Here we talk about various elections that need to be made by the entities:
Gains and Losses on Realisation basis
Article 20 (3) of UAE Corporate Tax Law provides that where financial statements are prepared on an accrual basis, an election can be made to take gains or losses into account for Corporate Tax purposes on a realisation basis. This means that for the purposes of calculating their taxable income for a tax period, instead of profits and losses in respect of assets and liabilities being determined based on IFRS adjustments, losses or profits are instead determined when an asset is disposed of or a liability is settled.
The election under this clause can either be made considering:
• All unrealised accounting gains or losses are not taken into account, or
• Only unrealised gains and losses in relation to those assets and liabilities held on the Entity’s Capital account. In this case gains or losses in relation to assets and liabilities held on that Person’s Revenue account would be taken into account and be subject to Corporate Tax on unrealized basis.
For further understanding, the revenue account relates to assets held on a short-term basis such as trade receivables or inventory, with the capital account relating to longer term assets such as plant and machinery or buildings.
Taxable persons who prepare their financial statements on an accrual basis may elect to take into account gains and losses on a realisation basis to prevent a Corporate Tax liability arising where there is no receipt of consideration to fund the resulting Corporate Tax payable.
2. Small Business Relief
Article 21 of UAE Corporate Tax Law allows a Resident Person to elect for Small Business Relief, resulting in the Resident Person being treated as having no Taxable Income in respect of each relevant Tax Period where the conditions of this Article are satisfied. The relief is intended to support start-ups and other small or micro businesses by reducing their Corporate Tax burden and compliance costs.
To qualify for Small Business Relief (SBR), the following criteria must be met:
• The Taxable Person must be a Resident Taxable Person, whether a Natural or Juridical Person.
• The Revenue of the Taxable Person for the Tax Period should be below or equal to Dh3,000,000.
• It's important to note that to claim this relief, the revenue for both the relevant Tax Period and the previous Tax Periods must be AED 3 million or below for each respective Tax period.
Small Business Relief (SBR) can be claimed for Financial Years falling between 1 June 2023 and 31 December 2026.
Eligible Taxable Persons have the option to elect for Small Business Relief (SBR) in their Tax Return. Once this election has been made, it cannot be amended. Upon election, they will enjoy the benefits such as completion of a simplified Tax Return, no requirement to pay any Corporate Tax and exemption from Transfer Pricing documentation.
While Small Business Relief (SBR) offers significant advantages, it's important to be aware of its limitations. Tax Loss Relief (i.e., carry forward of tax losses) and carry forward of net interest expenditure are not available to those claiming SBR.
Business should properly evaluate their profitability and eligibility prior to opting for SBR.
Qualifying Free Zone Election for 9% Tax
As per Article 9 of the UAE Corporate Tax Law, a Qualifying Free Zone Person can make an election to be subject to Corporate Tax at 9%.
The election shall be effective from either of:
• The commencement of the Tax Period in which the election is made or
• The commencement of the Tax Period following the Tax Period in which the election was made.
This would mean that the Free Zone Entity would qualify by default as a Qualifying Free Zone Person as long as it meets the following criteria:
• Adequate substance in the UAE
• Earning of Qualifying Income
• Not elected for taxation at normal rates
• Compliance with transfer pricing
• Non-qualifying revenue should not be in excess of de-minimis threshold
• Audit of financial statements
Foreign Permanent Establishment Income Exemption
Article 24 of UAE Corporate Tax Law allows a Resident Person to elect and claim an exemption from Corporate Tax for income derived through a Foreign Permanent Establishment. A Foreign Permanent Establishment is defined as a branch or other presence or activities of the Resident Person in a foreign jurisdiction that would constitute a Permanent Establishment
The Foreign Permanent Establishment exemption is intended to eliminate or reduce potential international double taxation and would equally apply to any expenditure of (or that is attributable to) the Foreign Permanent Establishment
Where an election under this Article is made, both the income and associated expenditure of a Resident Person’s Foreign Permanent Establishments are not taken into account in determining the Resident Person’s Taxable Income. Similarly, any Foreign Tax Credits is not available. Any election made must apply to all Foreign Permanent Establishments that is subject to sufficient level of taxation in the Foreign jurisdiction.
As part of the Impact Assessment process, Entities need to review the pros and cons of the options prior to making the election. Some of the elections are irrevocable and hence careful thought needs to be given to the long-term impact of the option selected.
In a bid to assist eligible resident businesses in streamlining their tax obligations and easing their financial burdens, MCA Management Consultants, a renowned player in the consulting industry, is providing Advisory Services for Corporate Tax Compliance.
MCA was established in the year 2009 and today ranks amongst the reputed professional services firm providing multi-disciplinary services in Audit, Assurance, Taxation, Corporate Services, Corporate Finance, Strategy, Accounting/CFO Services, Transformative Technologies and Asset Management Solution.
The writer is Senior Partner, MCA Management Consultants