Taxing times ahead: UAE SMEs brace for new Corporate Tax Law

The implementation of corporate tax in the UAE is imminent and effective starting 1st June 2023. Federal corporate tax has been implemented in the UAE in an effort to advance the nation’s standing as a premier global centre for trade and investment as well as quicken the strategic goal of growth and transformation. Here, we address the significant considerations to bear in mind about corporate tax.

Business and tax experts have been talking about it since it was announced. With this declaration, the UAE is the fourth GCC nation to enact a federal corporate tax. The corporate tax practice helps avoid detrimental tax tactics and promotes the uptake of international requirements for tax transparency.

While a lot has been said and written about corporate tax, businesses are still trying to wrap their heads around the idea of corporate tax because it is unprecedented in the UAE. Here's a round-up of the top FAQs and primary considerations you need to bear in mind -

What is UAE corporate tax?

Corporations and other commercial entities' net income or profit is subject to corporate tax, a type of direct tax. Moreover, it is often called “Corporation Income Tax” or “Company Profits Tax”.

It is, in essence, a tax imposed on the net profit realized by the companies. It mandates that businesses pay taxes on a specific part of their profits.

How is business tax determined in the UAE?

In the UAE, corporate tax is computed at 9 per cent of the net profit shown in the company's financial statements. Only if the taxable net profit exceeds AED 375,000 would the corporate tax be applied. In other words, there is no tax on net earnings up to AED 375,000.

The MoF also recently introduced extraordinary small business relief.

Who in the UAE is liable for corporation tax?

Companies with a taxable (net) profit of more than AED 375,000 are subject to corporation tax and must pay a part of their net profits as corporate tax.

When will the UAE's federal corporation tax take effect?

The corporate tax will go into effect for the first fiscal year, beginning on or after June 1, 2023.

When will the government publish the corporation tax law?

The UAE’s Ministry of Finance published the company tax bill under Federal Decree-Law number—47 of 2022 on their website.

What types of enterprises or earnings are not subject to corporate tax?

Any enterprises exceeding the AED 375,000 profit mark must pay corporate tax. However, some forms of revenue or businesses are free from corporate tax.

Not applicable to foreign investors who do not continue business in UAE.
Corporate tax incentives are currently offered to free zone businesses that follow all regulatory requirements.
Capital gains and dividends received by UAE businesses from their qualifying shareholdings are exempt from corporate tax.
Not applicable on qualifying intra-group transactions and restructurings

The new tax regime has a significant effect on all UAE-based companies as well as private individuals engaged in commercial activities. Companies and private individuals should start evaluating the impact of the new regulations. This entails evaluating how the laws are applied, simulating the effects on cash flow, considering the exception regimes, and designing the processes and procedures to manage compliance.

In an exclusive conversation with SME10X, Tyne Hugo, Senior Associate at BSA Ahmad Bin Hezeem & Associates, pointed out, "The biggest ramification for businesses, other than the 9 per cent tax itself, will be compliance. Businesses need to hit the ground running, and where it has been common to keep financial books casually, this will no longer be an advisable option to manage a business."

Hugo pointed out that it is not uncommon for there to be substantial and complicated corporate structures in the UAE that were initially (and legally) made with the intention of not having to pay total tax in foreign jurisdictions and which may no longer work now, given the incoming CT, and is certainly something for businesses to consider. Compliance will be a crucial factor, and if companies fail to comply, there will be severe consequences in the form of penalties.

To achieve tax compliance, start by understanding your tax obligations, including the applicable tax rates, deadlines for filing returns and making payments, and any tax incentives or exemptions your business may be eligible for. It is also essential to keep track of changes in tax laws and regulations that may affect your tax liabilities.

Maintain accurate income, expenses, assets, and liabilities records to support tax calculations and filings. Ensure you have proper documentation to support any tax deductions or credits you claim.

To simplify the tax compliance process, consider using tax software or hiring a tax professional to assist you with your tax filings. This can help ensure that tax calculations are accurate and meet all relevant tax deadlines.