UAE businesses must prioritise corporate tax efficiency

02/07/2025 04:54 AST

UAE businesses need to prioritise tax efficiency and understand the intricacies of the newly implemented Corporate Tax rules to ensure compliance and optimise their financial structures, Alia Noor, Associate Partner at Ahmad Alagbari Chartered Accountants, told audiences at the Gulf News Growth and Investment Forum in Dubai on Tuesday.

Alia, who provided a comprehensive overview of the Corporate Tax landscape using hit TV show Game of Thrones references, emphasised the importance of understanding taxable income as the primary determinant of tax rates. "The battlefield is the business, and the sword is your compliance," she said.

Starting with the basics, Alia said that if a company's annual taxable income exceeds Dh375,000, it falls under the 9 per cent tax bracket. For natural persons operating a business with a trade license once their yearly revenue reaches Dh1 million, mandatory registration for Corporate Tax is required in the subsequent year before March 31.

"(Here) victory is not measured by land or gold, it is measured by your tax efficiency and how you structure, whether you rule from the mainland stronghold or from the free zone fortress," Alia explained.

Free zones and registration for CT
Delving into the specifics of free zones, Alia said that being located in a Free Zone doesn't automatically guarantee a 0 per cent tax rate. Businesses must meet the criteria of a "Qualifying Free Zone Person" to potentially benefit from the 0 per cent rate on qualifying income. In comparison, non-qualifying income would be subject to the standard 9 per cent rate.

She stressed that registration for Corporate Tax is mandatory for all companies in the UAE, whether offshore or onshore, with a trade license or certificate of incorporation.

She said that new companies must register within three months of incorporation, with late registration incurring a Dh10,000 penalty. However, Alia shared a recent announcement from the Federal Tax Authority (FTA) stating that penalties could be waived if the first tax return is filed within seven months of the end of the financial year.

Look out for offshore operations
Alia also warned businesses with offshore operations, stating that the FTA is monitoring companies managed and controlled from the UAE, those with a permanent establishment in the UAE, or those earning state-sourced income in the country, all of which fall under the scope of taxation. "FTA is not watching only your companies incorporated in the UAE. It is watching your offshore companies as well," she said.

Highlighting the global impact on large multinational corporations, Alia spoke of the "Two Pillar" system which took effect starting January 1. This rule affects multinational companies with an annual consolidated revenue exceeding EUR 750 million (approximately Dh3.15 billion). She also outlined a "substance-based income inclusion" shield, which allows for a reduction in the two-pillar income based on 5 per cent of payroll costs for employees working on multinational group activities in the UAE and 5 per cent of the annual revenue for companies with tangible assets in the UAE.

'Safe harbor provision'
Addressing the "domestic minimum top-up tax," which ensures a global minimum tax rate of 15 per cent, Alia explained the importance of the de minimis "Safe Harbour" provision. Companies with revenue of less than EUR 10 million or those experiencing a loss or income of less than EUR 1 million in a period may not be subject to this top-up tax, but this requires an annual election.

She also detailed specific rules for Multinational Corporations (MNCs) in their initial phase in the UAE, potentially allowing their total revenue to be exempt from tax, provided they meet certain conditions regarding the number of jurisdictions in which they operate and the value of their assets outside the UAE.

Vital points of note
On compliance, Noor explained that all financial conditions and calculations must be made in UAE Dirhams (Dh), requiring conversion from other currencies using specific settlement rates. She also said that group companies need to prepare a special-purpose audit report, focusing on the companies within the tax group.

Discussing allowable and disallowable expenses, Alia said that salaries must align with concession market rates based on benchmarking, entertainment expenses are 50 per cent allowable for clients (100 per cent for employees), and interest is permissible up to 30 per cent of EBITDA. Bribes and personal expenses are disallowable.

Alia stressed the importance of making informed decisions during the tax return submission, particularly regarding irrevocable elections for Free Zone status, realisation basis accounting (for companies with cash flow issues), small business relief (for revenues below Dh3 million), business restructuring relief, and foreign permanent establishment exemptions.

She also stressed the importance of maintaining accurate documentation, including ledgers and books of accounts, for a period of seven years. For companies with revenues exceeding Dh 200 million are required to maintain local file for multinational companies, maintaining a master file is mandatory as well.

For all businesses transfer pricing documentation is mandatory to ensure arm's length transactions and avoid penalties for tax evasion. She advised businesses to streamline their structures by closing inactive companies to reduce compliance costs and to follow the correct procedures for company liquidation, including CT registration and obtaining a liquidator report.