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A free zone will receive a tax benefit of 0% CT if it maintains sufficient substance and complies with all regulatory requirements.
Inayat-ur-Rahman, business editor
The UAE is introducing a competitive corporate tax regime (CT regime), effective from 1 June 2023 or later. The CT regime is based on international best practices to deliver on its commitment to adopting international standards of tax transparency and preventing harmful taxation. In addition, it will provide the basis for implementing the global minimum effective tax rate proposed by the OECD BEPS project “Pillar 2”.
The scope of the CT regime is broad and includes all businesses throughout the UAE, with the exception of businesses involved in the extraction of natural resources, which are subject to emirate-level taxes. Taxpayers include legal entities and natural persons.
Tax Arslan Mushtaq, partner at athGADLANG, revealed this in an exclusive interview with Gulf Today.
“The UAE is introducing a 9% CT regime, which is the lowest in the GCC, compared to 20% in Saudi Arabia, 15% in Oman, 15% in Kuwait and 10% in Qatar. CT rates from 0 – AED 375,000 0%, adjusted accounting net profit was 9%,” Mushtaq added.
He mentioned that the 0% CT tax rate will greatly reduce the pressure on the start-up and SME sector in the UAE. Large multinational corporations will have different tax rates, which will be announced later. CT does not apply to employment income and other income such as dividends and rental income from real estate investments in the UAE.
“If the free zone maintains sufficient substance and complies with all regulatory requirements, the free zone will receive a tax benefit of 0% CT. In addition, for certain domestic and cross-border payments that do not require the filing of a withholding tax return, a 0% tax benefit will apply. Withholding tax. UAE businesses will receive foreign tax credits on tax paid on income earned outside the UAE under its extensive network of double tax treaties.”
“As such, the CT regime will solidify the UAE’s position as a leading global business centre, attract foreign investment and actively support the UAE economy.”
“The UAE Ministry of Finance has released a public consultation paper outlining the CT law. CT will have an impact on key business functions, including accounting, IT systems, human resources and legal. Therefore, businesses operating in the UAE must Participants involved and consulted key departments to develop a CT implementation roadmap for smooth and timely CT implementation.”
Legal structure: The CT regime will tax both resident and non-resident businesses, which will adversely affect their profits. To address this impact, the current legal structure must be assessed to identify optimization opportunities and undertake the required restructuring.
Capital structure: The public consultation paper outlines a deduction of interest expense to 30% of EBITDA in accordance with the interest restriction rules proposed in the OECD BEPS Project Action 4. Therefore, the capital structure must be assessed to ensure a balance of debt and equity. In addition, interest expenses payable to related parties must be equitable and deductible only when there is a legitimate business reason.
Business models and contracts: CT will have an impact on existing business models, as suppliers may increase prices to mitigate CT impacts that have a direct impact on existing profits and business bottom lines. Therefore, existing contracts (sales and purchases) must be evaluated and modifications required to maintain current profitability.
Accounting Consideration: CT will be calculated based on the adjusted accounting net profit (or loss) reported in the financial statements prepared in accordance with accounting standards and principles accepted by the UAE. Key considerations and adjustments businesses should consider, such as the tax implications of fair valuation unrealized gains and losses and impairments, provisions, bad debts, depreciation costs, etc.
Process optimization: The CT regime will have a significant impact on existing processes and systems. Existing accounting processes must be assessed for the quality of tax data and the adequacy of documentation. Additionally, existing IT systems must be assessed and upgraded as necessary to support CT implementation.
Compliance Obligations: The CT Regime will have compliance obligations for CT registration, filing CT returns and record keeping requirements for similar businesses. A roadmap for CT implementation must include a timeline of CT obligations and an assessment of current document management systems, as non-compliance can have significant adverse effects.
“It is already clear that corporate tax will be implemented in the UAE, and now is the time to implement the required changes,” concluded Mushtaq.
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