Here, we provide a detailed analysis of key actions to be taken in light of the UAE's new Corporate Tax (CT) regime, effective Jan 1, 2024.
We advise using transitional rules and other reliefs to optimise tax burden and consider the importance of preparing finance, accounting, tax operations, IT systems, and internal training for CT implementation.
1. Consider Free Zone Footprint:
Businesses in the Free Zones (FZs) can benefit from a 0% CT rate. However, the conditions to
be a Qualifying Free Zone Person (QFZP) are complex, and FZ businesses should not assume
these will be met. Priority actions:
● Analyse the pros and cons of qualifying versus remaining in the standard 9% CT regime,
including the practical requirements to comply and maintain QFZP status.
● Consider and plan whether any updates are required to transactions, pricing, intercompany agreements, documentation, etc, to ensure all conditions are met.
● Review and plan the relevant operational substance in light of this critical regime
condition.
2. Review Group Structure:
A Group's holding, financing, investment and operating structure will impact its tax profile. Importantly, it may also impact its ability to make certain elections like grouping or the incidence of tax on certain income like dividends and gains. Priority actions:
● Review legal entity structure and consider whether this gives rise to any CT inefficiencies or limits opportunities (such as grouping). For private groups, review the separation between corporate and private ownership.
● Review the funding structure and consider whether this gives rise to opportunities or risks, such as limits on interest deductions, or non-deductible capital.
● Based on the above, identify and execute any updates as required, including considering the rationalisation of unnecessary entities or structures
3. Review Corporate Accounting:
The UAE CT profile of each taxpayer will primarily be driven by the financial profile of the businesses. Accounting policies, entries, and disclosures which are not carefully considered can give rise to unintended tax outcomes. Priority actions:
● Review accounting policies that could impact key tax areas, such as items recorded in Other Comprehensive Income, provisioning, depreciation, revaluation and amortisation.
● Review major expense categories to ensure they meet the tax deduction requirements, especially those specifically regulated by the tax legislation (interest, entertainment, exempt income expenses, etc.).
● Review and consider whether deferred tax must be provided in the financial statements for FY2023.
4. Plan Transfer Pricing Profile:
Compliance with transfer pricing (TP) rules and regulations is a core requirement of the CT regime. Priority actions are the below, but there is still time after January 1, 2024, to ensure readiness with the TP rules and regulations:
● Review the TP model to ensure alignment with the operating model.
● Ensure the transactional design aligns with the value creation within the group based on the key functions, assets and risks.
● Design TP policies that are aligned with the arm’s length principle that can be implemented throughout the financial year 2024 by incorporating TP adjustments before closing the financial statements or through TP adjustments in the CT return.
5. Review Foreign Entity Profile:
Entities incorporated outside of the UAE may still be exposed to CT here because of their actual or deemed presence there. Priority actions:
● Identify any foreign company Directors or senior management who effectively manage the company from the UAE.
● Identify key commercial activities of foreign companies which are being carried on in the UAE by employees or related parties based in the UAE.
● Make any updates to board composition, delegation of authority, governance procedures, and operating models to manage and mitigate any potential unintended outcomes.
6. Consider Claims & Elections:
The CT legislation allows for certain elections and claims to optimise the tax burden. Priorityactions:
● Consider using transitional rules to mitigate taxation on pre-CT gains/appreciation of
capital assets.
● Ensure all requirements are met for CT grouping, sharing of tax losses, and other reliefs.
7. Review Operational Readiness:
Managing the new UAE CT obligations requires effective finance, tax operations, processes, and IT systems. Priority actions:
● Ensure that you can generate separate Trial Balances for each entity, as the CT Law requires separate and standalone financial statements for each entity.
● Review the Chart of Accounts and determine the need for tax sensitisation with respect to tracking tax-exempt incomes, qualifying vs non-qualifying incomes for QFZP, non-deductible expenses and TP adjustments.
● Form a view on how UAE CT will be governed, as this will impact the extent to which you need to adapt or change your IT Systems and Tax Department, including hiring plans and budgets.
● Ensure responsibilities between Tax and other teams are clear and formalised, and other business areas are informed about the upcoming changes.
● Conduct internal awareness sessions and training for non-tax functions such as legal, accounting, procurement, business development, human resources and C-suite.
To know more about how SRGA Global can help you plan your business
in compliance with UAE Corporate Tax, email us at vasu.gupta@srgaglobal.com
