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Corporate Tax Planning: Key Techniques for Businesses in Dubai

Jun 9, 2023 | Accounting

No doubt you have heard of the new corporate tax system in the UAE. As of 01/06/2023, the new Corporate Tax rate of 9% could very well apply to your existing business (for full details, read our guide here). So you might be wondering what you should be doing with your corporate tax planning, and rightly so!

In this article, we’ll explore the ins and outs of corporate tax planning in Dubai, from understanding the UAE’s tax system and its recent changes to identifying key strategies that can help your business save money and operate efficiently. We’ll also discuss the importance of staying updated on tax laws and the benefits of seeking professional advice to keep your business on the right track.

A New Era of Taxation in Dubai

Implemented on the June 1 2023, the UAE Corporate Tax system is going to impact businesses operating in the country. Keep in mind that tax rates for companies in the UAE vary from 0-9% based on their taxable income.

To promote tax transparency and prevent harmful tax practices, the UAE introduced the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.

This legislation lays the groundwork for implementing a Federal Corporate Tax in the UAE, effective for financial years starting on or after the launch date.

The purpose of Corporate Tax is to tax the net income or profit of corporations and other businesses. Introducing this tax helps the UAE reach its strategic objectives, accelerate development and transformation, and maintain its commitment to meeting international standards.

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Who’s Affected by Corporate Tax and the Applicable Rates

Corporate Tax applies to different entities, such as UAE companies incorporated or effectively managed and controlled in the UAE, individuals conducting a business or business activity in the UAE, and foreign legal entities with a Permanent Establishment in the UAE.

UAE-incorporated companies like LLCs, PSCs, and PJSCs face Corporate Tax as resident persons. Foreign companies are considered resident persons for UAE Corporate Tax if they are effectively “managed and controlled” in the UAE.

Resident juridical persons are subject to UAE Corporate Tax on their income source from both the UAE and abroad, while non-resident persons are only subject to Corporate Tax on income from their Permanent Establishment in the UAE or income sourced in the UAE. The applicable Corporate Tax rates are 0% for taxable income up to and including AED 375,000, and 9% for taxable income exceeding AED 375,000.

Who’s Exempt from UAE Corporate Tax Law

Some businesses or organizations are exempt from Corporate Tax. These include Government Entities, Government Controlled Entities specified in a Cabinet Decision, Extractive Businesses, and Non-Extractive Natural Resource Businesses.

Moreover, businesses involved in extracting the UAE’s natural resources and certain non-extractive activities subject to Emirate-level taxation are outside the scope of UAE Corporate Tax, provided they meet specific conditions.

Exemptions from UAE Corporate Tax also apply to the UAE Federal and Emirate Governments, wholly Government-owned companies, businesses engaged in the extraction of UAE natural resources, Public Benefit Entities, Investment Funds, public or private pension or social security funds, and UAE juridical persons wholly-owned and controlled by certain exempted entities.

Having a good grasp of the UAE’s Corporate Tax system can help you plan effectively and take advantage of the opportunities offered by this attractive tax environment. To learn more, feel free to explore various resources on Corporate Tax for enterprises, freelancers, mainland companies, and general information about tax in Dubai.

Calculating Taxable Income under UAE Corporate Tax Law

Deductions under UAE Corporate Tax Law

To calculate your taxable income for a Tax Period, you’ll need to look at your accounting net profit (or loss) and make adjustments for specific items listed in the Corporate Tax Law. The Tax Period is usually the Gregorian calendar year, but it can be different if your business follows a unique 12-month period for financial statements.

Wondering about capital gains? They’re included in your annual taxable income just like any other income. And you can apply the realisation principle, meaning income is only taxable when a gain or loss is actually realised.

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Transactions with Related Parties and Connected Persons

Got transactions with Related Parties and Connected Persons, regardless of their location? Transfer pricing rules apply to your UAE business. Luckily, those double tax treaties we mentioned earlier can help you avoid double taxation on your income and ease the tax burden, especially for businesses with cross-border transactions.

Tax Loss Provisions under UAE Corporate Tax Law

In the UAE, a tax group is considered a single taxable entity, and the parent company takes care of administration and tax payments for everyone. To form a tax group, the parent company needs to own at least 95% of the share capital and voting rights of its subsidiaries. This offers benefits like better tax planning and reduced compliance costs.

You can also transfer tax losses between UAE group companies with at least 75% common ownership, provided they meet specific conditions.

Transfer of Losses under the UAE Corporate Tax

The corporate tax regime allows for exemptions or deferrals of corporate tax related to transferring assets or liabilities between group members. If your UAE resident companies have at least 75% common ownership, you can take advantage of intra-group transfer relief, subject to certain conditions.

And the good news doesn’t stop there. Tax deferrals are available for specific corporate reorganisation transactions, such as mergers and spin-offs. This means you can change your business structure or transfer assets without worrying about immediate tax implications, making it easier to grow and expand.

By understanding and managing taxable income under the UAE Corporate Tax Law, you can ensure your business operates within the legal framework while minimising your overall tax liability. Just stay informed about exemptions, deductions, transactions with related parties, tax loss provisions, and transfer of losses – and you’ll be on the right track!

Reliefs under UAE Corporate Tax Law

Tax Group Provisions under UAE Corporate Tax Law

Did you know that under the UAE Corporate Tax Law, businesses can form a tax group to help consolidate and simplify their tax compliance obligations? If you’re wondering whether your business is eligible for forming a tax group and aligning tax years, you can consult with corporate tax consultants in Dubai.

Benefits and Requirements of Forming a Tax Group under UAE Corporate Tax Law

Forming a tax group can help your business effectively manage its tax compliance and reporting obligations. However, it’s important to understand the requirements and benefits associated with joining a tax group.

For tax planning purposes, keep in mind the UAE’s international agreements, like international agreements for the avoidance of double taxation. These can limit the application of UAE Corporate Tax if there’s a conflict between the Corporate Tax Law and an international agreement. The Federal Tax Authority is responsible for the administration, collection, and enforcement of UAE Corporate Tax and other federal taxes. Meanwhile, the Ministry of Finance remains the ‘competent authority’ for the purposes of bilateral/multilateral tax agreements and the international exchange of information for tax purposes.

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Calculation of Corporate Tax Payable

The UAE Corporate Tax Law requires your business to calculate its corporate tax payable based on its taxable income for the relevant tax period. If you have a small business with revenue below a certain threshold, you can claim ‘small business relief’ and will be treated as having no taxable income during the relevant Tax Period.

You may also be subject to simplified compliance obligations.

Payment and Refund of Corporate Tax

Your corporation is required to pay its corporate tax liabilities according to UAE Corporate Tax Law. However, certain reliefs are available under the tax law to help you navigate your tax obligations.

For example, only individuals who engage in a business or business activity, as per a Cabinet Decision, will be subject to UAE Corporate Tax. Additionally, UAE holding companies are subject to UAE Corporate Tax, but dividends and capital gains earned from domestic and foreign shareholdings are generally exempt from Corporate Tax, subject to certain conditions.

Corporate Tax Group Relief for Companies

Investment funds and regulated UAE investment managers can also benefit from corporate tax relief under UAE Corporate Tax Law. Investment funds can apply to the Federal Tax Authority to be exempt from UAE Corporate Tax, subject to meeting certain requirements.

Regulated UAE investment managers can provide discretionary investment/asset management services to foreign funds and customers without creating a permanent establishment for the foreign investors or the foreign investment fund in the UAE, where specific conditions are met.

Understanding the various reliefs available under UAE Corporate Tax Law can help your business optimize its tax planning strategies and ensure compliance with tax obligations.

Compliance with UAE Corporate Tax Law

Dealing with taxes can be a headache, right? But having a clear understanding of UAE Corporate Tax Law can help your business in Dubai stay compliant and minimize tax liabilities. In this section, we’ll cover the important aspects of the law, such as registration and deregistration, tax returns, penalties, anti-abuse rules, and transitional rules.

Tax Registration and Deregistration under UAE Corporate Tax Law

Staying compliant with tax laws is important for effective tax planning in the UAE. To make sure you’re on the right track, assess your tax position and review your financial records. It’s a good idea to consult with tax professionals, like those providing VAT & Tax Consultancy services, to help your company follow UAE Corporate Tax Law.

Tax Returns and Clarifications under UAE Corporate Tax Law

Submitting accurate tax returns and clarifications is an important part of complying with UAE Corporate Tax Law. By keeping detailed records and using depreciation, you can help your business lower its tax liability and keep more of your hard-earned money.

Did you know that donating to approved sports clubs, taking advantage of VAT refunds, and choosing the right business structure can also help? Staying informed about changes in tax laws is key to ensuring timely and accurate tax returns.

Violations and Penalties under UAE Corporate Tax Law

Nobody wants to face penalties and fines, right? To avoid these consequences, invest in proper tax planning strategies. Maximizing deductions, planning for retirement, and considering tax-free zones can help your business minimize its tax burden and maximize after-tax income.

Hiring a tax professional is a great idea, too. Obtaining a UAE tax residency certificate can also benefit your business by avoiding double taxation.

Anti-Abuse Rules under UAE Corporate Tax Law

The UAE Corporate Tax Law has some restrictions on tax planning strategies to prevent abusive tax practices. By staying informed about these anti-abuse rules, you can ensure compliance and avoid penalties.

Working with a tax professional can help your company navigate these restrictions and develop tax strategies that follow UAE Corporate Tax Law.

Transitional Rules under UAE Corporate Tax Law

As tax legislation evolves, transitional rules might be introduced to help businesses adjust to new rules and regulations. Understanding these rules is important for businesses in Dubai to stay compliant with UAE Corporate Tax Law and avoid penalties.

Keep an eye out for updates and changes in legislation. Consulting tax professionals can help ensure a smooth transition to new tax regulations and proactively manage your tax liabilities, minimize risks, and maximize your financial success.

Consult with the Best Corporate Tax Advisors in Dubai

Maintaining Accurate Records for Effective Tax Planning

A great starting point for your tax planning is to begin maintaining accurate records of your income and expenses. This way, you can take advantage of all the deductions and credits available to you. Plus, it helps you monitor your financial progress, cash flow, and make informed decisions about your business.

Utilising Tax-Advantaged Accounts and Strategies

Did you know that tax-advantaged accounts, like contributions to a qualifying pension plan or retirement account, can help reduce your tax burden in the UAE? That’s because these contributions can be claimed as a tax deduction, up to a certain limit, lowering your taxable income and reducing your tax bill. So, why not invest in tax-advantaged accounts and strategies to maximize your financial growth while minimizing tax liability?

Investing in Tax-Free Zones and Business Structures

The UAE is famous for its tax-free zones, such as the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). Businesses in these zones are usually exempt from income tax and VAT. By investing in these tax-free zones, you can save a significant amount on tax payments.

But remember, it’s important to choose the right business structure, like setting up a branch or representative office of a foreign company, to fully enjoy these benefits.

The UAE also has tax treaties with several countries, which reduce or eliminate taxes on specific types of income, such as dividends, interest, and royalties. Understanding and leveraging these treaties can be a game-changer in your tax management strategy.

Compliance and Keeping up with Changes in Tax Laws

To effectively do your corporate tax planning, always stay compliant with tax laws in the UAE. Non-compliance can lead to penalties, fines, or even legal trouble. And since tax laws and regulations change often, keeping up with these changes and adapting your business practices is crucial. If you need help understanding how the UAE tax system compares globally, it’s a good idea to consult professional tax advisors.

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Donations and VAT Refunds to Reduce Tax Burden

Want to lower your tax burden in the UAE while supporting the local community? Charitable donations and sporting initiatives are your answer. Donations to approved sports clubs are tax-deductible up to a certain limit.

You can also claim deductions on business expenses, education expenses, and charitable donations to reduce your tax burden.

What’s more, if you’re a non-resident of the UAE, you might be eligible for a VAT refund on purchases made in the country. This allows you to recover some of the VAT paid and reduce your overall tax burden. Navigating the VAT refund process can be challenging, so working with a professional tax advisor can help you maximize potential savings.

Harness the Power of Dubai’s Tax System for Business Success

Congratulations! You’ve made it to the end of this comprehensive guide to Corporate Tax planning for businesses in Dubai. Now it’s time to harness the knowledge you’ve gained to make well-informed decisions and take advantage of Dubai’s business-friendly tax environment.

Remember, the key to success lies in understanding the UAE Corporate Tax system, staying compliant with the laws, and employing effective tax planning strategies. By doing so, you’ll ensure a smoother journey in growing your business and maximizing your financial success.

However, navigating the complexities of the tax landscape can be challenging. That’s why it’s crucial to partner with top-notch corporate tax advisors who can guide you through the process and help you stay compliant while maximizing your tax savings. So why wait? Elevate your business to new heights in Dubai by leveraging the power of its tax system!

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