What Will Be the Impact of Proposed UAE Corporate Tax for Legal Persons?

As only a few months are left for the corporate tax to take effect, more business owners are now approaching corporate tax consultants in Dubai to assess its potential impact on their companies. Even though the corporate tax is likely to become effective on June 1st, 2023, we are still waiting for the government to release the UAE Corporate Tax Law. We can still carry out a primary assessment on the impact of the Proposed UAE Corporate Tax for legal persons based on the Public Consultation Document released by the Ministry of Finance.

However, businesses are cautioned to wait for the release of the UAE Corporate Tax Law as many of the provisions in the consultation document are subject to amendments. The proposed corporate tax will impact natural persons doing business in the UAE (sole establishment owners, individual partners an unincorporated partnership etc.) However, in this article, we will let you know how the proposed UAE corporate tax impacts legal persons or companies. Read ahead for more insights:

Applicability of UAE Corporate Tax on Legal Persons

The UAE corporate tax will apply to the UAE companies and other legal persons incorporated in the UAE. Foreign legal entities that have permanent establishments in the UAE or that earn a UAE-sourced income will also come within the scope of the corporate tax. Legal persons include Limited Liability Companies (LLC), Private Shareholding Companies, Public Joint Stock Companies, and other legal structures established under the laws of the UAE that have a distinct legal personality.

Most importantly, legal persons incorporated in a foreign jurisdiction that is effectively managed and controlled in the UAE will be treated as if they were UAE-incorporated entities. In short, the following types of companies will come within the scope of the UAE Corporate Tax regime:

  • Domestic companies in the UAE Mainland
  • Companies incorporated in the UAE free zones (Free Zone Persons)
  • Foreign companies (provided they have a Permanent Establishment in the UAE; or earn income from a source in the UAE)

Classification of Residential Status of Legal Persons

Legal persons or companies will be classified as residents and non-residents. Consider the following:

  1. UAE resident persons will be taxable in the UAE on their worldwide income
  2. A legal person or a company incorporated in the UAE will be automatically considered a residents
  3. Foreign companies will be treated as residents if they are effectively managed and controlled in the UAE. It means the directors or other decision makers of the company make the key management and commercial decisions in the UAE
  4. Non-residents will be subject to UAE corporate tax on the taxable income from their Permanent Establishment in the UAE and income that is sourced in the UAE

Progressive UAE Corporate Tax Rate for Companies

As per the proposed UAE corporate tax regime, 0% corporate tax will apply on annual taxable income up to AED 375,000. And 9% corporate tax will apply on annual taxable income exceeding AED 375,000. Corporate tax advisors in Dubai can advise you on the relevant tax rates.

Applicability of Corporate Tax on UAE Free Zone Companies

Companies licensed by a free zone authority in the UAE are referred to as Free Zone Persons. Such companies will be subject to the proposed UAE corporate tax but will continue to enjoy the current tax incentives if they maintain adequate substance and comply with all regulatory requirements including audit of books of accounts.

  • Free Zone Persons can benefit from a 0% CT rate on income earned from transactions with businesses located outside of the UAE, or from trading with businesses located in the same or any other Free Zone
  • The 0% CT rate will apply to income from certain regulated financial services directed at foreign markets
  • A Free Zone Person that has a branch in mainland UAE will be taxed at the regular corporate tax rate on its mainland sourced income while continuing to benefit from the 0% corporate tax rate on its other income
  • If a Free Zone Person transacts with mainland UAE but does not have a mainland branch, the Free Zone Person can continue to benefit from the 0% corporate tax rate if its income from mainland UAE is limited to ‘passive’ income
  • The 0% corporate tax regime will also apply to transactions between Free Zone Persons and their group companies located in mainland UAE
  • A Free Zone Person located in a Designated Zone for VAT purposes can benefit from the 0% corporate tax rate on income from the sale of goods to UAE mainland businesses that are the importer of record of those goods

UAE Corporate Tax Compliance Requirement

Companies that are within the scope of the UAE corporate tax have to comply with the following obligations:

  • Carry out corporate tax registration in the UAE
  • Obtain a Tax Registration Number (TRN) from the Federal Tax Authority (FTA)
  • Calculate and pay the tax liability
  • File the tax return within 9 months from the end of the relevant tax period
  • Maintain financial and other records that explain the information contained in the tax return

Key Areas of Impact for the Legal Persons

Companies will be impacted by the UAE corporate tax in the following ways:

Audit of Financial Statements

Mainland companies need to follow relevant laws and regulations to determine whether their financial statements need to be audited by accredited audited firms in the UAE. However, taxable income will be calculated based on the profits reported in the financial statements that are prepared as per internationally accepted standards. Moreover, free zone companies will be required to have audited financial statements if it wants to benefit from the 0% corporate tax regime.

Review of Systems and Processes

A review of the current processes and systems will be required to assess the company’s readiness for the UAE corporate tax regime. This review will be related to the accounting of income and expenditure, inter-company transactions, capital assets and inventory management, etc. Businesses will also need to think about optimising these processes to meet their reporting and compliance requirements under the UAE corporate tax regime. Corporate tax consultants in Dubai can help you in carrying out the review.

Assess the Impact of Permanent Establishment

Since the concept of Permanent Establishment (PE) will be adopted, foreign companies conducting business in the UAE need to evaluate their existing business models, long-term agreements and contracts, intragroup and cross-border transactions etc. Corporate tax advisors in Dubai can help you with this assessment.

How can Corporate Tax Consultants in Dubai Help you?

The best corporate tax consultants in Dubai such as Jitendra Chartered Accountants (JCA) can assist companies with robust reviews of their current business operations to assess their readiness for corporate tax. Our services at JCA as Corporate Tax Consultants include

  • Corporate tax Assessment & Advisory Services (one-time or retainer basis)
  • Corporate tax Compliance Services
  • Corporate tax Agent Services to Represent you to FTA in case of any notices served by FTA