Last week saw a series of ministerial and FTA decisions on the UAE Corporate Tax, bringing more clarity on the way forward for business owners to gear up for the tax.
Here are some common queries business owners have on the tax and its implications.
To avoid audit requirements or to claim Small Business Relief (SBR), can a free zone company opt to be taxed instead of being treated as a Qualifying Free Zone Person? If yes, can the company change the option in future tax periods?
A free zone company may elect to be subjected to corporate tax. In such scenarios, it will cease to be a QFZP even if otherwise eligible. The decree does not specify that the election (to be subjected to tax) could to be withdrawn and/or changed every tax period.
It is more likely than not that the option to tax will be irreversible. Free zone companies should be very careful before opting to tax to seek any temporary relief under SBR or from audit requirements.
Is a start-up having revenues below Dh50 million - but eligible for 0 per cent tax as a Qualifying Free Zone Person - still required to maintain audited financial statements?
Yes, every Qualifying Free Zone Person is required to maintain audited financial statements irrespective of their revenue or profit levels.
I intend to create a ‘tax group’. None of the member companies will have an individual turnover of over Dh50 million. However, the aggregate turnover of the group will be above Dh50 million. Will the audited financial statements be applicable to the tax group?
A ‘taxable person’ is required to maintain audited financial statements if such ‘taxable person’ is deriving revenue exceeding Dh50 million during the relevant tax period.
In the FAQs, it has been mentioned that two or more taxable persons (who forms a tax group) be treated as a single taxable person for tax purposes. Further, the decree provisions shall apply to a tax group, as the context requires.
Accordingly, the audit requirements may apply based on the aggregate turnover of a tax group. The tax group may seek further clarification from FTA on this issue.
The recent ministerial decision states that the conditions in which the presence of a natural person in the UAE would not create a Permanent Establishment. Does it mean that non-resident individuals will not be subject to corporate tax?
Any individual conducting a business – to be specified in a Cabinet decision – in the UAE will be subject to corporate tax. It is not mandatory that such individuals should be a UAE resident.
The ministerial decision relating to temporary presence in the UAE would apply to non-resident individuals who are not engaged in any business in the UAE.
For individuals e employed by non-resident companies and are physically present in the UAE - e.g., expatriates on secondment - the companies should carefully evaluate the provisions relating to permanent establishment/tax presence in the UAE.
The VAT only had a decree law and an executive regulations, followed by public clarifications from the Federal Tax Authority (FTA). Under corporate tax, in addition to the decree, we are witnessing decisions from multiple authorities such as from the Cabinet, ministries and the FTA. Are all these part of corporate tax laws?
Yes. Under the legislative principle of delegated/subordinate legislation, the principal legislation - i.e., the corporate tax decree - specified the subjects/topics on which further laws will be made by corresponding authorities such as the Cabinet, the minister of finance and/or the FTA. All such decisions should be treated as a part of the corporate tax laws for compliance.
The principle of delegated/subordinate legislation is used by many countries in their legislative process.
Can a company change its financial year for the purpose of corporate tax?
The FTA decision (No.5 of 2023) has specified the scenarios and conditions for requesting a change in the tax period (typically a financial year). Apart from certain prescribed scenarios, there should be a valid commercial, economic, or legal reason to change the tax period.
Business owners should consider the anti-abuse rules and the spirit of the tax laws before planning to change their financial years to defer the corporate tax implications.
I was told that a company will not get an expense deduction for tax purposes if an employee does not use a corporate card for payments (instead of personal card or cash). Is it correct that an employee cannot pay for company’s expenses and seek reimbursement?
It is not mandatory that a taxpayer company should directly make payments to all suppliers and vendors. For expenses, especially miscellaneous, employees should be able to pay first and seek reimbursement from the employer.
It has been clarified in the MOF FAQs that all legitimate business expenses incurred wholly and exclusively for the purposes of deriving taxable income will in principle be deductible.