted by the company when transacting with related parties.
• Transfer Pricing Documentation: Companies are required to prepare transfer pricing documentation justifying their transfer pricing policies.

Country-by-Country Reporting

• Multinational Enterprises: If you are an MNE, then you are required to submit a CbCR to the FTA.
• CbCR Requirement: The CbCR should comprise details of the MNE’s worldwide distribution of income, taxes, and other economic activities.

Penalties and Fines

• Late Registration: Fine for late registration ranging from (Aed 10,000 to Aed 50,000). Filing Return Late: The tax rate of fee for filing return is AED 1,000 to AED 10,000.
• Default on Tax Payment: AED 1,000 to AED 10,000 fine for tax payment default.

Recent Tax Amendments UAE

On January 1, 2023, Cabinet Decision 1 of 2023 came into effect which introduced certain amendments to the corporate tax law in the UAE. The amendments intend to provide more clarity and certainty for business as well as outline the government’s response to specific stakeholder concerns. Here are the key amendments:

Free Zone Businesses: The amendments clarify that the corporate tax applies to free zone businesses, but include some exemptions. For instance, income derived from transactions with customers in a free zone (or another emirate, or, ultimately, foreign customers) is exempt from tax for businesses in a free zone. The new amendments bring in transfer pricing when it comes to intercompany transactions, where businesses will now be required to have documentation to ensure arm’s length pricing of transactions.

Country-by-Country Reporting: The amendments require MNEs to submit a CbCR to the FTA. CbC reporting discloses the revenue, taxes, and other economic activity by the entity that116 Is the parent corporation of a multinational enterprise.

New Tax Incentives: The amendments include provisions that offer tax incentives for companies that invest in research and development and for companies operating in specified strategic sectors, such as renewable energy.

Action Items for Businesses

• Check Tax Registration Requirement: Make sure that your business has been registered for corporate tax with FTA.
• Know Tax Filing and Payment Obligations: Learn what the deadlines are for filing and making payments.
• Corporate Tax: Evaluate the effect on your profits and ability to compete.
• Evaluate New Tax Law Impacts: Work with your tax professional to assess how the new tax law and regulations will impact you and your business.

Conclusion

Because of the ever-changing corporate taxation in the UAE and with laws and regulations varying on the local level, international businesses should also be vigilant to ensure adherence to the local taxation of the UAE. It is imperative for companies doing business in the UAE to remain vigilant, stay informed of regulatory changes and obtain professional advice to ensure compliance and to score a deal in the game. It is highly critical for companies to comprehend the corporate tax regulations and abide by the criteria imposed on them to avail the advantages of having a foothold in UAE.