UAE corporate tax: Know the distinction between personal and business assets

Make sure you have the correct documentation to avoid making a costly mistake

Like VAT, the correct supporting documentation is required for any corporate tax deduction against taxable income. Silvia Razgova / The National

Today, I want to address two issues – property and dubious suppliers.

One of the modern miracles of the UAE is the speed at which it has developed, in particular regarding property – personal and commercial. Many of you may have purchased one or more.

Now that corporate tax is live, the question of what is personal and what is business has become a pressing one.

There are many who have been using juridical entities, placing one or more of their assets within. Each location may have its own entity.

There can be good structuring reasons for this. Simply, with no tax on earnings, it's a useful tool for day-to-day management and nicely produces a profit and loss statement.

Misreading corporate tax law has led some to liquidate these entities, returning ownership to a natural person. The reasoning is that individuals do not pay income tax, unlike entities.

This argument might hold weight if there were just one property, one that wasn’t multistorey and mixed-use. However, it might still be difficult to defend moving ownership from a legal entity to a personal one.

Corporate tax has anti-avoidance provisions. Their purpose is to allow the relevant regulatory authority sufficient scope to prevent both the letter and the spirit of the law from being undermined.

The above example would appear to be driven by a desire to avoid the payment of tax.

Any decision that an infraction has occurred that isn't specifically outlined in legislation may be challengeable in court.

In jurisprudence, there is something called equity, where the spirit of the law can be considered. However, there is caution: such matters are rarely black and white.

There’s one additional element to consider. Ministerial Decision No. 120 of 2023 on Transitional Rules for Corporate Tax creates a time stamp after which such a change has tax implications.

The critical piece is the fiscal year of the juridical entity. I’m still finding that people make unsubstantiated claims as to what this is. With so many entities still not registered for corporate tax, it’s a reckless act to make assumptions without validating this key date with the Federal Tax Authority.

Next, there is another query asked of me that raises more questions than I could provide answers to.

It’s not unusual to have that one supplier who seems unable to provide formal paperwork relating to his business.

By this I mean a trade licence or a VAT certificate. In the case of the latter, as long as VAT is not being charged, the issues are minimal. Or so you might think.

It’s not enough to quote a VAT number on an invoice. The official certificate should also be provided by your supplier the first time you trade. This you should file away carefully alongside each original paper invoice.

Reclaiming VAT charged to you demands that you are confident that all is in order with those bills. You will face penalties for invalid claims.

This brings us to corporate tax. Like VAT, you are required to have correct supporting documentation for any deduction against taxable income.

Starting with the principle that ignorance of the law is no defence in law, what happens when it’s discovered that a supplier’s invoices are invalid, for example by virtue of the entity not legally existing or trading within its licensing under UAE laws?

How would this be discovered, I hear you ask? During an audit by an intrepid, proactive and curious inspector.

Fine, you may reply, but we have thousands of transactions and this kind of issue is only likely to arise among smaller values of goods or services. Surely an inspection will focus on the larger numbers?

While this is generally true, do you really want to be the one who gets caught?

OK, what would happen if we were found out? The deduction would be disallowed; there will probably be a penalty. What follows are the kickers.

This inspection will likely occur a few years after the submission of that corporate tax return. Firstly, you will owe interest on the amount of tax you should have paid. You are open to potential per-incident penalties – yes, one for each mistaken claim.

Finally, and of greatest impact, confidence that your supporting documentation is in order will have just dissipated. This could get expensive financially, particularly if you are sensible and monetarily value you and your team’s time.

The questions and actions I’m seeing and hearing tell me the UAE is not very prepared for what is already happening.

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