Ever since the announcement of UAE Corporate Tax (CT), businesses and individuals alike also have a natural curiosity to understand its implications.
Very rarely one gets to witness an actual “paradigm shift”. For tax professionals, otherwise used to frequent tax reforms, to witness the introduction of a taxation regime is perhaps a life time opportunity.
Ever since the announcement of UAE Corporate Tax (CT), businesses and individuals alike also have a natural curiosity to understand its implications. But businesses should avoid treating CT as a Y2K hysteria and wait for the detailed laws and regulations.
Limited information (press release and 47 Frequently Asked Questions (FAQs)) is currently available in the public domain. Ministry of Finance (MoF) has stated that further information on CT will be provided towards the middle of 2022 and businesses will have ample time to prepare for CT. Our ‘Tax Conversation’ series will focus on key issues that will be faced by businesses in the coming months.
Should businesses rush to change their financial year?
9 per cent CT will become effective for financial years (FY) starting on or after 01/06/2023. The start date could vary for instance if the financial year is June – May the effective start date would be June 1, 2023; January – December date would be Januaury 1, 2024; and April – March date would be April 01, 2024.
The possible option to defer CT by 3 to 10 months by changing the FY to Apr-Mar could appear tempting to businesses. One should wait for the detailed laws to see if any transitional provision prevents such tax deferment by disregarding recent changes in FY.
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Tax exemptions in Free Zones
The CT incentives currently being offered to free zone businesses, that (a) comply with all regulatory requirements and (b) do not conduct business with mainland UAE, will be honoured.
Detailed laws should address following issues:
a) Whether the technical disqualification i.e. conducting business with mainland UAE will be restricted to the supplies/sales to mainland customers?
If procurement of goods/services from mainland UAE is also treated as conducting business with mainland UAE, businesses will need to significantly realign their operations.
b) Whether the CT incentives continue at an entity level or at revenue streams level?
At an entity level, businesses having revenues both from mainland UAE and from within/outside UAE, would be ineligible for CT incentive on its entire profits.
However, at revenue streams level, the revenues and corresponding costs will need to be divided into different streams. The net profit corresponding to within/outside UAE operations should be eligible for CT incentives. Such scenario will require robust accounting and record keeping.
c) Will the third-port shipments / offshore transactions be eligible for CT incentives?
Third port shipments refer to a procurement of goods from suppliers outside UAE for reselling to customers outside UAE wherein the overseas suppliers directly deliver the goods to the overseas customers. One should remember that such transactions were expressly covered under the purview of Economic Substance Regulations (ESR) through an amendment. Considering the focus on such transactions, one needs to see if CT incentives will cover such transactions.
d) Grandfathering clause: Whether the CT incentive cease to apply for new businesses incorporated in Free Zones post 01/06/2023?
If yes, free zones might witness a sudden rush of new companies before such grandfathering clause kicks in.
e) Salary to owners: A fair number of free zone businesses could be 100 per cent owned by a single individual/owner.
As salary to individuals are outside the scope of CT, many owners are contemplating to increase the salaries to themselves from the business to save CT.
Under the KSA corporate tax, any amounts paid or benefits offered as salaries/wages to a shareholder/partner or their relatives are apparently not allowed as a deduction from taxable income under the KSA corporate tax.
Before increasing the salaries to oneself, the business owners must wait to see if UAE CT adopts such features from KSA corporate tax.
Preparing for CT is not about getting ready for the unknown. The unknown should become known within the next 6 months. Businesses will have sufficient time for the implementation of corporate tax.
