2023, Dubai: UAE corporate tax, major impact on the Emirates

The recent introduction of Corporate Tax in Dubai, also known as corporate income tax in Dubai, has significantly transformed the tax landscape of this dynamic metropolis. This recent tax reform has raised many questions among companies and entrepreneurs operating in the region. We have prepared an article outlining the most important aspects of CIT.

Impact of Corporate Tax on businesses: what are the tax rates?

One of the key elements of Corporate Tax is the variation in tax rates, an essential aspect to consider. It should be noted that in the United Arab Emirates, there are two categories of taxpayers: individuals and legal entities. The tax rates for these two categories are detailed as follows:

• 0% for taxable income up to AED 375,000.
• 9% for taxable income exceeding AED 375,000.

Qualifying free zone persons are subject to a 9% tax rate on taxable income that does not meet the definition of qualifying income. To better understand how income tax is calculated, let us take the example of a company with taxable income of AED 1,000,000. The amount of income tax would be determined as follows: Taxable income of AED 375,000 subject to income tax at a rate of 0%: AED 375,000 x 0% = AED 0 Taxable income exceeding AED 375,000 subject to income tax at a rate of 9%: (AED 1,000,000 - AED 375,000) = AED 625,000 x 9% = AED 56,250 Thus, in this situation, the company would owe a total of AED 56,250 in income tax.

Understanding taxpayers and the taxable base

We can list 3 types of taxable profiles for corporate tax: -Legal entities registered in the Emirates, including in Free-zones, subject to taxation on their worldwide income. -Foreign legal entities effectively managed and controlled from the Emirates (under the concept of Place Of Effective Management - POEM), subject to taxation on their worldwide income. -Individuals carrying out a commercial activity in the Emirates, taxed on their worldwide income related to that activity.

Beneficiaries of the corporate tax exemption

Just as there are profiles subject to corporate tax, there are 4 eligible for a corporate tax exemption:

• Government entities and entities under their control.
• Individuals involved in sectors such as resource extraction and activities related to non-extractive natural resources.
• Investment funds and public benefit organizations that meet the eligibility criteria.
• Pension funds and social security schemes regulated by the competent authorities.

Taxes at the heart of free zones: key points to know

For a free zone company to qualify for a tax exemption, it must:

• Maintain a significant presence in the United Arab Emirates.
• Determine its "qualifying income".
• Refrain from opting for the standard corporate tax rates.
• Follow the arm's-length principle and have supporting documentation for financial transactions.

Qualifying Activities for Free Zone Companies

For Free Zones that may benefit from an exemption, the first condition is to have economic substance in the Emirates and carry out the following activities: (a) Manufacturing goods or materials. (b) Processing goods or materials. (c) Holding shares and other securities. (d) Owning, managing and operating ships. (e) Reinsurance services. (f) Fund management and public benefit services. (g) Wealth and investment management services. (h) Head office services for related parties. (i) Treasury and financing services for related parties. (j) Aircraft financing and leasing, including engines and reusable components. (k) Distributing goods or materials in a designated zone to a customer who resells those goods or materials, or parts thereof, or processes or alters them for sale or resale. (l) Logistics services.

Income Exempt from Corporate Tax

There are types of income and related expenses that are not included in the calculation of taxable income, as follows:

• Dividends or profit distributions from companies resident in the Emirates.
• Dividends or profit distributions from holdings in foreign companies (with participation exemption).
• Any other income arising from holdings.
• Income generated by a foreign permanent establishment (to avoid double taxation).
• Income from the operation of aircraft or ships by non-residents engaged in international transport.

Non-deductible expenses: an obstacle to profits

After the audit report has been prepared, it is up to the General Meeting of shareholders to take over. Non-deductible expenses include various items such as donations, grants, gifts, fines, bribes, dividends without supporting documentation, expenses unrelated to the business activity, and losses unrelated to the activity subject to tax.

Payments to related persons: guidelines and limitations

Payments made to related persons are permitted, but they must comply with specific guidelines. There are three categories of payments:

• Payments to owners: A payment or benefit granted by an entity to a person related to it may be deducted only if it corresponds to the market value and is exclusively related to the entity's activity.
• Directors/Officers: The arm's-length principle, as well as transfer pricing rules and documentation, applies to determine the fair value of the service.
• Related party of an owner, director or officer: In this case, any excess payment that does not correspond to market value cannot be recorded as a deductible expense.

Combating tax abuse: rules in place

The legislation has introduced general provisions to prevent tax abuse and discourage attempts at tax evasion.

Preparing tax returns

Tax returns must be filed and tax paid within nine months of the end of the respective tax period. This obligation also applies to businesses operating in free zones and subject to corporate tax, unless they benefit from specific tax incentives. It should be noted that all taxpayers, whether or not they have made a profit, are required to file a tax return. This step is particularly important for taxpayers who have incurred tax losses, as it allows them to use these losses to reduce taxable income in future tax periods. Publication of financial statements: Various categories of taxpayers are required to prepare and maintain financial statements, which must be submitted for audit or certification, with the precise details to be determined by the competent authorities. The tax authority may also request that the taxpayer provide these financial statements to determine taxable income. For 2023, financial statements as of December 31 must be prepared in accordance with the arm's-length principle, as stipulated in Article 34 - Transitional Rules. Record retention: It is essential to retain all supporting documents and records relating to corporate tax for a period of seven years from the end of the relevant tax period, even for businesses benefiting from tax exemptions. The introduction of Corporate Tax in the United Arab Emirates marks a significant step in the evolution of the country's tax system. Engaging an experienced accounting firm can play an essential role in managing tax compliance and maximizing tax benefits for businesses operating in the Emirates. For professional advice and expert support regarding Corporate Tax, contact ARES Accounting: support@ares-accounting.com.