When it comes to operating a business in the United Arab Emirates, you have probably heard about the introduction of corporate tax in the UAE. Thus, although the UAE still has low rates of corporate taxation compared to other countries, there are ways to minimize the taxation burden and increase profits. This article will shed light on some of the most effective strategies that could be employed when seeking to reduce corporate tax liability in UAE.
Understanding Corporate Tax in the UAE
The UAE has officially stated that it will introduce a federal corporate tax starting from the first of June, 2023. The standard rate of corporate tax will be 9% for companies earning more than AED 375,000 of profits. However, there are certain exceptions and allowances given to businesses which we will discuss below in this article.
Corporate tax rates in the UAE
| Taxable Income (AED) | Corporate Tax Rate |
|---|---|
| 0 - 375,000 | 0% |
| Above 375,000 | 9% |
| Large multinationals that meet specific criteria | To be determined based on 'Pillar two' of the OECD Base Erosion and Profit Shifting Project |
Best ways to reduce corporate tax liability in UAE
Take Advantage of Tax Exemptions and Incentives
The UAE has put in place several tax reliefs and incentives for the companies involved in various sectors. Thus, by satisfying the criteria for such exemption/incentives and applying for them, you can considerably minimize your corporation tax.
- Government Entities: It is also important to understand that any kind of government entity in the UAE is free of corporate tax.
- Extractive Businesses: Companies in the field of the natural resources exploration and production including oil and gas field enjoy lower corporate tax rate of 5% in UAE.
- Non-extractive businesses: If a company is performing activities that are beneficial to the GDP diversification of the UAE, it may qualify for lower taxation or even be excluded from certain taxes.
- Public Benefit Entities: Notably, some public benefit organizations including charities and education institutions are excluded from paying corporate tax in UAE.
- Free Zones: Companies that are established in free zones might not be subjected to taxation or their tax rates could be reduced.
Properly Structure Your Business
It is also important to consider the structure of the business because it plays a big role in determining the corporate tax due. For instance, establishing a subsidiary in a free zone can offer tax advantages and other privileges.
- Setting up a subsidiary company in a free zone: This simply means that through establishment of a subsidiary company in a free zone, the business entity can benefit from the concessions offered in the free zone; whereby it can import and export its products without incurring the cost of paying import and export duties and get well facilitated in the various processes of customs.
- Setting up a branch in a free zone: On this other hand, the business can opt for establishing a branch in a free zone in order to enhance its operation. Although a branch cannot be regarded as a legal entity that is distinct from the parent company, it can also enjoy the advantages associated with free zone tax entities' status.
Maintain Accurate Financial Records
It is important not to have incorrect records with regards to the financial records you have if you want to undergo corporate tax reduction. The concept of documenting each expenditure for your business enables you to claim some added deductions which in turn minimizes the taxable income thus reducing you tax implication.
- Tax Deductions: For instance, businesses can offset their revenues by such expenses as rent, salaries and depreciation among others. Specifically, it is necessary to keep track of these expenses and make sure they qualify as deductions.
- Audit and Assurance: Outsourcing auditing and assurance services involves hiring an independent auditing firm to conduct your audit and assurance of financial statements to help you fix any irregularities that you may be having in your financial statements and also ensure that you conform to the set legal requirements when conducting business in UAE.
Hire a Registered Tax Agent in the UAE
You should seek the services of a registered tax agent in the UAE in order to ensure that your business is on the right side of the law as far as tax compliance is concerned. A tax agent can also assist you to go through the possibilities that may allow for reduced amount of taxes that will be paid and whether or not you are qualified for some tax incentives and tax deductions.
- FTA Accredited Audit and Taxation Firm: This is because a tax agent must be a member of a firm that has been accredited by the Federal Tax Authority (FTA) and most importantly the tax agent must be well versed with the tax laws of the United Arab Emirates.
- Corporate Tax Consultants in UAE: A tax agent should employ competent corporate tax consultants who will be in a position to give efficient advice on tax matters.
Timely Corporate Tax Return Filing and Payments
Late submission of your corporate tax return or non-payment of your taxes attracts other costs in form of penalties and increased fees. Thus, if you ensure that you are preparing your tax returns and filing them as and when due, you with be able to avoid these other costs and be compliant with the tax laws of UAE.
FAQs
Q: How can companies reduce their tax liability in the UAE?
A: Some of the ways through which companies can minimise their tax cost in the UAE include availing the tax exemptions and reliefs, integration of the business structure, keeping sound records, engaging a registered tax consultant, and filing and paying corporate tax in the correct time.
Q: Are there legal ways to minimize corporate tax in the UAE?
A: Yes, it is legal to reduce corporate tax in the UAE through the following; tax waivers and incentives, tax reliefs for allowable expenses, and operation structures.
Q: What are common tax deductions available to businesses in the UAE?
A: Some of the allowable tax deductions that any business might be qualified for in the UAE are, rent, salary expenses, depreciation, and interest expenses.
Q: Does the UAE offer tax incentives for businesses?
A: Yes, the UAE has set out a legal framework for taxation and has been providing tax credits to the companies in certain fields or in certain geographical zones known as free zones. Some of these incentives may range from low taxation policy, tax holidays, and privileges such as import and export duty-free and easy custom formalities.
Conclusion
Hence, to reduce corporate tax liability in the UAE, the aspect needs careful planning and close attention to detail. Some of the strategies that will help you reduce your taxes include taking advantage of tax exemptions and incentives, structuring your business properly, keeping good fiscal books and records, hiring a registered tax agent in dubai , and ensuring that you are always on-time in filing and paying your corporate taxes.