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Navigating corporate tax readiness in 2024: Key considerations and challenges ahead

Three critical components demand immediate attention under corporate tax laws: Deductions, reliefs, and considerations unique to free zones

As we mark the halfway point of 2024, the question of corporate tax readiness looms large for businesses. What does it take for one to believe that their businesses are corporate tax ready? Does one still believe that being in free zone, is being free from tax and compliance? Or does one still believe that all the expenses it has accounted for, would be allowable for corporate tax purposes.

To navigate these complexities effectively, inter alia, three critical components demand immediate attention under corporate tax laws: deductions, reliefs, and considerations unique to free zones.

While discussing about deductions, in the first place to be ensured that all the expenses are booked and classified appropriately. This would entail a close link with the auditing of financial statements. Financial audits now serve dual purposes—ensuring accuracy in financial statements and aligning with corporate tax regulations. Expenses that are recognized in the financial statements might not necessarily qualify under corporate tax regulations (for instance, personal, entertainment and thin capitalization of interest), necessitating a meticulous scrutiny and adjustment. The nature of payment would again play a key role in determining the allowability.

Another correlation is dealing with the transactions with group companies. At the outset, adherence to arm's length principles in pricing is non-negotiable. Separately, as the UAE continues to establish itself as a global hub for businesses, most businesses set up their presence in the UAE especially as headquarters due to which related party transactions are poised to form a substantial portion of transactions for many entities. Because of this, adherence to transfer pricing rules becomes critical. For instance, shareholders drawing salaries from their company would be required to benchmark the remuneration drawn by them to be at the arm’s length principle.

Similarly, those seeking to leverage Corporate Tax reliefs must meet specific conditions attached to it, emphasizing the urgency of compliance and documentation. Documentation proving eligibility such as asset valuations for pre-tax period gains is crucial. While all the reliefs (small business, transfers within qualifying group etc.) have to elected in the course of filing return of income, which for all the entities will be due next year, from a tax optimization perspective, the decision has to be taken no later than now.

From a transfer pricing angle, the law also provides a relief from benchmarking “low value adding services” by offering a safe harbour of five percent on such services thereby reducing the compliance burden to some extent. However, businesses must carefully analyse whether their provided services qualify under the restricted scope of “low value adding services”. This necessitates a detailed assessment to determine eligibility for the safe harbour provision.

One could not emphasize enough the importance of satisfaction of conditions for claiming the free zone zero percent benefit. From a readiness perspective, documentation would again play a key role for evidencing satisfaction of the conditions. For instance, a free zone person that is engaged in the activity of distribution of goods or materials would be required to ensure that its customer is not the end user, in order to fall within the scope of the ‘qualifying activity’. This can be achieved by obtaining confirmation through undertakings or contracts and meticulously preserving such documentation.

Looking ahead to 2025, implementation of BEPS Pillar II framework would mandate Multi-National Enterprises to pay a fifteen percent Global Minimum Tax (GMT) on their profits. Though not in effect presently in the UAE, it is wise for businesses to anticipate its future implementation.

In commitment to aiding businesses in their journey towards corporate tax readiness, we will continue to share expert insights and tips in our ongoing article series.

The writer is Partner, MICS International