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.

The United Arab Emirates (UAE) has long been recognized for its business-friendly environment, characterized by the absence of corporate and personal tax. However, a significant shift has occurred with the introduction of the UAE Corporate Tax (CT) law through Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (CT Law). This new legislation has far-reaching implications for taxpayers, particularly for Holding Companies.

Let’s explore how this new legislation affects the Holding Companies.

Understanding Holding Companies

Holding Companies primarily hold controlling interests in other companies. Their income typically comes from dividends, capital gains, and interest. The UAE law defines a Holding Company as a company that establishes or controls subsidiaries through shares or membership interests, allowing it to influence their decisions.

Definition under Company Law (Federal Decree-Law No. 32 of 2021)

Article 268 – Definition of the Holding Company

A Holding Company is a Joint Stock Company or a Limited Liability Company that establishes subsidiaries inside the State or abroad or controls existing companies by holding shares or membership interests, enabling such a Company to control the management of the subsidiary and influence its decisions.

The name of the Company followed by the expression ‘Holding Company’ shall appear on all papers, advertisements, and other documents issued by the Holding Company.

Definition as per UAE Economic Substance Regulations (ESR)

A company that:

• Has acquisition and holding of shares or equity interests in other companies as its sole activity.
• Derives its income solely from dividends and capital gains on its equity interests.

Taxation for Holding Companies

The tax treatment of a Holding Company depends on its location:

• Free Zone: Companies in Free Zones like Abu Dhabi Global Market (ADGM) or Dubai International Financial Centre (DIFC) may be eligible for a 0% tax rate if they qualify as Qualifying Free Zone Persons (QFZPs). To achieve this, they must demonstrate sufficient substance in the Free Zone, comply with transfer pricing rules, and have audited financial accounts. Income from holding shares for at least 12 months is considered a Qualifying Activity, making such Holding Companies likely to benefit from the 0% CT rate.
• Mainland: Holding Companies outside Free Zones (mainland) are generally subject to the 9% CT unless their income falls under exemptions listed in Article 22 of the CT Law. This includes dividends and capital gains from domestic companies and, under certain conditions, dividends and profits from foreign subsidiaries.

Exempt Income for Holding Companies on Corporate Tax

Holding Companies can significantly reduce their tax burden through various exemptions:

1. Dividends from Resident Companies: Dividends received from UAE-incorporated companies are generally exempt from CT. This promotes domestic investment and simplifies the tax structure.
2. Dividends from Foreign Shareholdings: Dividends from foreign subsidiaries can also be exempt if the Holding Company meets the Participation Exemption requirements (refer to a separate post for details).
3. Capital Gains from Shareholdings: Capital gains from selling domestic or foreign shares may be exempt under the Participation Exemption, encouraging long-term investment.
4. Headquarter Services in Free Zones: Headquarter services provided to related parties in the same Free Zone or across jurisdictions qualify as a Qualifying Activity for QFZPs. This includes management, administrative, or strategic services.

Taxable Income for Holding Companies

Not all income streams are exempt from the tax, let’s look at the income categories which falls under the purview of taxation:

1. Interest Income: Interest earned from loans, exceeding a specific limit, is generally taxable. Additionally, interest expenses on loans from related parties used for dividend distributions or capital activities may not be deductible unless a legitimate business purpose is demonstrated.
2. Rental Income: Rental income is generally taxable, with exemptions under specific conditions (e.g., commercial property income within a Free Zone earned from another Free Zone person is taxed at 0%).
3. Service Fees: Fees for management, consultancy, strategic advisory, or administrative support provided to subsidiaries are subject to Corporate Tax.
4. Royalties: Royalties received for intellectual property (patents, trademarks, copyrights) are taxable.
5. Foreign Exchange Gains: Gains arising from foreign exchange transactions, realized or unrealized, are taxable.

The UAE’s new corporate tax law has some changes that Holding Companies need to grasp. However, by staying informed and meeting the requirements for exemption, you can keep your Holding Company business thriving in the UAE’s pro-business climate. Think of it as a chance to showcase your company’s legitimacy to unlock tax benefits.

MS for corporate tax compliance of Holding companies in the UAE

MS can be a valuable partner for Holding Companies for understanding the nuances of the new UAE Corporate Tax law. We offer thorough support, assisting with Free Zone and substance requirements for the 0% tax rate, ensuring compliance with transfer pricing regulations, managing tax record keeping and reporting, and keeping you updated on the evolving tax landscape. Let us help your Holding Company thrive in the new UAE corporate tax environment.

The United Arab Emirates (UAE’s) well-established reputation as a tax-advantageous jurisdiction is evolving with the recent introduction of corporate tax. While comprehension of the tax regime is essential, ensuring compliance to avoid potential penalties holds equal importance. This shift in the UAE’s fiscal strategy underscores the need for businesses to stay informed about corporate tax regulations.

Let’s delve into the potential consequences of missing deadlines or making errors in your UAE corporate tax filings.

Understanding UAE Corporate Tax Penalties

The table of violations outlined in Cabinet Decision No. (75) of 2023 details the repercussions of various offenses. Here’s a breakdown of some key points:

• Record Keeping: Failing to maintain up-to-date records for tax purposes can result in a hefty fine of AED 10,000 for the first offense. Repeated offenses within 24 months will double the penalty to AED 20,000.
• Information in Arabic: Not providing tax information in Arabic language records can incur a penalty of AED 5,000.
• Late Deregistration: Businesses that delay deregistration application submission beyond the deadline will face a penalty of AED 1,000, accumulating to a maximum of AED 10,000 per month.
• Delayed Notifications: Businesses failing to notify the authorities about changes requiring tax record updates can be penalized with AED 1,000. Repeat offenders within 24 months will see the penalty increase to AED 5,000.
• Legal Representative’s Obligations: Legal representatives who miss sending out appointment notifications or fail to file tax returns face penalties ranging from AED 500 to AED 1,000 per month, depending on the duration of the delay.
• Voluntary Disclosure: Errors in tax returns, assessments, or refunds can be rectified through voluntary disclosure. However, a 1% monthly penalty on the tax difference is applied from the due date until the disclosure is submitted.
• Failure to Disclose Voluntarily: If tax authorities discover discrepancies before a voluntary disclosure is made, a fixed 15% penalty on the tax difference is imposed. An additional 1% monthly penalty is added from the due date until the disclosure or tax assessment is issued.
• Auditor Obstruction: Businesses that hinder tax audits by not providing necessary support can be penalized with AED 20,000.
• Late Declaration: Delaying the submission of declarations attracts a penalty of AED 500 per month for the first year, rising to AED 1,000 per month thereafter.

Staying Compliant and Keep Away UAE Corporate Tax Penalties

Here are some key steps to ensure smooth sailing when it comes to UAE corporate tax filings:

• Timely Registration: Register for corporate tax within the timeframe mandated by the Federal Tax Authority (FTA) to avoid registration penalties.
• Meet Deadlines: File your corporate tax requirements by the official due date to steer clear of late filing penalties.
• Record Keeping: Maintain proper and up-to-date records of your income, expenses, and other tax-related data. This meticulousness ensures the accuracy of your tax return and minimizes the risk of penalties for errors.

By understanding and adhering to corporate tax filing requirements in the UAE, businesses can save themselves from unnecessary expenses and ensure they are compliant with the UAE’s tax regulations. Remember, a proactive approach – registering on time, meeting deadlines, and maintaining accurate records – is key to avoiding penalties and ensuring a smooth tax filing experience.

MS as Your Partner to Dodge UAE Corporate Tax Penalties

Don’t let the complexities of UAE corporate tax filing lead to penalties for your business. MS can help you understand this new corporate tax landscape. Our team of tax professionals can guide you through the registration process, ensure timely filings to avoid penalties, and help you maintain meticulous records for accurate tax return preparation. We understand the complexities of the UAE tax regulations and can minimize the risk of errors or omissions that could trigger penalties. Let MS be your partner in ensuring corporate tax compliance and saving you from unnecessary expenses.

The United Arab Emirates (UAE) is a hub for international business, and its Free Zones (FZs) are a major reason. These designated areas offer significant advantages for companies, including startups, due to their tax benefits and streamlined setup processes. The strategically located FZs offer a unique blend of advantages, including world-class infrastructure, simplified business setup processes, and most importantly, a tax regime designed to empower businesses. Unlike the mainland UAE, FZs provide a game-changing incentive for startups and established companies alike: a 0% Corporate Tax rate on qualifying activities.

Tax Advantages for Qualifying Free Zone Businesses

The UAE’s recent Corporate Tax regime recognizes the importance of FZs. Businesses operating within these zones, known as Qualifying Free Zone Persons (QFZPs), can enjoy a highly attractive 0% Corporate Tax rate on specific activities and transactions. This applies to:

• Transactions between QFZPs and Free Zone Persons (where the Free Zone Person is the Beneficial Recipient of these transactions).

• Certain activities performed from within the prescribed geographical areas of a Free Zone (or a Designated Zone for distribution activities).

Corporate Tax for Free zones: Benefits for businesses with no Initial Revenue

Even if a startup or a business within a Free Zone doesn’t generate any initial revenue (Qualifying Income), it can still qualify for tax exemptions. As long as the company operates within the designated area and doesn’t earn income from non-qualifying activities, it can benefit from this tax break. This allows startups the breathing room they need to establish themselves without the burden of corporate tax.

Maintaining Your QFZP Status in the Free Zones

The benefits of being a QFZP are substantial, but maintaining this status requires adhering to certain conditions. A company can lose its QFZP designation and be subject to standard corporate tax rates for four years if it:

• Opts Out of QFZP Benefits: Companies can choose to forgo QFZP advantages and enter the standard tax regime. However, this comes with a four-year period where they can’t reclaim QFZP tax benefits.
• Fails to Meet Qualifying Criteria: Not meeting the qualifying criteria for a specific tax period can also result in losing QFZP status for the following four tax periods.

Case Study:

Company X (a QFZP) is incorporated on July 1st, 2023, in a Free Zone with the aim of developing and providing innovative educational software (a Qualifying Activity). The company operates in the calendar year for its Tax Period. During the remainder of 2023 and the entirety of 2024, Company X focuses on its preparatory phase.

Due to being in the development stage, Company X doesn’t generate any Qualifying Income in 2023 and 2024 as its Qualifying Activity of educational software development isn’t fully operational. There’s no revenue generation during this period, but the company incurs expenses for development and staffing.

Analysis:

The absence of Qualifying Income in the initial phases (2023 and 2024) wouldn’t automatically disqualify Company X from its QFZP status. As there is no revenue generation from the Qualifying Activity. Therefore, Company X can potentially retain its QFZP status for the 2023 and 2024 Tax Periods, considering its future potential to generate Qualifying Income once the educational software is developed and launched, leading to revenue generation. Company X can file its Tax Returns as a QFZP for the initial years (2023 and 2024).

The UAE’s Free Zones, with their tax breaks and simplified setup processes, offer a ground for startups. With careful planning and adherence to QFZP requirements, companies can leverage these benefits to establish themselves and thrive in the UAE’s dynamic business environment.

Focus on your business, Let MS handle the Tax hassle

If you’re still trying to figure out the new UAE Corporate Tax system, MS can simplify the process. Our team of tax experts can handle everything from registration to filing, ensuring accuracy and efficiency. We will analyze your company’s finances to determine your exact taxable income, considering any exemptions or deductions available. By letting MS handle your corporate tax filing, you’ll save valuable time and resources, knowing your taxes are in the hands of professionals.

For businesses considering or already established in the United Arab Emirates (UAE), understanding the nuances of Corporate Tax registration is important. While the UAE is celebrated for its tax-efficient environment, recent developments have introduced specific requirements for corporate tax compliance across certain Emirates. The recent introduction of corporate tax in the UAE has sparked questions for businesses across the country. Whether you’re a mainland company or operate within a free zone like Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC) with special tax privileges, understanding the registration requirements and adhering to them is crucial.

Who needs to Register with UAE Corporate Tax?

The first step is determining if your business is subject to corporate tax. As per Article 11 of the Corporate Tax Law, the following entities must register:

· Commercial and other legal firms registered in the UAE, as well as organized foreign legal entities that handle the majority of their operations in the UAE.

· Permanent establishment; company Income tax and corporate tax; residency status: non-resident juridical persons (foreign entities).

· Consequent to this requirement, several Non-Resident persons are deriving State Sourced Income.

· Residents or companies who are non-tax residents have established an economic connection with the UAE through the legal acquisition of Income from Immovable Property.

· Legal entities provided that the person carrying out Business or Business Activities in the UAE and the Turnover of the Business or Business Activities in question, according to the Gregorian calendar year, is more than AED 1,000,000.

Step-by-Step Guide to Register with UAE Corporate Tax

1. Eligibility Check: Confirm your business falls under the UAE corporate tax bracket.

2. TRN Application: Obtain a Tax Registration Number (TRN) through the Federal Tax Authority’s (FTA) online portal. You’ll need details like your business’s legal status, trade license number, and contact information.

3. Document Gathering: Collect necessary documents, including:

· Valid trade license photocopy.

· Company’s Memorandum of Association (MOA).

· Current passports of shareholders, directors, and authorized signatories.

· Photocopies of owners’ company IDs and authorized signatories’ IDs.

4. Registration Application: Submit the application form on the FTA website. The form will request details about your business activities, any exemptions you might claim, and other relevant information. Double-check all information before submission.

5. FTA Review: The FTA will review your application. This process can take time, so be patient. The FTA may request additional documents or clarifications if needed. Respond promptly to avoid delays.

6. The Initial VAT Registration: To obtain a Tax Registration Number (TRN) for corporate tax purposes, businesses must first undergo the VAT registration process. This initial step involves completing a detailed 8-step form on the FTA portal. After submitting the application, businesses can track its progress through the provided website. Once approved, they can access their TRN number through the same portal, ensuring compliance with UAE tax regulations.

7. File for CT (In your tax period): After successfully completing and receiving approval for your registration application, you will be issued a tax registration number or certificate confirming your business’s registration for corporate tax in the UAE. Once in possession of this certificate, you can proceed to fulfil your corporate tax obligations by making the necessary payments. The specific tax liabilities will vary based on factors such as your business activities and turnover.

Deadlines and penalties for delays

It is also important to note that if the CT registration application is not filed within the mentioned periods, the administration has the right to impose a penalty of up to AED 10,000.

Beyond Registration

· Record Keeping: The UAE government emphasizes proper business conduct and maintaining accurate financial records along with on-time registration.

· Tax Filing and Payment: Once registered, you’ll need to file tax returns and pay corporate taxes based on your business activities and turnover. Consulting a tax expert is recommended to ensure you meet all tax obligations.

Embrace Transparency and Accountability while Registering with UAE Corporate Tax

Complying with corporate tax registration demonstrates your commitment to transparency and accountability. The FTA’s online portal streamlines the process, but remember, timely and accurate submissions are crucial to avoid penalties and maintain a positive relationship with the tax authorities.

Get rid of Corporate Tax burden with MS

Understanding the specific rules of Corporate Tax registration in the UAE and the requirements for free zones and mainland can be complex. Early registration ensures a smooth process and helps businesses stay compliant. This not only protects your company but also contributes to the UAE’s economic development. For a hassle-free and compliant registration, consider seeking help MS. We can address your specific needs and ensure you meet all legal requirements without fail.

The business landscape in the UAE is undergoing a significant shift with the introduction of corporate tax. This new tax regime comes with important deadlines for businesses to register, and these deadlines can vary depending on your company’s specific situation. The new corporate tax system is designed to be both effective and competitive, aligning with international standards. This will make the UAE an even more attractive location for businesses and investors. The tax system will also support the UAE’s development goals and strategic plans. Additionally, it fulfils the country’s commitment to tax transparency, which helps to prevent unfair tax competition and fosters good relations with developed nations.

While free zones are amping up their offerings to attract new businesses, all companies in the UAE, including those in free zones like Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), need to be aware of the corporate tax registration requirements.

Key Points for Existing Businesses:

• Registration Corporate Tax Deadlines Based on License Issuance Date: The deadline for existing companies to register for corporate tax depends on when their licenses were issued. You can find the specific timelines outlined in the Federal Tax Authority (FTA) Decision.
• Multiple Licenses: If your company holds multiple licenses, the earliest issuance date dictates your registration deadline. Ensure you submit your application within the allotted timeframe to avoid penalties.

Deadlines for New Businesses (including Free Zones):

• Three Months After Incorporation: New companies incorporated on or after March 1st, 2024, including those in free zones, have three months from their incorporation date to register for corporate tax. Be aware that your registration might fall before June 30^th as the deadline for these cases is strictly three months from the date your license was issued.

For example: If your business is incorporated on March 3^rd, 2024, your Corporate Tax deadline is on June 3^rd, 2024.

• Foreign Companies: Foreign companies effectively managed and controlled within the UAE after March 1st, 2024, need to register within three months of their financial year-end.

Upcoming Corporate Tax Deadline – June 30th, 2024:

• Don’t Miss Out: This deadline applies to all businesses with licenses issued in March or April of any year prior to 2024. Failing to register by June 30th can result in a penalty of AED 10,000.

The takeaway

The introduction of corporate tax in the UAE necessitates action from businesses. Familiarize yourself with the deadlines based on your company’s specific situation and ensure timely registration to avoid penalties. While free zones are offering attractive incentives to draw in new businesses, remember that corporate tax registration applies to all companies in the UAE.

MS for ensuring hassle-free Corporate Tax registration

We know that the deadline assessment will be a daunting task, but MS is here to help you through the process. Our team of experts will assess your specific situation to ensure you meet the correct deadline. We’ll guide you through every step of the process, ensuring all documentation is accurate and filed on time. MS is here to make your Corporate Tax registration smooth and ensure compliance, sparing you from additional penalties for late registration. Take action now to ensure your business stays compliant and penalty-free.