UAE: Corporate tax law to bring further transparency, say analysts and tax experts

New corporate tax law will bring transparency and more sustainable investments within the country as businesses also will now be more prudent in their investment plans

Analysts and tax experts say that there is no need for companies to panic as they still have time at hand to prepare for the corporate tax regime, which will come into effect from June 1, 2023.

The UAE issued Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses on Friday. This means businesses will be subject to a nine per cent tax with profits exceeding Dh375,000 per annum.

“Companies have sufficient time to evaluate the tax implications and prepare for the corporate tax regime. They should not panic about an immediate implementation. A strategic and thought-through approach will be helpful to optimise the tax implications,” said Pankaj S Jain, managing director, AskPankaj Tax Advisors.

Jain added that companies would need to now prepare adequate, standalone financial statements for each entity for tax compliance. “Expenses need to be demonstrated that have been incurred wholly and exclusively for the purpose of business. The accounting function of the companies will, henceforth, need to be focused and thorough,” he added.

Naveen Sharma, Hon. Cultural Events Director at India Club and former chairman of the Institute of Chartered Accountants of India (ICAI) Dubai chapter, noted that corporate tax, one of the lowest in the world, will help the nation to establish a new source of income that is not reliant on oil and corporate dividends.

“Now it is high time for the companies to evaluate their financials in accordance with the corporate tax law, particularly the groups having multiple entities. The group concept will differ from what we know under VAT law and accordingly, the provisions of transfer pricing will apply. It will require the proper understanding of the intercompany transactions and its impact under the new law,” said Sharma.

“The new corporate tax regime is designed around the international best practices, and it will help UAE in strengthening its position as a global hub for investment and businesses,” said the ICAI past chairman.

Nimish Goel, partner at WTS Dhruva Consultants, termed it a fairly comprehensive legislation which incorporates a fair bit of suggestions invited by the Ministry of Finance on its public consultation document.

“A significant inclusion is the anti-avoidance provision that aims to arrest potential tax abuse. A welcome deviation from the Public consultation document (PCD) is the allowance of carrying forward interest disallowed for a period of 10 years. This should benefit heartily leveraged companies typically in real estate and infrastructure companies,” he said.

Time to scrutinize books

Shailesh Khandelwal, partner – Shailesh Khandelwal and Co., believes that it’s time for businesses to start scrutinizing their existing accounting and bookkeeping systems and make the necessary changes to align their systems with the requirements of the provisions of this law.

“Businesses must also re-look into their existing contracts with their customers and make the necessary changes, if required, to incorporate the burden of corporate tax in their profit margin. Else, they might have to suffer with losses on account of reduction of a profit margin due to corporate tax,” he said.

Vikas Panchal, general manager for Middle East at Tally Solutions, said the government’s decision to maintain a zero per cent threshold for taxable profits up to and including Dh 375,000 recognises the significant role that start-ups and SMEs play in the UAE’s economy.

“Nine per cent standard rate ensures that the UAE’s corporate tax regime is amongst the most competitive in the world. This will further strengthen the country’s position as a global business and financial centre,” added Panchal.

He added that most SMEs have adapted to digital transformation following the introduction of VAT in 2018 and this will ensure a seamless transition to this new tax implementation for them.

Bring transparency

• UAE issues law on 9% corporate tax law, reveals exemptions