The UAE is a popular destination for entrepreneurs with numerous initiatives designed to ease the process of doing business. When the Federal Tax Authority introduced its new rules on corporation tax in late 2022 (UAE Corporation Tax) some wondered whether the move might slow down start-up growth in the Emirates; however, the government has introduced a range of relief measures in line with its commitment to support SMEs.
Rayhan Aleem, Founder and Managing Partner of the customer focused accounting firm Alpha Pro Partners commented, “Like all companies, SMEs need to be aware of the corporate tax rules, understand their implications, and factor them into accounting processes. It can be overwhelming as there is a lot of information circulating from different sources, not all of it accurate. But SMEs should know that there is plenty of help available so they can continue to thrive.”
There have been 24 pieces of legislation released since the announcement of Corporation tax in the UAE. Here are the key takeaways that affect entrepreneurs.
# Annual income subject to Corporation tax (as per cabinet decision No. 116 of 2022)
Smaller companies may not have corporation tax to pay based on their profit threshold.
1. Taxable profits not exceeding AED 375k – 0% corporate tax.
2. Taxable profits exceeding AED 375k – 9% corporate tax.
# Small business relief (Article 21 of Law No. 47)
Small business tax relief allows for the taxable person to be considered as not having any derived taxable income in a fixed tax period to reduce their tax costs and compliance requirements.
1. It is available for companies with revenues less than AED 3m.
2. Freezones and multinationals do not qualify.
3. Applies mainly to mainland businesses.
# Business restructuring relief (Article 27 of Law No. 47)
1. Business restructuring such as a mergers or demerger can result in a taxable gain or loss (even if the ultimate ownership of the business does not change).
2. This article allows certain types of restructuring transactions to take place in a tax neutral manner.
# Interest expenditure (Article 29 of Law No. 47)
1. This article stipulates the circumstances when interest on business loans can be deductible against profit subject to corporation tax.
2. Interest from conventional and shariah compliant loans is included.
# Entertainment expenditure (Article 32 of Law No. 47)
1. Only 50% of the entertainment expenditure can be deducted against taxable profits.
2. Employee entertainment is 100% deductible.
# Payments to connected persons (Article 36 of Law No. 47)
1. Payments to connected persons (e.g. directors or owners) must be at market value and wholly and exclusively for business purposes (i.e. business owners cannot pay themselves inflated salaries).
# Tax loss relief (Article 37 of Law No. 47)
1. Tax losses can be offset against the taxable income of subsequent tax periods subject to conditions.
# Withholding tax (Article 45 of Law No. 47)
1. Withholding tax is currently at 0% in the UAE in most circumstances (other GCC states impose WHT).
# Foreign tax credit (Article 47 of Law No. 47)
1. Foreign tax incurred can be used to reduce the taxable income.
# Accounting standards and methods (Ministerial decision No. 114 of 2023)
1. Small businesses with less than AED 3m of revenue can apply cash-basis accounting, benefitting those who have a high level of accounts receivables.
# Free zones (Article 3 of law No. 47)
1. 0% of Corporation tax is available for qualifying free zone entities on qualified income.
Qualifying income is:
1. Income derived from transactions with other free zone persons except for excluded activities.
2. Income derived from transactions with a non-free zone person but only in respect of qualifying activities.
Qualifying activities include:
1. Manufacturing of goods or materials.
2. Processing of goods or materials.
3. Holding of shares and other securities.
4. Ownership, management and operation of ships.
6. Fund management services.
7. Wealth and investment management services.
8. Headquarter services to related parties.
9. Treasury and financing services to related parties.
10. Financing and leasing of aircraft, including engines and rotable components.
11. Distribution of goods or materials in or from a designated zone to a customer that resells such goods or materials, or parts thereof or processes, or alters such goods or materials or parts thereof for the purposes of sale or resale.
12. Logistics services.
It is imperative to get professional advice before acting in accordance with any of the above. A trusted tax consultant can advise on how to prepare and proceed in more detail. The Federal Tax Authority (FTA) website is also an excellent resource for educating yourself on corporation tax.