The UAE has long been a land of opportunity for startups with a strategic global location, world-class infrastructure, and a tax-free environment before 2018. Recently, several new initiatives have been designed to align the commercial landscape with international best practices, improve the ease of doing business, and diversify the country’s revenue. After VAT was introduced in 2018, we now have the new corporate tax, which will be applicable for financial years starting on or after 1 June 2023. For some entrepreneurs, this has caused a level of uncertainty.

 

It is true that startups, like all companies, need to be aware of the corporate tax rules, understand their implications, and factor them into accounting processes. However, a lot of information is circulating from different sources, which can be overwhelming and misleading. A trusted accountant can easily help you navigate the regulations so you can continue to thrive.

 

Here is an overview of what we know right now:

 

When does the rule come into effect?

 

Businesses are subject to corporate tax with financial years on or after 1 June 2023. You should refer to your company registration documents and/or memorandum of association (MOA) to check when your financial year is. Most companies have a year-end of 31 December, meaning the rule would not be effective until 1 January 2024. For these businesses, the first return and payment is due nine months after their year-end. For businesses with a year-end of 31 December 2024, it would be due by 30 September 2025.

 

What is the threshold for payment?

 

Corporate tax will be levied on annual taxable profits above Dh375,000 at a standard rate of 9%.

What if my company is registered under a free zone?

Where the free zone offers tax-free incentives to register, these will be honoured by the FTA resulting in a 0% rate, subject to the requirements. One of these requirements is that the company has qualified income. If your company is trading on the mainland for example, you would not be eligible for exemption. It is important to note that we are still awaiting clarifications on the qualifying income definition for free zones.

 

As per the legislation, to be considered a qualifying free zone person, you must:

• maintain adequate substance in the UAE
• derive ‘qualifying income’
• not have made an election to be subject to corporate tax at the standard rates
• comply with the transfer pricing requirements under the corporate tax law

What to consider as an owner-managed company

 

Owner-managed companies, including sole traders, partnerships, and limited companies where the owner(s) oversee the daily running of the business will not be able to draw inflated salaries above market rate to reduce their tax liabilities. Salaries need to be arms-length i.e. aligned with the standard market rates.

 

What tax relief is available for SMEs?

 

The UAE Ministry of Finance announced the introduction of the Small Business Relief for Corporate Tax Purposes, intended to support startups and other small or micro businesses by reducing their corporate tax burden and compliance costs. 

 

Some of the key takeaways are as follows:

• This applies to mainland businesses

• Taxable persons can claim small business relief where their revenue does not exceed Dh3 million for each tax period

• The small business relief will only apply until December 2026

• Owners of multiple entities cannot split your businesses into separate licences to artificially claim the small business relief for each entity

• Tax losses will not be carried forward for subsequent periods

• Multinational companies will be exempt from tax relief if the group revenues are more than Dh3.15 billion

Accounting requirements

 

UAE businesses subject to corporate tax, including free zone companies, are required to register, obtain a tax registration number and file a tax return.

Businesses registered for VAT and adhering to the VAT laws are likely to cover the basics, such as keeping accounting records and issuing and collecting tax invoices. However, there are areas you will need to build on for corporate tax. These include:

• Amending the chart of accounts in your accounting system to record claimable and non-claimable expenditure

• Making sure that all expenses claimed are in the name of the business and for business purposes

• Although audited financial statements have not yet been mandated, keeping audited financials is good practice and will strengthen credibility in the eyes of tax authorities

• Engaging with tax advisors and consultants to review accounting policies and processes to ensure you are tax compliant and efficient

Generally speaking, small businesses will need around one to two months to prepare for corporate tax, whereas larger businesses will need three to six months.

 

Finally, there are still some grey areas that need to be considered, such as the “qualifying income” definition for free zones. We are also still waiting to determine the requirements for audited accounts and what information needs to be submitted on tax returns. It is wise to engage a trusted tax consultant who can dvise on how to prepare and proceed in more detail. The Federal Tax Authority (FTA) website is also an excellent resource for educating yourself on corporate tax.