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Is your business corporate tax ready? : Frequently asked questions by clients

Common queries highlight a broader need for clarity and understanding

As we advance in our series on corporate tax readiness, addressing the frequently asked questions (FAQs) regarding corporate tax and transfer pricing is essential. Over the past few months, we have observed a surge in misconceptions and uncertainties circulating within the business community. These common queries highlight a broader need for clarity and understanding as businesses try to understand the complexities of tax regulations and transfer pricing strategies. By tackling these questions, we aim to dispel confusion and provide practical insights to help businesses achieve compliance and optimise their tax positions effectively.

FAQs:

Residency principles

I am an Indian citizen living in UAE for the past 10 years. I have Indian income of more than Rs1.5 million, I believe I am satisfying conditions for being a non-resident as per Indian Income-tax Act, do I need to be mindful of anything else?

Yes, you will have to be mindful of the tax nomad provisions in the Indian Income-tax Act since your Indian income is more than Rs1.5 million.

Corporate tax compliances and limits

I have a trade licence but the company is dormant since years, do I need to register for corporate tax?

Yes, corporate tax registration is compulsory even if the company does not have any turnover during the year unless the company is officially liquidated, license is surrendered, and company is de-registered on the portal. Failure to register or even de-register once liquidated attracts penal implications.

I have three sole proprietorships in my name with turnover of Dh700,000 in each of them. Am I subject to corporate tax since a natural person is subject to corporate tax only if the turnover exceeds Dh1 million?

Yes, turnover of all the sole proprietorships will be clubbed to test the threshold of Dh1 Mn. Since the turnover exceeds the thresholds when clubbed, you are subject to corporate tax and you need to register for corporate tax.

My entity was incorporated last year on 10 June 2023, with financial year as January- December. When would be my first return filing due?

Since your entity was incorporated in June 2023, your first tax period of 7 months would be 10 June 2023 till 31 December 2023, and consequently, first return will be due in 9 months from 31 December 2023 i.e. on 30 September 2024.

Have penalties already started?

Yes, if you miss the due date for corporate tax registration, a penalty of Dh10,000 will be imposed on the entities. Entities that have already missed the deadline are currently receiving these penalties.

Transfer pricing

I am an executive director of a company and I am not related to the owners in any way. Does my remuneration still need to be at the arm’s length price?

Yes, directors and officers of the company are squarely covered under the definition of connected persons and any payments or benefits provided by the taxable person to connected persons must comply with the arm’s length principle.

Do I need to maintain transfer pricing (TP) documentation even if my turnover doesn’t exceed the threshold (Dh200 million)?

All businesses are required to maintain records of their transactions with related parties and connected persons, and certain businesses must submit this information along with their tax return. Additionally, if the Dh200 million revenue threshold is exceeded, the entity will also be required to maintain a local file and master file.

Deductions

I paid a service fee to the local government, and due to some delays, I also incurred a fine for late payment. Will both the service fee and fine be deductible for corporate tax purposes?

Government fees and charges incurred wholly and exclusively in the ordinary course of business are deductible for corporate tax (CT) purposes. However, any fines or penalties paid for a breach of law are not deductible. Accordingly, although service fee would be deductible, fine would be not. To specifically note, any fine paid for breach of contract would be deductible.

Our entity paid for the business trip tickets of our managing director, who is also a shareholder. Will this expense be considered as entertainment, even though it was incurred for business purposes?

As per the law, expenses incurred on travel for shareholders are classified as entertainment expenses. Therefore, only 50 per cent of the expense will be deductible.

Foreign businesses

I have a company situated in the UK that provides services to clients based in the UAE. We do not have any branch or place of business in the UAE. Is the entity still required to pay taxes in the UAE?

A non-resident person or entity is subject to UAE Corporate Tax (CT) only if they have a permanent establishment in the UAE or earn income sourced from the UAE. Income is generally considered to be sourced from the UAE if it is derived from a UAE resident, a UAE permanent establishment, or activities performed, assets located, capital invested, or rights used in the UAE.

Since your entity does not have a permanent establishment or physical presence in the UAE, and there is only state-sourced income, you are not required to file tax returns in the UAE. Instead, withholding taxes, which are currently 0 per cent, would apply.

Is there is any case in which any entity incorporated outside UAE, may be considered as resident taxable person in UAE?

Yes, a foreign juridical person may be considered a UAE resident for Corporate Tax (CT) purposes and subject to UAE CT on its income sourced from both the UAE and abroad if it is effectively managed and controlled in the UAE, meaning it has its place of effective management in the UAE. This analysis will depend on case-to-case basis.

While we have addressed many of the general queries circulating in the market, consulting an expert for any specific questions is highly recommended. As the UAE enters this new era of tax regulation, seeking guidance from a consultant can provide valuable insights and ensure compliance with the latest requirements.

The writer is Partner, MICS