UAE Corporate Tax Compliance Issues and Solutions
Tax is not a new word for businesses or individuals, but corporate tax is completely new to UAE businesses and individuals, too. Let’s understand more about corporate tax, when it came, how it's impacting businesses, registration deadlines, corporate tax filings, associated penalties, and other compliances relating to corporate tax. In this article, let us demystify the intricacies of Corporate Tax and major compliance to be taken care of in UAE Tax Law.
As part of global compliance and matching with the global standards of taxation, the UAE introduced Corporate Tax on 01 June 2023. The Corporate Tax is applicable for businesses in UAE and there is no personal income tax levied in the country. To support the business, UAE chose one of the lowest tax rates around the globe along with many benefits like indefinite loss transfer, 0% Corporate Tax on profit up to AED 375,000, Small Business Relief etc.
Who will be falling under corporate tax? So, they categorized in 2 ways:
- Natural person- There is no corporate tax on salary or personal income. If someone doing business exceeds the revenue of 1 million dirhams in a Gregorian calendar year are subject to Corporate Tax.
- Juridical person- It is mandatory for every business, doesn’t matter how much revenue or how much profit you are generating. The effective Corporate Tax rates can be from 0% to 15%. 0% Corporate Tax benefits can be availed by Qualifying Free Zone persons whereas 15% Corporate Tax is applicable for MNEs whose global turnover is more than 3.15 Billion Dirhams ( OECD Pillar 2)
Corporate Tax Registration:
Every company in the UAE must register for corporate tax, if any company is established after 1st March 2024 then within 3 months from the date of license issuance, needs to register else the penalty is 10,000 AED. If a company (Mainland or free zone) is established before 1st March 2024 then, FTA (Federal Tax Authority) issued a deadline for registration, irrespective of the year of establishment just look at the month of incorporation. This clarification has been published through FTA Decision No.03 of 2024. Read more
Corporate Tax Return Filings
The UAE’s corporate tax law comes with 3 slabs 0%, 9%, and 15%. If a company’s net profit is below 375, 000 AED then it is 0%, on the other hand, if it is above 375,000 then needs to pay a 9% tax or (15% for MNCs with certain conditions) on taxable income exceeding 375,000 AED. Now, companies adapt to this entirely new framework, they are required to understand a few things;
- Register for corporate tax with the Federal Tax Authority (FTA),
- Calculate their taxable income accurately, and
- Submit tax returns within stipulated deadlines.
Once you have done with the corporate tax registration process, you need to file a return within 9 months from the end of your financial year.
If anyone fails to comply with these requirements they can lead to huge penalties, reputational damage, also with some other operational disruptions. Below, is a list of specific challenges encountered related to corporate tax, how to overcome them?
Some Common Corporate Tax Compliance Challenges in the UAE
1. Failure to Register for Corporate Tax on Time
The first step in corporate tax compliance is timely registration with the FTA (Federal Tax Authority). Meeting the deadline for Corporate Tax registration is equally important for new entities as well as existing businesses registered in the UAE.
While registering for Corporate Tax, certain things are very crucial like the election of tax period, declaration of branch details, if any, correct legal type etc. Wrong Corporate Tax registration can lead to administrative penalties and future legal implications. A tax agent or tax agency can take care of Corporate Tax registration and make sure that none of the details presented are wrong.
2. Inaccurate Calculation of Taxable Income
This is the second step that businesses should calculate taxable income. Need to have a look at it-
- Misclassifying expenses or revenue,
- Overlooking allowable deductions, or
- Inaccurate financial reporting.
If you are calculating any wrong amount then it may lead to incorrect tax filings and also result in paying unnecessary tax or incurring penalties for underreporting.
In order to comply with tax regulations and timely filing, it is always recommended to have an experienced tax agency that works on your business tax filings. A Tax Agency can appoint qualified agents for your company who make sure that the tax calculations are error-free and that all the adjustments to the UAE Corporate Tax Law have been taken care of.
3. Missing Tax Filing Deadlines
As per the UAE Corporate Tax Law, the businesses must submit the Corporate Tax return within 9 months from the end of the tax period. Delays in tax filings can lead to hefty administrative penalties along with interest payments on tax due.
How to cope with this?
Keep a well-organized system for record-keeping which ensures that all necessary documentation is in place for timely return filing.
4. Improper Record-Keeping
The FTA requires that all businesses must maintain proper records and relevant documentation for their tax filings, including:
- Financial statements,
- Contracts,
- Receipts, and
- Any other relevant tax-related documents.
Keeping all records which are related to the tax filing is very important. Missing documents identified during the tax audit can lead to administrative penalties. Along with your Corporate Tax filing, a tax agency can maintain your records pertaining to your tax computation. As per the Corporate Tax Law, all the records must be maintained for a minimum of 8 years.
5. Overlooking Double Taxation Avoidance Agreements (DTAAs)
For UAE businesses that are engaged in cross-border activities, then overlooking the benefits of Double Taxation Avoidance Agreements (DTAAs) can lead to unnecessary tax liabilities. The UAE has signed DTAAs with multiple countries to prevent businesses from being taxed twice on the same income. So, for a better understanding of DTAAs consult a tax agency or a professional with expertise in international tax to analyze the relevant DTAAs for you and understand how they impact your tax liability. With the help of proper guidance, your business can leverage these agreements to reduce the risk of double taxation.
Don’t panic about these new taxation rules in the UAE, Flying Color Tax Consultants will assist you in taxation, accounting, auditing, and any queries related to tax. While focusing on your core business, you can hire an expert for your business to keep track of everything about taxation it could be anything like Corporate Tax, VAT, accounting and bookkeeping, audit services, etc.
To learn more about Stuck with Corporate Tax Compliance Challenges in the UAE?, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.