UAE corporate tax: Why it pays to get ahead of potential requirements as deadline nears

Get off to a flying start with the new tax. The corporate tax will be introduced in the UAE in June this year. AP

I held two documents in my hands when writing this article. In one was the public consultation document on the UAE’s corporate tax, released in April 2022. In the other, the corporate tax decree law, released in December 2022.

While the former is half the length of the latter, there is much in the former that is missing in the latter, leaving many unanswered questions.

To put things in perspective, when the value added tax was launched, there were three separate pieces of legislation — nearly 200 pages in total. Today, we have about 60 pages for the corporate tax that will be introduced in the UAE in June this year. There are also three short Cabinet decisions.

Juggling between the two documents, let’s examine elements of what was hinted at, what has been legislated and the questions that arise for which legal clarity is still awaited.

One recommendation to manage onshore versus offshore trading might be to set up an onshore branch entity. The public consultation document says that an onshore branch entity can be taxed in its own right, while the offshore parent can continue to benefit from zero per cent corporate tax.

However, the decree law states that parent and child (branch) will be treated as one and the same taxable person. Some serious legislative gymnastics will be required to bring us back to the clearly stated position of the public consultation document.

One solution would be to utilise the definition of qualifying income. This right exists as a Cabinet decision within the decree law under Article 18.1.b. However, the implications are, to put it mildly, messy.

The easy part would be to clearly identify an entity’s taxable revenue. However, costs deductible against that would almost certainly be attributable to both taxable and non-taxable revenue.

Effectively and legally, business owners would be required to keep two separate sets of books. Both would need to be fully auditable.

How many businesses currently have that level of sophistication?

Until now, an external audit was only required in certain locations. The public consultation document stated it would become a requirement for any entity seeking to sit outside the corporate tax regime.

The number of authorities that issue trade licences are increasingly making this a standard requirement. One such example is the Dubai Multi Commodities Centre, which very recently announced that all its licensed entities would be required to settle salaries through the Wages Protection System (WPS). The centre already requires an external audit.

The decree law only states that the minister will, in the future, decide which categories of taxable persons will require an external audit.

A logical conclusion is that the UAE’s commercial evolution will involve the creation of a UK equivalent of Companies House, probably with all the periodic reporting and transparency that comes with it.

What I have read convinces me that all entities should prepare to conduct an annual audit. Whether or not the right to enforce the requirement is explicit, there is a reading of the decree law that implicitly may require one on demand.

My advice: Have an external audit conducted for the 12-month period before the corporate tax begins to take effect. For most, this would be January to December 2023. A formal external review of the opening position of your entity ahead of the corporate tax can only be useful.

Getting ahead of potential requirements is often the best preparation.

Here’s an example of where the two documents did what was expected of them.

The public consultation document succinctly addressed the question of commercial permanent residence in the UAE. It clearly defined the purpose of doing so and the rights accrued to the UAE.

In the decree law, under Article 14, containing seven detailed clauses, clarifying details were laid out.

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

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

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

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

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

Yes, there will still be some questions, but we know enough to make informed decisions.

If there is one thing missing in both the documents that I would have liked to see, it is the rules for changing one’s tax year. Under the corporate tax, we know it will be your accounting year. This is normally defined in your formation documents, typically your Articles or Memorandum of Association.

Generally, the two default positions are to use calendar year or date of formation, more often than not the former.

The process of changing your accounting year would be as per the rules of your trade licence issuing authority. Typically, it would be an amendment to the formation documents, maybe an updated version or a formal board minute.

To avoid entities gaming the system — moving their annual accounting year to May 1 — meaning that the corporate tax would not apply to them until May 2024, it’s not inconceivable that a lockout period for changes could be announced.

Once launched, will changing tax year entail a new process? A corollary question, has anyone changed their VAT reporting period? I’m not aware of anyone who has done so.

David Daly is a partner at the Gulf Tax Accounting Group in the UAE