Are You Prepared for the Federal Corporate Tax Regime in UAE?
The UAE Ministry of Finance (MoF) on 31st January 2022 announced the introduction of a federal corporate tax (CT) which will be effective for financial years starting on or after 1 June 2023. Though the actual UAE tax legislation is not yet finalized, businesses must undertake certain immediate actions based on the information available on the website of MoF and the Federal Tax Authority.
Reviewing Corporate Structure
The guidance provided on these websites along with international best practices can help businesses get prepared for a smooth transition to the new CT regime. A critical review of legal structure and business operation is advocated before the enforcement of CT legislation because free zone entities will continue to enjoy subject to certain terms and conditions. Hence a review of corporate structures of Free Zone and mainland entities becomes immensely important for the appropriate planning and implementation of tax optimisation and tax mitigation strategies.
The Public Consultation Document provided some guidelines about the CT impact on free zone business entities which are registered in free zones. In the event of income generated from international sources and the same or any other free zones, the free zone entity will be exempt from CT. However, if the income is generated from the mainland branch of the free zone entity or other mainland entities, the income will attract tax at a 9% CT rate. The passive income generated from the mainland entities including interest, royalties, dividends and capital gains on the sale of shares held in the mainland companies will also be exempt from CT.
Transactions between free zone entities and their mainland group entities will be free of CT. However, payments made by mainland entities to the Free Zone establishments will attract CT. A Free Zone entity with a mainland branch will only be taxed on mainland sourced income but will enjoy a CT holiday on its Free Zone offshore income. All free zone entities must remain compliant with all applicable regulatory and statutory requirements to avail of CT exemptions.
A prudent tax planning therefore must begin with an immediate review of corporate structures of both mainland and free zone entities and the agreements for such transactions. In case a free zone entity derives a large % of revenue from a mainland company, it will be wise for that entity to incorporate a mainland branch for tax optimization. Similarly, a mainland business having a significant free zone derived revenue must explore the possibility of channelling part of the same to a free zone entity.
Planning About Transfer Pricing
As UAE announced the Transfer Pricing (TP) requirements to be aligned with the OECD TP guidelines and documentation requirements, the Free Zone entities that are part of a group having more than one legal entity and intend must plan about TP on priority.
The OECD TP guidelines require the connected persons, commonly referred to as related parties, to deal with each other at arm’s length and it needs considerable documentation to prove that arm’s length measures are being rightly taken care of. Just raising an invoice for intra-group transactions may not be sufficient to prove the authenticity of the transactional value and Intra-group transactions of goods and services must be supported by contractual agreements requiring planning and reviews. The business entities must review and define their TP policies for intercompany transactions.
Planning for Preparation of Financial Statements
The UAE CT rule mandates audited financial statements, particularly for the free zone entities who seek to enjoy CT holidays. The audited financial statements must be prepared as per the international financial standards, GAAP and must have objective evidence of documentation for intra-group transactions. All such entities must work with a qualified and experienced Corporate tax advisory in UAE to ensure that the financial statements comply with the law.
Before the enactment of new corporate tax laws, all businesses in UAE must review the financial and legal aspects of their businesses to assess risks and opportunities
How can IMC Help?
Effective tax planning is indispensable for saving taxes and availing of all relevant tax deductions. It is thus important for businesses to hire a professionally qualified and well-reputed Corporate tax advisory in Dubai, UAE like IMC group who can help your business prepare for the UAE CT and ensure a smooth transition to the next financial year. As your tax consultant, IMC can assist you in a high-level impact assessment, in both qualitative and quantitative terms, of the introduction of CT and TP, based on the existing legal and operational structure and carry out a detailed analysis to identify restructuring and optimisation opportunities. IMC can also help amend contracts and other legal agreements during CT implementation and review and implement necessary TP policies for your business including carrying out TP risk and opportunity analysis. During post-implementation, IMC will support your business during CT registrations and help prepare and submit CT returns and TP documentation.