The UAE introduced one of the lowest corporate tax rates across the globe at 9 percent. Businesses based in all seven emirates are subject to the federal Corporate Tax (CT), which came into effect starting on June 1, 2023, or January 1, 2024, depending on whichever financial year they follow.
For homegrown firms that have never heard of CT before, this type of tax is unfamiliar territory. Many business owners might leave bookkeeping till the last minute or be under the impression that they’re exempt from paying corporate income tax altogether. It’s natural to have doubts, but time is ticking and, more than two years later, corporates are still at risk of getting penalized.
With the help of our in-house accounting expert, Hannah Sparrow, head of sales for the external accounts division at A&A Associate, we break down some common mistakes firms have been making when it comes to CT filing in the UAE.
What is federal Corporate Tax?
First, let’s get the definition out of the way – what CT means, who it is levied on and why. Corporate tax, in simplest terms, is a direct tax imposed on the net profit of businesses and corporations. The UAE levies a CT rate of 9 percent.
“Corporate tax rates vary widely among countries. The average rate globally is 23.37 percent, so, in comparison, 9 percent in the UAE is very attractive for business owners,” explained Sparrow. “With the introduction of CT, the UAE wants to strengthen its status as a top global center for business and investment; speed up its development and changes to reach its long-term goals; and show its commitment to international standards for clear and fair tax practices.”
What is the minimum income for corporate tax in UAE?
Do note that CT is not applied to an individual’s personal earnings or salary from the public or private sector. Rather, CT applies to all businesses conducting business activities under a commercial license in the UAE.
Businesses are only subject to the corporate tax based on their taxable income, which means that their net profits need to fall above a certain threshold. If your business in the UAE makes under this threshold, then you pay 0 percent on CT.
As per Ministry of Finance, CT rates are:
– Zero percent for taxable income up to AED 375,000 and
– Nine percent for taxable income above AED 375,000.
These threshold limits apply exclusively to mainland companies.
Regardless of your earned income, all taxable entities need to register for CT with the FTA. In other words, registration is mandatory for all companies, even those in the free zones.
Corporate tax hiccups: Top 3 mistakes to avoid in UAE
Despite the corporate tax levy, Sparrow finds that most clients are still not confident about CT rules and regulations. She points out three common misconceptions:
1. Businesses are confusing VAT and CT
Value added tax (VAT) is a 5 percent indirect tax on revenue borne by the end consumer. Businesses collect VAT on behalf of the Federal Tax Authority (FTA), and they can also reclaim VAT paid on their purchases related to business activities. On the other hand, corporate tax is levied on net profits borne by businesses. Both are crucial aspects of business compliance in the UAE. Find out if you should register for VAT; and how to register your business for CT with us.
2. Businesses assume that CT registration is not mandatory in free zones
Another misconception stems from free zone entities who might think that they’re not subject to CT registration because of the nature of the jurisdiction they operate in. This is false. Free zone companies are required to register for corporate tax, even if they’re exempt from tax payments.
Select free zone entities do enjoy a 0 percent tax rate, as long as their profits are earned from business activities conducted within free zones and not on the mainland. Check with our A&A Associate consultants whether you fall under qualifying activities or not.
3. Businesses use informal methods of bookkeeping
Accounting is not being carried out properly, says Sparrow. It’s essential that businesses “maintain books of accounts that are up to international financial reporting standards” to avoid errors.
Some businesses end up tracking their numbers in a Microsoft Excel spreadsheet, which will not be satisfactory for CT return filing. Our team at A&A Associate can help you file for CT returns and maintain professional books of accounts in compliance with the FTA.
Upcoming deadlines to observe
Our expert strongly urges businesses who incorporated from June 1, 2023, onwards to confirm their filing deadlines. This is because the deadline to file for the first CT return falls within nine months from the tax year-end.
The penalty for late corporate tax registration is AED 10,000.
How A&A Associate can help
When uncertain about tax laws and regulations, always approach professionals who can set up a reliable system for your business.
Sparrow said: “I would advise that businesses hire professional advisory firms and ensure they have experienced accountants who understand the UAE’s tax laws. Even a simple error can have a huge impact on business finances – you could either be paying more than what is required or you could get a penalty for not paying enough.”
At A&A Associate, expert accountants handle impact assessment, advisory and planning, CT registration, CT filing, bookkeeping, and more. Meet your CT deadlines by contacting us today.
Email: tax@aaconsultancy.ae
Phone: +971 56 511 1912
