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From influencers to free zone entities: 5 things to know about UAE corporate tax

Federal Decree Law has provided clarity on many other aspects of the corporate tax and a certainty on its implementation

The Federal Decree Law on ‘Taxation of Corporations and Businesses’ has been released in the public domain on 09/12/2022. The introduction of corporate tax will be a paradigm shift for the UAE economy, UAE businesses as also for certain individuals.

The key features of the corporate tax law were already shared by the Ministry of Finance (MoF) in early 2022 e.g. the highlight tax rate will be 9 per cent to be calculated on the taxable profits, not the gross revenue, of a business. The tax will be imposed on a slab basis as the initial Dh375,000 of the yearly taxable profits will not be taxed.

The Federal Decree Law has provided clarity on many other aspects of the corporate tax and a certainty on its implementation. To firmly ascertain the tax implications, one has to momentarily wait for the release of related cabinets decision(s). The cabinet decision(s) will provide details and regulations.

Here are the top five important aspects of the corporate tax:

1. Influencers, freelancers and individuals doing business

Often referred to as ‘Corporate Tax (CT)’, the expression is a misnomer for individuals.

Though CT will not apply to an individual’s salary and other employment income, individuals who are engaged in a business would be covered under CT.

‘Business’ has been defined widely to mean any activity conducted regularly, on an ongoing and independent basis. Examples include commercial, agricultural, vocational, professional and service activities.

Accordingly, the social media influencers and freelancers could also be taxed. A sole proprietorship or a civil company will anyway be taxable. The cabinet decision(s) will determine the taxable business categories for individuals.

Dividends, capital gains, saving incomes earned in a personal capacity should not be taxable. Subject to the details in the cabinet decision(s), an individual’s income from real estate investment (in personal capacity) will generally not be taxable.

Domestic transfer pricing will apply to payments made to a connected/related party by a company including salary and allowances.

2. Tax relief for small businesses

Small businesses with revenue/gross income below a certain threshold can claim ‘small business relief’. Such businesses will be treated as having no taxable income and be asked to undertake simplified compliance obligations.

The threshold will be based on the revenue and not the profits/taxable income. For example, a social media influencer having a taxable profit/income of Dh600,000 on a gross revenue of Dh1,000,000 would otherwise have a net tax liability of Dh20,250 (9 per cent X (600,000 (-) 375,000).

If the threshold of ‘small business relief’ is set at say, Dh1,000,000, the tax liability of such individual will become nil.

3. Tax exemptions to free zones persons (FZPs)

Entities in a free zone would be eligible for tax exemptions only if it (a) maintain adequate substance in the UAE; (b) derive “qualifying income”; (c) comply with transfer pricing rules and maintain the relevant documentation; and (d) not opt to be subject to CT.

The scope of “qualifying income” will be specified in the cabinet decision(s). It would be an understatement that Free Zones entities are eagerly awaiting for the said decision(s).

In the context of the public consultation document issued earlier by MoF, it was expected that if a FZ entity earns any income which is not exempt (i.e. non qualifying income), its entire income including the ‘qualifying income’ would be taxed at 9 per cent .

However, the federal decree law seems to suggest that zero per cent will be applicable on “qualifying income” and 9 per cent will be applicable on “non-qualifying income”. Subject to the cabinet decision(s), such category based taxation would be a massive relief and allow FZ entities to continue the domestic operations.

4. Financial records and permission to maintain unaudited statements

Taxpayers are expected to prepare and maintain financial statements along with all documents and records to support the CT returns. The records should be maintained for at least seven years.

Each UAE entity, unless it is a part of CT tax group, will need to prepare stand-alone financial statements. However, all entities may not be required to have audited financial statements. The cabinet decision(s) will specify the categories of taxable persons required to maintain audited/certified financial statements.

Taxpayers would also need to translate amounts, income as well as expense, denominated in a foreign currency on a transaction-by-transaction basis at the exchange rate set by the Central Bank of the UAE.

5. Anti-avoidance provisions

On the lines of best international practices, the law also contains anti-abuse/anti-avoidance provisions. Such provisions enables the tax authorities to disregard a transaction or an arrangements which are carried out without a valid commercial reason to gain undue tax advantages. The provisions would apply not just for international transactions but also for domestic transactions.

Concluding remarks

The CT will be applicable on your regular financial year starting on or after 01 Jun 2023. The transition to CT requires a strategic review of the business operations along with a special focus on accounting discipline, document maintenance and retention.

The transition to CT could be uneasy, perhaps unpleasant, but a timely action by the companies can ensure that it does not become painful.

(Pankaj S. Jain is the managing director of AskPankaj Tax Advisors. For feedback and queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.)