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The UAE Corporate Tax Law provides a legislative basis for the introduction and implementation of Federal Corporate Tax in the UAE, which came into effect earlier this year on June 1. With the intention to support the UAE in achieving its strategic objectives, the introduction of corporate tax is expected to help accelerate the nation’s development and transformation. The certainty of a competitive corporate tax regime adhering to international standards, along with the UAE’s extensive network of double tax treaties, are together expected to cement the UAE’s position as a leading jurisdiction for business and investment.

How its roll out impacts day-to-day business, and the legal ramifications, especially for small businesses is a matter of critical importance for the nation’s booming entrepreneurial and business community.

Avoiding significant penalties

According to the UAE Ministry of Economy, the SME sector represents more than 94 per cent of the total number of companies operating in the country and provides jobs for more than 86 per cent of the private sector’s workforce. In Dubai alone, SMEs make up nearly 95 per cent of all companies, employing 42 per cent of the workforce and contributing around 40 per cent to Dubai’s GDP. Areen Jayousi, Partner at UAE-based law firm, Horizons & Co. believes the UAE introduction of corporate tax presents significant implications for businesses, especially SMEs.

Areen Jayousi

“Key considerations include understanding the specific tax rate and compliance thresholds, maintaining accurate financial records, and being aware of tax deductions and exemptions,” says Jayousi. “Companies must also consider international tax implications, particularly for cross-border transactions, an issue that has been thus far overlooked by many. Non-compliance can lead to significant penalties, necessitating timely tax filings. This new tax regime impacts financial planning, potentially prompting business restructuring for tax efficiency. SMEs should seek professional advice to navigate these complexities and ensure compliance with the UAE’s corporate tax laws.”

Issues and challenges

Manali Chopra, Director of Accounting, Audit, & Tax, AKW Consultants, reveals a substantial shift in the firm’s clients wanting to know more about corporate tax laws and their legal ramifications since implementation in June this year.

Manali Chopra

“Our clients often seek guidance on aligning financial strategies with the dynamic tax framework, with key concerns including the applicability of corporate tax on free zone companies, and the treatment of partner/directors’ incomes,” says Chopra. Notably, one of the predominant challenges involves restructuring companies, especially when dealing with multiple entities under a holding company as, by extension, it involves the complexity of employee visas and the tax implications of where their salaries are derived from within the group company.”

Benefits and rewards

Focusing on SMEs, Chopra says small businesses need to be aware of Small Business Relief (SBR) and the benefits it holds. “One of the notable legal aspects of corporate law that must be focused on by SMEs is the Small Business Relief. While corporate tax laws are applicable to all Taxable Persons, the UAE offers relief to SMEs with a 0 per cent tax rate for revenue below Dh3 million. Whether you fall below the threshold or not, however, proactive measures, including meticulous record-keeping, are crucial to avoid legal consequences. Other important considerations are transfer pricing, and adherence to laws governing intra-company trades among entities with common ownership.”

Manan Chadha

Elaborating further on SBR and its benefits for small businesses, Manan Chadha, Managing Director, TRC Pamco Middle East, a Dubai-based audit firm believes its objective is to reduce the corporate tax burden and compliance expenses for SMEs. “Election for SBR must be made while filing the corporate tax return in order to claim relief for each tax period. Transfer pricing documentation rules do not apply to SMEs who have elected for SBR,” says Chadha.

“SMEs shall also ensure that they have complied with the Arm’s Length Principle and if required, shall submit adequate documentary proof when requested for by the FTA. SMEs who have elected for SBR in their tax returns cannot carry forward their tax losses and disallowed net interest expenditure to future taxable years."

Key queries on implementation of corporate tax

Kinnari Rahul Doshi, a tax expert and FTA Registered Tax Agent in the UAE, and who serves as Managing Partner of UAE-based N R Doshi & Partners, spotlights some of the main issues or queries raised by clients with the implementation of corporate tax here in the UAE.

Kinnari Rahul Doshi

"In the course of implementing corporate tax policies in the UAE, our clients have encountered a spectrum of challenges and inquiries, broadly on Corporate Tax Compliance, Corporate Structure, and adoption of Corporate Tax.

"One prominent issue involves a lack of a comprehensive plan to anticipate the nuances of changes in the business model. Understanding the potential impacts of Corporate Tax on Legal Restructuring, Tax Groups, and the intricate web of Transfer Pricing is essential.

"Clients operating internationally seek assistance on the implications of UAE corporate tax on their global tax position, including potential double taxation issues and the application of tax treaties. Additionally, many businesses are seeking insights into qualifying for Free Zones Person’s Status, understanding Qualifying Activities/Income, and navigating the complexities of Participative Exemption, Exempt income, and Corporate Tax Implications for Non-Resident Shareholders and Permanent Establishments

"One common thread is the challenge of understanding and ensuring compliance with the new corporate tax regulations laid out by the UAE Ministry of Finance. Many businesses are grappling with the complexities and nuances of these new requirements.

"Companies are deeply engaged in evaluating how corporate tax could impact their overall costs and profitability. It's become a crucial factor in their financial assessments and strategic decision-making processes and are actively exploring tax planning strategies. This includes a thorough evaluation of available deductions, exemptions, and incentives to optimize their tax liabilities.

"At N R Doshi & Partners, We assist our clients in addressing these multifaceted challenges requires a holistic strategy, including clearer communication channels, and a proactive approach to anticipate and navigate the intricacies of corporate tax implementation in the UAE."