UAE corporate tax: Recent updates for SMEs and free zones explained

It will be your decision to opt in or out of tax. Be certain of what ground you’re standing on. Silvia Razgova / The National

Last week, a document, more than 100 pages long, was published by the Federal Tax Authority (FTA) on free zones and corporate tax.

We will take a look at what was clarified and anything new that can be gleaned. There are practical examples sprinkled throughout to guide readers.

This article will focus on small and medium enterprises. I want to start with what they should be doing collectively. None of us are as good as all of us.

As always, these large releases have constraints on what might be interpreted. When you consider the potential permutations and perspectives not yet understood, it’s reasonable to allow some latitude.

However, for fairness, the regulatory authorities, the courts and appeals mechanisms will over time formally clarify misunderstandings or gaps in our knowledge. It should be possible for those reporting under the corporate tax regime to give feedback to its questions.

It would be ideal if we had a matrix solution – one set of panels representing various industries and a similar structure by area of effect of law. Yes, there would be an element of duplication but it would ensure a more complete feedback solution.

This would be a forum to ask grounded questions. Uncertainty is the enemy of a smooth and efficiently operating economy.

Critically, it must be understood that these forums are not going to produce instant answers. Their purpose is that serious businesspeople get to ask difficult questions and know that these are being received, reviewed and potentially addressed. Experienced people understand that some things take time and many elements need to be brought together to move forward.

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  The UAE issued its federal corporate tax law that will levy a headline 9 per cent rate on taxable income exceeding Dh375,000. Silvia Razgova / The National

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  Taxable income below the aforementioned threshold will be subject to a 0 per cent rate of corporate tax. Chris Whiteoak/ The National

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  No corporate tax will apply on salaries or other personal income from employment — be it in the government, semi-governmental, or private sector, the Ministry of Finance said. Chris Whiteoak/ The National

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  Businesses will become subject to the UAE corporate tax from the beginning of their first financial year that starts on or after June 1, 2023. Victor Besa / The National

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  The UAE corporate tax regime builds from best practices globally and incorporates principles that are internationally known and accepted. Victor Besa / The National

There is an existing process within the VAT framework that allows for feedback and clarifications. However, it’s unwieldy and effectively driven by individual approaches. It potentially suffers from the inefficiency of each new engaging party understanding the process.

Overtly legalistic language is the minimum issue you face with utilising this channel. I have heard some say they feel like they are being asked to make a first draft of a formal piece of tax legislation to the issue they are facing. Imagine going to hospital and prepping yourself for surgery.

New guide

On picking up the newly released Free Zone Persons Corporate Tax Guide, I would advise starting with the legislative references. This gives you guidance on the document's starting position. It might even inspire you to find, print and review one or two of them.

In some cases, these are the smaller three or four-page releases that in themselves might not have made sense when published. Remember that corporate tax law is a highly complex jigsaw puzzle.

Free zone entities have to elect not to pay corporate tax and having done so, are excused for that annual reporting period and the following four periods.

If the same entity is found to be in breach of the conditions that permit this, it becomes taxable in the period of failure and the subsequent four periods.

A penalty that locks an entity into paying tax for a number of years might seem appropriate, but why lock an entity into not paying for the same period? Surely we are likely to see entities being reset, closed and reopened, to mitigate such sanctions? There can be very good reasons to choose to pay taxes.

Let’s unpack transactions with natural persons. That’s you, the human being, reading this article. If you purchase something in a qualifying free zone that is delivered by a qualifying free zone entity, the revenue is deemed to be an excluded activity.

This means tax is not payable by the supplier on its sale price.

The rules for juridical entities are different. Juridical means any entity that exists because a licence says it does. Juridical entities cannot and do not read newspapers.

For businesses that operate single physical standing businesses in free zones, this is important. Substance is reasonably easy to prove. You have a shop that's been fitted out. It has the personnel required to operate it. Customers walk in your business’ front door to purchase your goods or services. It’s likely that the ultimate owner is present, therefore all strategic decisions can be said to be made there.

Does marketing outside the free zone invalidate your ability to elect not to pay tax? No. Can you sell a certain amount of product outside the boundary? Yes, up to 5 per cent of total sales. Keep in mind you will need to bifurcate your turnover. How good are you at keeping accounts currently? Be honest.

It will be your decision to opt in or out of tax. Be certain of what ground you’re standing on.