As we reach the midpoint of 2024, the issue of corporate tax preparedness is a significant concern for businesses. What criteria must be met for a business to consider itself ready for corporate taxes? Does the belief persist that operating in a free zone exempts one from tax obligations and compliance? Or is there an assumption that all recorded expenses will be deductible for tax purposes?
To effectively manage these challenges, three key elements under corporate tax laws require urgent attention: deductions, reliefs, and considerations specific to free zones. Ensuring that all expenses are correctly recorded and categorized is crucial. This involves a close alignment with financial statement audits, which now serve dual purposes: ensuring financial accuracy and compliance with tax regulations. Not all expenses recognized in financial statements may qualify for tax deductions (e.g., personal expenses, entertainment, and thin capitalization of interest), necessitating careful review and adjustments. The nature of payments also plays a critical role in determining their tax deductibility.
Transactions with group companies must adhere to arm's length pricing principles. As the UAE continues to establish itself as a global business hub, many entities set up headquarters here, leading to a significant volume of related party transactions. Compliance with transfer pricing rules is therefore essential. For example, shareholders drawing salaries from their companies must ensure these are benchmarked according to the arm's length principle.
Seeking corporate tax reliefs requires meeting specific conditions, highlighting the importance of compliance and documentation. Evidence such as asset valuations for pre-tax period gains is crucial. Decisions regarding reliefs (e.g., for small businesses, transfers within qualifying groups) must be made during the income tax return filing, which is due next year. From a tax optimization perspective, these decisions should be made promptly.
The law provides relief from benchmarking for 'low value-adding services' by offering a safe harbor of five percent, reducing compliance burdens. However, businesses must assess whether their services qualify under the limited scope of 'low value-adding services', requiring a detailed eligibility assessment.
Claiming the free zone zero percent benefit requires meeting specific conditions, with documentation playing a key role in demonstrating compliance. For instance, a free zone entity engaged in distributing goods must ensure its customers are not end users, requiring confirmation through undertakings or contracts and careful documentation preservation.
Looking ahead to 2025, the implementation of the BEPS Pillar II framework will require multinational enterprises to pay a fifteen percent Global Minimum Tax (GMT) on their profits. Although not yet in effect in the UAE, businesses should prepare for its potential future implementation.
In support of businesses' journey towards corporate tax readiness, we will continue to provide expert insights and tips in our ongoing article series.
