CT in UAE Part-2: Detailed laws awaited for key issues on Free Zones

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.

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.

The writer is the managing director of AskPankaj Tax Consultants.Views expressed are his own and do not reflect the newspaper’s policy.