As we continue our series on corporate tax readiness, addressing the frequently asked questions (FAQs) about corporate tax and transfer pricing is crucial. Over the past few months, we have noticed a rise in misconceptions and uncertainties within the business community. These common queries underscore a broader need for clarity and understanding as businesses navigate the complexities of tax regulations and transfer pricing strategies. By addressing these questions, we aim to clear up confusion and offer practical insights to help businesses achieve compliance and optimize their tax positions effectively.

FAQs:

Residency principles

I am an Indian citizen living in the UAE for the past 10 years. I have Indian income exceeding Rs1.5 million, and I believe I meet the conditions for being a non-resident under the Indian Income-tax Act. Do I need to consider anything else?

Yes, you must be aware of the tax nomad provisions in the Indian Income-tax Act since your Indian income exceeds Rs1.5 million.

Corporate tax compliances and limits

I have a trade licence, but the company has been dormant for years. Do I need to register for corporate tax?

Yes, corporate tax registration is mandatory even if the company has no turnover during the year unless the company is officially liquidated, the license is surrendered, and the company is de-registered on the portal. Failure to register or de-register after liquidation can result in penalties.

I have three sole proprietorships in my name, each with a turnover of Dh700,000. Am I subject to corporate tax since a natural person is subject to corporate tax only if the turnover exceeds Dh1 million?

Yes, the turnover of all sole proprietorships will be combined to test the Dh1 million threshold. Since the combined turnover exceeds the threshold, you are subject to corporate tax and need to register.

My entity was incorporated on 10 June 2023, with a financial year from January to December. When is my first return filing due?

Since your entity was incorporated in June 2023, your first tax period of 7 months will be from 10 June 2023 to 31 December 2023. Consequently, your first return will be due 9 months from 31 December 2023, i.e., on 30 September 2024.

Have penalties already started?

Yes, if you miss the due date for corporate tax registration, a penalty of Dh10,000 will be imposed on the entities. Entities that have already missed the deadline are currently receiving these penalties.

Transfer pricing

I am an executive director of a company and am not related to the owners in any way. Does my remuneration still need to be at arm’s length?

Yes, directors and officers of the company are covered under the definition of connected persons, and any payments or benefits provided by the taxable person to connected persons must comply with the arm’s length principle.

Do I need to maintain transfer pricing (TP) documentation even if my turnover doesn’t exceed the threshold (Dh200 million)?

All businesses are required to maintain records of their transactions with related parties and connected persons, and certain businesses must submit this information with their tax return. Additionally, if the Dh200 million revenue threshold is exceeded, the entity will also be required to maintain a local file and master file.

Deductions

I paid a service fee to the local government and, due to delays, incurred a fine for late payment. Will both the service fee and fine be deductible for corporate tax purposes?

Government fees and charges incurred wholly and exclusively in the ordinary course of business are deductible for corporate tax purposes. However, any fines or penalties paid for a breach of law are not deductible. Accordingly, the service fee would be deductible, but the fine would not.

Our entity paid for the business trip tickets of our managing director, who is also a shareholder. Will this expense be considered entertainment, even though it was incurred for business purposes?

As per the law, expenses incurred on travel for shareholders are classified as entertainment expenses. Therefore, only 50% of the expense will be deductible.

Foreign businesses

I have a company in the UK that provides services to clients in the UAE. We do not have any branch or place of business in the UAE. Is the entity still required to pay taxes in the UAE?

A non-resident person or entity is subject to UAE Corporate Tax (CT) only if they have a permanent establishment in the UAE or earn income sourced from the UAE. Since your entity does not have a permanent establishment or physical presence in the UAE, and there is only state-sourced income, you are not required to file tax returns in the UAE. Instead, withholding taxes, which are currently 0%, would apply.

Is there any case in which an entity incorporated outside the UAE may be considered a resident taxable person in the UAE?

Yes, a foreign juridical person may be considered a UAE resident for Corporate Tax (CT) purposes and subject to UAE CT on its income sourced from both the UAE and abroad if it is effectively managed and controlled in the UAE, meaning it has its place of effective management in the UAE. This analysis will depend on a case-by-case basis.

While we have addressed many of the general queries circulating in the market, consulting an expert for any specific questions is highly recommended. As the UAE enters this new era of tax regulation, seeking guidance from a consultant can provide valuable insights and ensure compliance with the latest requirements.

The writer is Partner, MICS