We are less than a month away from the implementation of the long-awaited Corporate Tax in the UAE. Rarely has a moment in the illustrious commercial history of the UAE been treated with as much anticipation, excitement and foreboding – all in equal measure. To an extent, the issue of an annual corporate tax in the country was an inevitability. From a series of small ports along the southern edge of the Arabian Gulf in the 1960s, the different emirates, guided by wise leadership, forged together a country, which is now counted amongst the world’s 30 largest economies. Not bad for a country with a total population of less than 10 million, eh?
Crucially, the UAE has positioned itself as one of those economies that are best poised to thrive in a post-natural resources-windfall environment. From the longest period, we have been hearing about the leadership making the right noises about the transitional nature of the oil bounty, and of the need to cultivate an industrial and services base beyond hydrocarbons. And hasn’t that paid off handsomely?
Today, the UAE boasts the highest concentration of industrial units and the highest contribution of non-hydrocarbon industries to the national economy anywhere in the entire Middle East and North Africa (MENA) region, and is well on its promise to diversify its economy away from hydrocarbons. Indeed, the country is joining hands with global heavyweights to combat human-activity-induced climate change, with the initiative being headed from the UAE’s side by H.E. Mariam Al Mheiri, UAE Minister for Climate Change & Environment.
The requirements for nation-building are ever increasing. The UAE is becoming an ever more complex economy, with multiple stakeholders who are all competing for attention. The demands on the UAE government are also increasing multi-fold, owing to these stresses. And none of these stakeholders can be accorded with a lower level of priority. It is in this milieu that a tax of this nature in the UAE begins to make sense.
The UAE has pondered over this eventuality for nearly a decade – I have been hearing conversations surrounding a corporate tax since the early 2010s – and has finally come round to implementing it. More than most other countries, the UAE understands the gravity of decisions and that damage to reputation is repairable only at significant cost, if at all. The challenge before the authorities was to bring about a corporate tax in the UAE without hurting the UAE’s reputation as the best place to do business in the MENA region.
And so, here we are.
Businesses that are registered for Corporate Tax will have a corporate tax charge on their annual income calculated as: Nine per cent of Taxable Income
Taxable Income is defined as that part of accounting income (annual profits) over and above AED 375,000. Annual profits below AED 375,000 will not be chargeable to corporate tax.
Over a series of reader-friendly articles, I hope to convey some general, useful information about the impending implementation of the UAE Corporate Tax regime, what it entails in terms of procedures and what it means in terms of operating businesses in the UAE, with a tilt towards businesses operating in the HVAC sector.
Who needs to register for Corporate Tax?
As per the recent statement by Younus Khoory, Director of the Federal Tax Authority, all businesses with an annual turnover in the previous accounting period of over AED 3,000,000 will have to register for corporate tax.
Government-owned or government-controlled entities are exempt from corporate tax, along with a few other specific categories of businesses. If your business generates more than AED 3,000,000 in annual turnover, and is not one of the businesses in the exempt category, you will have to get your business registered for Corporate Tax.
How to go about doing so?
If your business is already registered for UAE VAT, you can apply to register your business for UAE Corporate Tax on the same EmaraTax Platform website, accessible on eservices.tax.gov.ae. You may wish to consult a tax consultant to help you with the process.
What about free-zone entities?
All free-zone entities, classified as “Qualifying Free Zone Person”, have the option of electing to have their annual income be classed as “Taxable Income” and be subject to Corporate Tax at the “normal” rate of nine per cent on accounting profits above AED 375,000, as with mainland companies.
In case they do not make this election, accounting profits, which fall under the definition of “Qualifying Income”, will not be subject to corporate tax; and accounting profits do not fall under the definition of “Qualifying Income” will be classed as “Taxable Income”, and will be subject to Corporate Tax at nine per cent, this time with no lower threshold of AED 375,000.
Qualifying Income? Yes. Zero per cent.
Qualifying Income? No. Nine per cent.
What is “Qualifying Income” of a free-zone entity?
The final word on what will constitute “qualifying income” is pending confirmation from the minister concerned at the time of writing.
All we know at the moment is that incomes made by free-zone entities, classified as “Qualifying Free Zone Person” is called “qualifying income”. The text of the law has a bit of circular reasoning to it, because of which I do not wish to conclude on that at this point.
Are management expenses and remuneration deductible expenses for Corporate Tax purposes?
This may be relevant to several businesses, especially those in the engineering consultancy space. And the answer is, ‘No, management expenses and remuneration – whether as dividends or as
management salary – are not deductible expenses for the purposes of computing Corporate Tax liabilities. Director’s remuneration, where the director under consideration does not have a significant equity stake in the business, however, can be considered to be deductible expenditure for the purposes of computing Corporate Tax liabilities.
What if the company is part of an international group of companies?
The locally registered entity of such companies will be considered when assessing corporate tax on a standalone basis.
For companies that are based out of the UAE, standalone status will include their UAE entities as well as any branches of the entity within the UAE as well as anywhere else in the world.
It is important for international businesses to be clear on the relationship between the various entities they control.
For corporate tax incurred separately by foreign branches of the company as well as foreign subsidiaries in their respective jurisdictions, Foreign Tax Credit may be available as a deduction from overall Corporate Tax liability, up to the overall Corporate Tax liability but not more than that.
As an alternative, a UAE company that is a Taxable Person can make an election to not take into account the income and expenditure of its Foreign Permanent Establishments (branches) in determining its own taxable income. When this election is made, no income, expenditure or foreign tax credit of the foreign permanent establishment (branch) can be taken into account in determining the UAE Corporate Tax liability.
The annual tax return must be filed no later than nine months from the end of the relevant tax period. So, if your business year-end is 31 December of Year 1, your business must submit the tax return no later than 30 September of the following year.
Audits of financial statements
Whilst the audit of these annual financial statements and calculations of taxable income by a certified auditor is still not mandatory, it is highly recommended, more so now than ever before.
I will take a deeper look at some specific aspects of a company’s financial statements affecting the Corporate Tax liability in the upcoming article, including managing inventory, valuations, unrealised gains and losses and much more.
Krishnan Unni Madathil, Auditor, Bin Khadim, Radha & Co Chartered Accountants, writes a bi-monthly macro-analysis on geopolitics, incumbent political structures, global business and finance exclusively for Climate Control Middle East. He may be contacted at email@example.com.