Inayat-ur-Rahman, Business Editor

The UAE is introducing a competitive corporate tax regime (CT regime) effective for year end starting on or after  June 1, 2023. The CT regime is based on international best practices to meet its commitment to adopt international standards for tax transparency and preventing harmful tax practices. In addition, it will provide the basis to implement the global minimum effective tax rate as proposed under “Pillar Two” of the OECD BEPS project.

 The scope of the CT regime is wide and includes all businesses across all Emirates with an exception for businesses involved in the extraction of natural resources which are subject to Emirate-level taxation. Taxable persons include legal entities and natural persons.

This was revealed by  Arslan Mushtaq, Partner Tax at athGADLANG, during an exclusive interview with Gulf Today.

“The UAE is introducing a CT regime with 9% which is the lowest in the GCC when compared to Saudi Arabia at 20% , Oman at 15%, Kuwait at 15%, and Qatar at 10%. The CT tax rate will be 0% for Dhs 0 - 375,000 and 9% on adjusted accounting net profits,” Mushtaq added.

He mentioned that the 0% CT rate will be a significant relief for start-ups and the SME sector in the UAE. There will be a different tax rate for large multinational companies which will be announced later. The CT will not apply to employment income and other income like dividends and rental receipts from UAE real estate investments.

“The free zone will have a tax incentive of 0% CT if they maintain adequate substance and comply with all regulatory requirements. Also, 0% withholding tax will be applied to domestic and cross-border payments for certain payments with no obligation to file a withholding tax return. There will be Foreign Tax Credit” for the tax paid by UAE businesses on income earned outside the UAE under its extensive network of double tax treaties.”

“As a result, the CT regime will cement UAE’s position as the leading global hub for business, attract foreign investments and support positively the UAE economy.”

“The UAE Ministry of Finance, UAE has issued a public consultation document that gives an overview of the CT Law. The CT will have an impact on key business functions including accounting, IT systems, HR, and legal. Thus, the businesses operating in the UAE must develop a roadmap for CT implementation by engaging key stakeholders and consulting the key departments to achieve a smooth and timely CT implementation.”

Legal structure: The CT regime will tax residents and non-residents businesses which will have an adverse impact on their bottom lines. To navigate this impact the current legal structure must be assessed to identify optimization opportunities and carry out the required restructuring.

 Capital structure: The public consultation document has outlined the interest expense deductibility to 30% of EBITDA in line with the interest limitation rules proposed by Action 4 of the OECD’s BEPS project. Therefore, the capital structure must be assessed for the right balance of debt and equity. Further, interest expense payable to the related party must be at arm’s length and will only be deductible if there is a valid commercial reason.

Business model and contracts: The CT will have an impact on the existing business model as suppliers are likely to increase their prices to mitigate the CT impact which has a direct impact on the existing margins and bottom line of a business. Thus, existing contracts (sales and purchase) must be evaluated and required amendments incorporated to maintain the current profitability.

Accounting consideration: The CT will be calculated based on the adjusted accounting net profit (or loss) reported in the financial statement prepared under accounting standards and principles accepted in the UAE. The key considerations and adjustments a business should consider like unrealized gains and losses on fair valuation and tax impact of impairments, provisions, bad debts, depreciation cost, etc.

Process optimisation: The CT regime will have a significant impact on existing processes and systems. The existing accounting process must be assessed for tax data quality and adequacy of the documentation. In addition, the existing IT system must be evaluated and upgraded if necessary to support the CT implementation.

Compliance obligations: The CT regime will have compliance obligations for a business-like CT registration, filing the CT returns, and record-keeping requirements. The roadmap for CT implementation must include timelines for CT obligation and evaluation of the current document management system as Non-compliance can have significant adverse impacts.

“The corporate tax will be implemented in the UAE has become clear and the time to implement the required changes is now,” Mushtaq concluded.