Is your SME ready for the corporate tax regime?

The UAE’s impending federal corporate tax regime, which was first announced on January 1 last year, amidst much speculation and uncertainty, is finally due to come into effect on June 1. But how will small and medium-sized enterprises (SMEs) be affected and how can you best position your company to handle these changes?  

The UAE’s corporate tax, which applies to accounting periods beginning on or after June 1, has been set at a standard rate of 9 per cent and will be applied to all taxable business profits exceeding Dhs375,000. It applies to all businesses and commercial activities with a few exceptions. These include organisations involved in the extraction of natural resources, which will continue to be taxed according to decrees issued by the respective emirate, and free zones, which will remain exempt provided they do not carry out business on the mainland.  

For small and medium-sized enterprises (SMEs), assessing the impact of the new corporate tax regime can be challenging due to the law’s complexity and intricacies and the variability inherent in the income of many of these organisations. It will involve significant compliance and reporting requirements and may also entail operational and structural changes to manage effectively.  

The following seeks address the concerns SME owners may have about ensuring complete tax filings and accurately predicting their tax liability.  

 Evaluating its impact on your business  

The first step to preparing for the new corporate tax regime is to gain an understanding of what your business requirements will be. There are several important questions at this stage that you should be looking  to answer:  

• Does your business fall into one  
• of the categories that are required to register?  
• What is your business’s accounting period?  
• What is the deadline for you to file a CT return?  
• How will CT affect your obligations and liabilities to your clients/customers and suppliers?  
• What changes, if any, will you have to make to your business’s corporate structure to minimise liability?  
• What company training or new hires will be necessary to manage this new obligation?  
• What financial information and records will your business need to keep to ensure effective management and compliance?  

This list is by no means exhaustive, but it is a useful starting point towards better understanding your company’s obligations and preparing your business ahead of time.  

 Will your business qualify for corporate tax?  

First and foremost, companies whose taxable income falls below the threshold of Dhs375,000 will be subject to a zero per cent rate. In addition to this, small businesses with revenue below a certain threshold will be eligible to claim, ‘small business relief’ and therefore be considered as having no taxable income. This will also mean that they have fewer compliance and reporting requirements to the Federal Tax Authority (FTA). The thresholds are determined by the Ministry of Finance (MoF) and more information on this can be found on their website.  

The primary exemptions to the corporate tax regime are detailed below and will either receive an automatic exemption or will be required to apply to the FTA to prove this status.  

• Any public institutions or UAE government departments  
• Wholly government-owned companies that carry out a mandated activity  
• Businesses involved in the extraction of UAE’s natural resources  
• Entities that are established for public benefit  
• Invest funds (subject to meeting required conditions)  
• Public or private pension or social security funds (subject to meeting required conditions)  
• Entities that are fully owned and controlled by exempted organisations   

Foreign branches   

The income of foreign branches will not be taxed directly but instead, it will be included in the taxable income of the parent company. The exception to this is if the branch profits are already subject to tax in the foreign jurisdiction, in which case exemption can be claimed.  

Free zone companies  

Free zone companies fall within the scope of corporate tax and as such, are required to register and file tax returns. However, they will effectively have a zero per cent rate provided their income is generated from outside the UAE or from doing business with other free zone companies. If they are not found to be meeting these conditions, do not maintain adequate substance in the UAE, or are deriving income from business with mainland companies, they may lose this exemption and their entire income may then become liable for corporate tax.   

If you are the owner of a free zone company, you may have to evaluate where your business generates most of its profits and whether it may be worthwhile setting up a mainland entity to handle a business that comes from other mainland companies to mitigate the risk of incurring excess corporate tax liability. Conversely, any mainland business that is dealing primarily with free zone organisations may want to consider the possibility of moving operations to a free zone to minimise their tax burden.   

Other income  

Other sources of income such as dividends and profit distributions are also exempt from CT provided there is a 5 per cent or greater participating interest in the capital or equity of the foreign entity and other conditions are met.  

Determining your business’ accounting period  

The CT will be charged on an annual basis based on your company’s accounting period. Most companies will have a tax period that runs from January 1 to December 31 – although this is not necessarily always the case.   

How to calculate taxable income   

A company’s taxable income is its net profit for the tax period after making any necessary adjustments for deductions or any applicable exempt income. These can include:  

• Unrealised gains or losses  
• Qualifying dividends and capital gains   
• Income from inter-group billing and transfers   
• Transferral of tax losses within a group  
• Any other incentives or tax reliefs as specified by the MoF  

Deadline to file tax returns  

You can register electronically through the FTA website, and this should be done before you file your first tax return. This is mandatory irrespective of your company’s operational status or whether your company’s business meets the minimum threshold for tax liability. Payment for any tax due must be made within nine months of the end of the relevant tax period.  

  Obligations and liabilities to customers and suppliers  

Corporate tax is likely to result in higher costs for your business. This may mean that you need to consider raising the price of your services to meet these demands. However, this should always be balanced against the need to remain competitive in the market and to charge an amount that reasonably reflects the service you provide. You should also consider how your tax obligations will impact your cash flow and financial resources since these are things that may affect your ability to pay your suppliers on time and fulfill your obligations to your customers. Ultimately, you need to find a way to manage your corporate tax obligations effectively whilst at the same time ensuring that your business maintains a good reputation and relationships with your clients and suppliers.  

Managing your corporate tax accounting obligations  

The new tax will undoubtedly place a burden on SMEs that don’t yet have an established in-house finance team to manage these obligations. Implementing an automated accounting system can help to handle the additional compliance and administrative requirements and could be a better option than the expense of hiring new members of staff and the time and resources that this would entail.   

Outsourcing this function to a reputable corporate services provider is another option that can help in the interim while your company is adapting to the new compliance requirements and can alleviate the burden of having to manage this function in-house.   

Benefitting the economy  

While the additional compliance and financial costs of the new tax regime may seem like an additional challenge to SMEs, it is ultimately a move that will benefit the UAE economy and by extension, businesses that operate within the country.   

The revenues generated by the new regime can be reinvested into improving the services available to small companies in the country and other projects such as smart government initiatives that will make doing business in the UAE much simpler and more streamlined.  

When taken in the context of tax systems in other developed economies, the 9 per cent rate also represents one of the lowest corporate tax rates globally and well below the average statutory rate of 23.37 per cent. This reflects the UAE’s desire to continue to make the country an attractive investment proposition while at the same time adhering to international standards and best practices.   

Lorenzo Jooris is the CEO of Creative Zone