Exploring the Benefits of Incorporating a Business in the UAE to Maximize Corporate Tax Savings

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Corporate Tax in the UAE

The UAE has been an attractive option for startups due to its strategic place in the world, excellent infrastructure, and tax-free environment up until 2018. Recently, measures have come into effect with the goal of bringing their commercial practices into line with global standards, streamlining business operations and diversifying revenue sources. The introduction of VAT in 2018 was followed by a corporate tax law which will become active as of June 2023; understandably this has caused some apprehension among entrepreneurs

Startup organizations should take note of the regulations surrounding corporate taxes, comprehend what they mean, and incorporate them into their accounting practices. However, with an abundance of data originating from numerous directions, it can be intimidating and confusing. Having a reliable accountant to assist you in deciphering these protocols will make sure your business keeps growing successfully.

What is the start date of the new rule?

Companies are liable for corporate tax payments as of the financial year beginning on or after June 1, 2023. To know when your financial year ends and how this rule applies to you, you should review your company registration documents and/or memorandum of association (MOA). Most businesses have a fiscal end date of December 31st which means that they would not need to comply with this rule until January 1st 2024. These companies then must file their return and make payment nine months from their year-end; in other words by September 30th 2025 if it is still December 31st 2024 at that point.

What is the minimum amount required to be paid?

If your company is registered under a free zone which offers tax-free incentives, the Federal Tax Authority (FTA) will honour these and give you a 0% rate. However, for this to apply, certain requirements must be met – in particular that the company draws qualified income. If it trades on the mainland or other areas then an exemption would not apply and corporate tax would be due on taxable profits above Dh375,000 with 9% as the standard rate of taxation. We are still waiting for further details regarding what qualifies as ‘qualified income’ from FTA at this time.

In order to be classified as a valid free zone entity, you must fulfil the following requirements:

have a sufficient physical presence in the UAE;

generate eligible income;

not opt into taxation according to regular corporate tax rates;

adhere to transfer pricing regulations set forth by the corporate taxation law.

What tax breaks are offered to small and medium-sized businesses?

The UAE Ministry of Finance declared the initiation of Small Business Relief for Corporate Tax Purposes, which is intended to provide assistance to startups and small or micro businesses by cutting down their corporate tax obligations as well as compliance expenses.

Here are some of the main points to consider:

Mainland companies must take note;

Taxable persons may be eligible for small business relief if their revenue is not over Dh3 million per tax period;

The opportunity to claim this relief will only last until December 2026;

Companies with multiple entities cannot divide them up solely in order to meet the criteria for claiming small business relief on each one;

Losses incurred during a given season cannot be carried forward into later periods;

Multinationals that post group revenues higher than Dh3.15 billion will not qualify for any tax savings.

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