The Role of Management in Preparing for Corporate Tax:
The United Arab Emirates issued Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, as it enters into force 15 days after its publication in the Official Gazette. Below is some important information that were set out in the law and preliminary explanations issued by the Ministry of Finance and the Federal Tax Authority with the aim of shedding light on the companies’ administrations to be prepared mathematically and administratively to comply with the law in order to avoid any fines or violations that may be inflicted on the companies and to ensure the reduction of tax burdens. The information was formulated in the form of a question and answer based on the questions we receive from the companies’ managers and for the ease of implementation and practical application.
What is the application date of the law and on which tax period does the tax start to be calculated?
Article No. 69 of the Decree-Law stated that the date of application of the law is for tax periods beginning on or after June 1, 2023.
For example: If we assume that the fiscal year of the company starts on July 1 and ends on June 30 of the following year, then the first tax period will be considered from July 1, 2023 and ends on June 30, 2024.
Another example: If we assume that the fiscal year of the company starts on January 1 and ends on December 31 of the same year, then the first tax period will be considered from January 1, 2024, and ends on December 31, 2024.
Is registration required for Corporate Tax, or is VAT registration sufficient?
According to Article No. 51 of the Decree-Law, every company that is subject Corporate Tax must register with the Federal Tax Authority, provided that the tax registration takes place before submitting the first tax return.
What is the deadline for submitting a tax return?
As set out in Article No. 53 of the Decree-Law, the taxable company must submit the tax return no later than 9 months from the date of the end of the tax period.
What is the Corporate Tax rate?
Article No. 3 of the Decree-Law reads that the tax is imposed at 0% on taxable income (company profits after adjustment) that does not exceed AED375,000, and the amount will be confirmed according to the Cabinet Decision, and 9% on the amount that exceeds the abovementioned amount.
As for qualified persons in the free zone, they are subject to a 0% on qualified income, and the remaining unqualified income is subject to a rate of 9%.
Is there a tax withheld at the source, as it happens in some tax systems?
Income generated in the State by non-residents and any other income as determined by the Cabinet is subject to the tax withheld at the source, but at a rate of 0% in accordance with Article No. 45 of the Decree-Law.
Are salaries and personal income subject to Corporate Tax?
According to Article 11 of the Decree-Law, Corporate Tax is imposed on natural persons carrying on business, provided that a decision is issued by the Cabinet clarifying the businesses that are subject to tax. Regarding salaries, the instructions issued by the Federal Tax Authority indicated that they will not be subject to Corporate Tax, in addition to exempted incomes in general according to Article 22 such as income generated from stock dividends and distributed dividends.
Will all business-related expenses be deducted to calculate taxable income?
Chapter (9) in the Decree-Law set out the deductible expenses, which must be entirely and exclusively related to businesses, as well as the non-deductible expenses, including, for example, restrictions on interest expenses and a percentage of entertainment expenses, as well as donations to unqualified parties, fines, bribes, and refundable value-added tax.
Will management salaries be deducted to calculate taxable income?
Regarding management salaries, the basic rule of deductible expenses must be considered, and whether the salary is linked entirely and exclusively to the businesses. Furthermore, chapter (10) of the Decree-Law must be considered in transactions between related parties and related persons, which provides that transactions shall be carried out according to the neutral price principle by any of the applicable transfer pricing methods stipulated in the Decree-Law.
Shall companies pay any Corporate Tax in the event of a loss, and will the losses be carried forward in accordance with the applicable tax laws?
As previously mentioned, tax is imposed on taxable income (profits after adjustment), and tax is calculated at the aforementioned rate on taxable income. In the absence of a positive income, there will be no entitlement to pay tax. Regarding carrying forward losses, Article No. 37 of the Decree Law on Tax Loss Facilities stated that losses realized after the entry into force of the law may be deducted up to a maximum of 75% of the taxable income for the subsequent years in which positive taxable income (profits) were achieved according to specified conditions by the law.
What is the position of free zone companies, does the Corporate Tax Law apply to them, or is it considered outside the tax scope?
According to Chapter (5) of the Decree-Law on persons in free zones, companies in free zones remain under the scope of the tax law, but they have taxincentives that distinguish them in the event that the companies qualify according to conditions such as having a realistic presence in the State and achieving qualified income that will be defined in the Cabinet’s Decision.
What is the position of foreign companies that have branches in the State, do the provisions of the law apply to them?
In Article (11), the Decree-Law laid down that the taxable ones take either the form of a resident or a non-resident. Accordingly, the case of the foreign company must be studied from this classification and the question that is raised here is whether the company is managed from within the State in order to be considered a resident, or it has a permanent establishment, so it is considered a non-resident. The same is the case with achieving a sourced income in the State. Therefore, the position of the foreign company must be considered in order to describe how it is subject to the Companies Act.
Is there any facility for businesses to be treated as one tax group, as is the case in value-added tax?
Chapter (12) in the Decree-Law singled out the terms and conditions under which a number of companies may be considered a tax group and the facilities for transferring losses and preparing consolidated financial statements. Among such conditions are the parent company owning 95% of the subsidiary company and that the group companies be legal residents.
Should regular accounts be kept and should audited balance sheets be prepared?
Keeping regular accounts for companies is a basic requirement not only for the Corporate Tax Law, but also for several laws in force, such as the Corporate Act. Keeping accounts is the basic pillar on which taxable income (profits after adjustment) is calculated. This is provided for in Article No. 20 of the Decree-Law that defining the taxable income comes on the basis of appropriate and independent financial statements prepared in accordance with the accounting standards accepted in the State. With regard to preparing audited financial statements for companies, Article No. 54 of the Decree-Law states that the Minister of Finance may issue a decision ordering taxpayer to prepare audited financial statements.
Are there any facilities for small companies?
Article No. 21 of the Decree Law stated the facilities for small businesses, in which the resident may elect that he did not achieve any taxable income for a tax period, according to conditions that will be determined by the Minister of Finance by a decision issued by him. However, if the resident chooses these facilities, some exemptions and other facilities mentioned in the law will be reduced such as exempted income and carrying forward losses.
Are there penalties for non-compliance with the Corporate Tax Law?
Similar to the Value Added Tax Law and the Excise Tax Law, the Tax Procedures Law defines fines and violations for non-compliance by companies and individuals with corporate tax, as laid down in Article No. 60 of the Decree-Law.
How to know more details about Corporate Tax and peruse the decisions of the Cabinet, the Minister of Finance and the executive procedures of the Federal Tax Authority related to Corporate Tax?
Laws and decisions related to Corporate Tax are included in an updated manner, as well as clarifications and more details about the implementation of the law on the website of the Federal Tax Authority, as well as the website of the Ministry of Finance.