The Federal Tax Authority (FTA) has issued Decision No. 7 of 2024, introducing a vital extension for filing Corporate Tax Returns and settling Corporate Tax Payable for specific taxpayers. For businesses incorporated, established, and recognized on or after 1st June 2023, with the tax period ended on or before 29th February, the new Corporate Tax Return and payable deadline is 31st December 2024.

Corporate Tax Filing: Penalties for Non-Compliance

Failing to meet the filing deadline can lead to severe financial consequences for your business. Understanding the penalties associated with non-compliance is essential:

• Non-filing Penalty: Businesses that fail to submit their tax returns on time will incur a penalty of AED 500 per month for the first 12 months. After this period, the penalty increases to AED 1,000 per month. This cumulative effect can lead to significant financial burdens over time.
• Failure to Settle Payable Tax: In addition to filing penalties, any outstanding tax amounts will attract a 14% annual penalty, which is calculated monthly. This penalty applies to the total payable tax that remains unsettled after the deadline, further compounding the financial implications for non-compliant businesses.

Preparing for Your Corporate Tax Filing

As the deadline approaches, it becomes increasingly important for businesses to ensure they are fully prepared for their corporate tax filing. Here are several strategies to help you get ready:

1. Gather Your Financial Documents: Start by collecting all necessary financial statements, invoices, receipts, and other relevant documentation. Having these organized and ready for review will streamline the filing process and help ensure accuracy in your tax return.
2. Review Tax Regulations: The corporate tax landscape is dynamic, with regulations subject to change. It’s essential to stay informed about any updates or modifications to corporate tax regulations that may impact your filing. Regularly reviewing official communications from the UAE government and tax authorities can help you stay ahead.

Even though the deadline may seem far off, preparing for your corporate tax filing is paramount. This is not just a compliance exercise; it’s an opportunity to ensure that your business is aligned with the new tax regulations and to avoid the financial penalties associated with late submissions. Prioritizing your corporate tax filing preparation will not only protect your business interests but also set a solid foundation for your organization’s future growth and success in the evolving economic environment.

Corporate Tax Filing: How MS can help

Our company offers end-to-end support for corporate tax filing, ensuring businesses meet their tax obligations with ease and precision. We start by assessing each client’s tax requirements, organizing financial documents, and identifying the appropriate tax period. Our expert team calculates tax liabilities accurately and handles the entire filing process, ensuring compliance with UAE regulations. We stay updated on any changes in tax laws and provide strategic tax planning to help clients reduce liabilities. Additionally, we manage filing deadlines, offering timely reminders, and post-filing support to address penalties or disputes.

As the corporate tax return filing deadline for entities established in June 2023 approaches on September 30^th 2024, businesses have a critical opportunity to minimize their tax liability by taking advantage of tax deductions and credits. But how do these tools impact your corporate tax return? Tax deductions reduce your taxable income, while tax credits directly lower the tax you owe, making them essential for optimizing your return.

Let’s look at the interlink between Corporate Tax Return Filing and Tax Deductions and Credits.

How Corporate Tax Return Filing and Tax Deductions and Credits are Related

Corporate tax return filing is the process where businesses report their taxable income and calculate their tax liabilities. Tax deductions and credits play a crucial role in this process by helping reduce the taxable income and, in turn, the total tax payable. Deductions allow businesses to subtract eligible expenses like operating costs and depreciation from their gross income, while tax credits directly lower the final tax bill.

What are Tax Deductions and Credits?

In the UAE corporate tax framework, tax deductions and credits serve as powerful tools for reducing the tax burden, but they work differently:

• Tax Deductions reduce the taxable income, which indirectly lowers the amount of tax payable by decreasing the base on which the tax is calculated.
• Tax Credits provide a direct reduction in the tax owed, effectively reducing the final tax liability by the amount of the credit.

Eligible Business Expenses for Tax Deductions in the UAE

Businesses can deduct certain expenses that are incurred “wholly and exclusively” in the production of taxable income. Understanding these qualifying expenses is crucial for any business filing corporate tax returns in the UAE.

Here’s a breakdown of some common eligible deductions:

• Operating Expenses: These include day-to-day business costs like rent, utilities, and employee salaries.
• Depreciation: The gradual reduction in value of fixed assets such as machinery, vehicles, and equipment can be deducted over the useful life of the asset.
• Interest on Business Loans: Interest payments on loans directly used for business operations can be deducted from taxable income.
• Cost of Goods Sold (COGS): This includes the direct costs associated with producing or acquiring the goods sold by the business.
• Professional Fees: Payments to professionals like accountants, lawyers, or consultants related to running the business are eligible.
• Research and Development (R&D): Expenditures on innovation, product development, and technological advancements.
• Employee Benefits: Salaries, bonuses, and other compensation tied to employee performance can be deducted.
• Bad Debts: Debts that are proven to be uncollectible and are written off during the financial year.
• Advertising and Marketing: Expenses incurred to promote the business, such as marketing campaigns, can also be deducted.

Non-Deductible Expenses

Not all expenses are deductible. Some costs are explicitly non-deductible under UAE tax law. These include:

• Fines and Penalties: Legal penalties or fines incurred by the business are not tax-deductible.
• Dividends Paid: Payments made to shareholders in the form of dividends are not deductible.
• Personal Expenses: Costs that are not directly related to business operations, such as personal travel or luxury expenses, are non-deductible.
• Certain Entertainment Expenses: While business-related client entertainment may sometimes be deductible, extravagant or unnecessary costs are generally excluded.

Specific Tax Credits Available in the UAE

While tax credits are less common than deductions, they can provide substantial relief to businesses engaged in specific activities or industries. Examples include:

• Foreign Tax Credits: If a business has paid taxes on foreign-sourced income, it can claim a credit to offset taxes owed in the UAE, thus avoiding double taxation.
• Research and Innovation Credits: Businesses involved in R&D may benefit from tax credits, especially in Free Zones like DIFC or ADGM, where innovation is encouraged.

These credits allow businesses to reduce the total tax owed, often providing direct savings that can be reinvested into the business.

Sector-Specific Tax Deductions and Credits

Certain industries, such as manufacturing, technology, and renewable energy, may enjoy additional tax benefits. Businesses operating in Free Zones or engaged in government-backed sectors may qualify for unique tax deductions or credits designed to promote sustainability, technological development, or capital investment.

For example, businesses in renewable energy might be eligible for deductions or credits related to energy-efficient investments or equipment. Similarly, tech companies engaged in innovation may qualify for credits tied to R&D activities.

Maximizing Tax Deductions and Credits: Strategic Planning

To fully benefit from the UAE’s corporate tax deductions and credits, businesses need to adopt a strategic approach. Here are a few tips:

1. Maintain Accurate Documentation: To claim deductions and credits, proper documentation is essential. Ensure that every expense is well-documented with receipts and invoices.
2. Amortize Assets: By spreading the cost of high-value assets (like machinery or equipment) over their useful life, businesses can manage depreciation deductions effectively.
3. Leverage Loss Carryforwards: If your business incurs losses in a given year, those losses can often be carried forward to offset taxable income in future years, helping to reduce your future tax liability.
4. Expense Timing: Plan your major expenses (e.g., purchases, investments) in a tax-efficient manner to optimize deductions for the current tax year.

Penalties for Incorrect Claims

Misreporting deductions or claiming non-eligible expenses can result in fines, penalties, and even audits by the FTA. It’s important to ensure that all claims are legitimate and supported by proper documentation to avoid penalties or reputational damage.

Effectively managing your corporate tax return involves a keen understanding of how tax deductions and credits can be utilized to your advantage. By carefully planning and documenting eligible expenses, leveraging available credits, and adopting strategic approaches to expense timing and asset amortization, businesses can substantially reduce their tax liabilities. As deadlines approach, a proactive and informed approach to tax planning will be invaluable in achieving the best possible financial outcomes for your business.

Tax Deductions and Credits: How MS can help

At MS, we specialize in guiding businesses through the complexities of corporate tax return filing in the UAE. Our team provides comprehensive support in identifying eligible tax deductions and credits, ensuring that you maximize your tax savings while maintaining compliance with regulatory requirements. We assist in maintaining accurate documentation, strategizing expense timing, and leveraging loss carryforwards, all tailored to your specific business needs. Let us help you turn tax obligations into opportunities for growth.

The introduction of Corporate Tax in the UAE had sparked a wave of anxiety among businesses, largely due to confusion and misunderstandings surrounding the new rules.

One of the most prevalent myths is that taxes are only payable from January 1, 2024. However, this is not true for businesses whose first UAE corporate tax return filing period falls between June and December 2023. For these companies, the initial tax return deadline is September 30, 2024, setting a vital benchmark for future filings.

Let’s clear the air and focus on what your first tax period will actually look like and how to effectively prepare.

Understanding Your First Tax Period for First UAE Corporate Tax Return Filing

Since the announcement of the UAE corporate tax law on June 1, 2023, businesses have been through a sea of changes. One area where confusion persists is the ‘tax period,’ which is the financial year or part of the year for which a tax return must be submitted.

Under the law, businesses have some flexibility in defining their financial year. They can align with the Gregorian calendar year (January to December) or select a custom 12-month period that matches their reporting practices. The law applies to all entities incorporated under the UAE Commercial Companies Law, such as mainland companies, free zones, trusts, civil companies, and even foreign entities operating in the UAE through branches or headquarters.

A common sticking point is determining the commencement of the first tax period. For most businesses, this period begins with the first financial year starting on or after June 1, 2023, typically January 1, 2024. However, newly incorporated companies might face more complexity, with their first financial year ranging from six to 18 months.

First UAE Corporate Tax Return Filing: Examples to Illustrate the First Tax Period

To provide more clarity, let’s look at some scenarios:

1. Company A: Established on February 1, 2023, and aligned with the Gregorian calendar, the initial financial period runs from February 1 to December 31, 2023. However, the first UAE corporate tax return filing period will start on January 1, 2024 – the first financial year beginning after June 1, 2023.
2. Company B: Incorporated on June 2, 2023, with a financial year from January to December, will see its first tax period run from June 2 to December 31, 2023. The tax return for this period is due by September 30, 2024. This breaks the myth that the first UAE corporate tax return filing is due only by September 30, 2025.

Key Points on Tax Obligations and Financial Year Flexibility

While businesses can choose their financial year, this flexibility does not alter their corporate tax obligations. Whether a company’s first tax period is shorter or longer than 12 months, the AED 375,000 income threshold for the zero percent corporate tax rate remains unchanged. Likewise, the small business relief limit of AED 3 million in revenue still applies. Companies with revenues exceeding AED 50 million must provide audited financial statements, regardless of the length of their tax period.

Additionally, for tax periods shorter or longer than 12 months, certain rules, such as the general interest deduction limitation, adjust proportionately. This ensures fairness in deductions and maintains the integrity of tax calculations.

First UAE Corporate Tax Return Filing: Special Considerations for Non-Resident Entities

The corporate tax law also provides guidance for non-resident persons operating in the UAE through a permanent establishment or dependent agent:

• Permanent Establishment: For non-residents with a fixed place of business, the first tax period begins six months after the entity has been operational. For instance, a company that began operations on February 1, 2022, and continues past June 1, 2023, would have its first tax period starting from January 1, 2024.
• Dependent Agents: The tax period for non-residents operating through a dependent agent begins immediately after June 1, 2023. A non-resident agent effective from March 1, 2023, will have its first tax period begin on March 1, 2024.

Foreign juridical persons effectively managed and controlled in the UAE are considered resident persons under the law. A foreign company with a financial year from January 1 to December 31 will have its first tax period starting from January 1, 2024, if managed and controlled in the UAE during this time. Similarly, a foreign entity with a financial year from September 1 to August 31 would have its first tax period starting on September 1, 2023, if under UAE management and control.

Deregistration Requirements

Businesses must deregister for corporate tax if they cease operations due to dissolution, liquidation, or other reasons. However, the expiration of a business license alone does not suffice for deregistration. Even if a company winds down its operations during its first tax period, it is required to register for corporate tax according to the law.

Optimize Your First UAE Corporate Tax Return Filing with MS

Our team at MS provides solutions to your business with its unique tax obligations, from understanding your first tax period to aligning your financial year effectively. We assist with tax registration, compliance, and financial reporting, ensuring your documentation is accurate and submitted on time. With continuous updates and strategic insights on evolving tax regulations, we keep you ahead of the curve, allowing you to focus on growth while we manage your tax responsibilities.

The introduction of corporate tax in the United Arab Emirates (UAE) marks a significant shift for businesses operating in the region. This new tax regime, effective for financial years starting on or after June 1, 2023, brings with it a range of challenges and opportunities. For many businesses, understanding this new landscape has introduced complexities and uncertainties, particularly concerning the determination of their initial tax period.

To address these concerns, the Federal Tax Authority (FTA) has recently issued clarifications regarding how to establish the first tax period under the UAE Corporate Tax Law. Understanding these guidelines is crucial for ensuring compliance, optimizing tax efficiency, and maintaining a competitive edge in this evolving environment.

Challenges in Determining the First Tax Period

Prior to the clarification, a key issue was the discrepancy between the financial year defined under the Commercial Companies Laws of the UAE (which can range from 6 to 18 months) and the Gregorian calendar year typically associated with tax periods. This ambiguity created uncertainty for businesses about when their first tax period would commence and end.

Determining the First Tax Period: FTA’s Clarification Brings Relief

The FTA’s recent announcement aims to address these concerns and provide clear guidelines for businesses. Here’s a breakdown of the key points:

• For UAE-based companies:
  • If the company’s first financial year begins before June 1, 2023, the first tax period will be the subsequent 12-month financial year.
  • If the first financial year starts on or after June 1, 2023, the first tax period aligns with the initial financial year as per the Commercial Companies Law.
  • Importantly, businesses with first tax periods ranging from 6 to 18 months do not need to apply for a tax period change.
• For non-resident businesses with a UAE permanent establishment:
  • If the permanent establishment existed before June 1, 2023, the first tax period begins on or after that date and covers a 12-month period.
  • If the permanent establishment was established on or after June 1, 2023, the first tax period starts from the commencement of operations and can last between 6 and 18 months.
• For UAE resident companies with effective management and control in the UAE:
  • The first tax period begins on or after June 1, 2023.

Implications for Businesses for Determining the First Tax Period

The FTA’s clarification offers much-needed clarity for businesses operating in the UAE. It simplifies the process of determining the first tax period and reduces the administrative burden. However, it’s essential to note that even if a business ceases operations during its first tax period, it must still register for corporate tax and file a tax return.

Furthermore, businesses should carefully consider the deadlines for tax deregistration, which is required within three months of ceasing operations. Failure to comply with these timelines can result in penalties.

The FTA’s clarification on the first tax period is a positive step towards streamlining the corporate tax landscape in the UAE. By providing clear guidelines, the authority has helped businesses better understand their tax obligations and plan accordingly. As the UAE continues to develop its tax regime, businesses should stay updated on any further developments, and adhering to the regime is crucial.

Act now with MS for UAE Corporate Tax Registration

 It’s essential for all entities to begin the registration process without delay, regardless of when their license was issued. This proactive approach helps avoid penalties and ensures compliance with the latest regulations. By staying informed and meeting deadlines, businesses can navigate the evolving UAE tax landscape effectively. Partner with MS to make your corporate tax registration smooth and safeguard your business interests in this dynamic environment.

Imagine building a thriving business in a tax-free jurisdiction. Sounds ideal, right? For Free Zone Persons in the UAE, this dream can be a reality. The UAE’s recent implementation of a Corporate Tax regime acknowledges the critical role played by FZs in the nation’s economic growth. Recognizing this, the government offers a highly attractive benefit – a 0% Corporate Tax rate for qualifying Free Zone companies and branches (QFZPs) engaged in designated Qualifying Activities and transactions. To qualify for this tax advantage, certain criteria must be met, including the fulfilment of the De Minimis Requirements.

The De Minimis Requirements

Think of the de minimis rules as walking a tightrope. One wrong step, and you risk losing your tax-free advantage. It’s crucial to balance your income streams to avoid exceeding the de minimis threshold.

Let’s break down these rules and guide you through this challenging landscape.

If a Free Zone Person generates income outside the defined rules of the 0% Corporate Tax rate on Qualifying Income, it will cease to be considered a QFZP unless it meets the de minimis rule.

Revenue not included for De Minimis Requirements

This standard focuses on revenue that arises from transactions with a foreign permanent establishment. The income of a Domestic Permanent Establishment refers to the total income of the foreign company linked with a Domestic Permanent Establishment. It includes:

• Income from immovable property situated in a free zone (excluding income from the use of land and buildings used for commercial purposes in a free zone for business operations through an agent in the zone when that income is derived from a transaction with a free zone person).
• Income from intellectual property, excluding qualifying income.

De Minimis Requirements: Tax Implications of Excluded Revenue/Earnings

Income from these sources will be subject to a 9% Corporate Tax rate, unless it is classified as Exempt Income under the Corporate Tax Law. The de minimis rules permit a Free Zone Person to earn a minor percentage of income from Excluded Activities and ineligible sources while still retaining QFZP status, provided the de minimis rule criteria are satisfied.

Understanding the De Minimis Requirements

1.  De Minimis Threshold

To qualify for the 0% corporate tax rate, a Free Zone Person (FZP) must meet the de minimis threshold. This is calculated as the lower of:

• 5% of the FZP’s gross income for the tax period
• AED 5,000,000
• Revenue Classification

To determine de minimis compliance, an FZP must carefully classify its revenue.

• Total Revenue: This encompasses all income received during the tax period, excluding contributions from permanent foreign establishments, permanent domestic establishments, and real estate income (except commercial property rentals within the free zone to other FZP’s).
• Non-Qualifying Income: This includes revenue from:
  • Transactions with non-free zone entities or for non-qualifying activities
  • Transactions with non-beneficial free zone recipients

By accurately categorizing revenue, FZP’s can calculate their non-qualifying income and determine if they meet the de minimis criteria.

Profit Attribution and Exempt Income

Determining the profit attributable to a permanent establishment, whether domestic or foreign, is based on the Arm’s Length Principle. Notably, income generated by exempt persons, such as those in the extractive industry, is excluded from these calculations as they fall outside the scope of the Corporate Tax Law.

Consequences of Non-Compliance

If an FZP fails to meet the de minimis requirements, it will lose its qualifying status and become subject to the standard corporate tax rate of 9%. This change takes effect from the beginning of the tax period and lasts for four years.

To maintain their tax-advantaged position, FZP’s must diligently manage their income streams to ensure non-qualifying income remains below the de minimi

s threshold. By adhering to these guidelines, businesses can avoid the significant tax implications of non-compliance.

UAE Corporate Tax Made Easy with MS

Don’t let the new UAE Corporate Tax system hinder your business growth. MS offers expert tax solutions to streamline the process. Our team of professionals will handle everything from registration to filing, ensuring accuracy and compliance. By entrusting your corporate tax matters to us, you’ll gain valuable time and resources to focus on what truly matters – expanding your business.

Disclaimer: 

Content posted is for informational & knowledge sharing purposes only and is not intended to be a substitute for professional advice related to tax, finance, legal, compliance or accounting. No warranty whatsoever is made in this regard, and it is not intended to provide and should not be relied on for tax/finance/legal/compliance or accounting advice. The content posted is subject to future amendments / changes / clarifications in the regulation by the authorities. For any clarifications, you may contact our finance, tax, compliance, legal team.