The introduction of a corporate tax regime in the UAE has undoubtedly shifted the country’s business landscape. For a nation that has long been attractive to businesses due to its tax-free environment, the move toward corporate taxation was significant, requiring businesses to recalibrate their strategies. Now, with the first year under the new regime nearly complete, it’s time to reflect on the key challenges, opportunities, and lessons learned.

In this article, we’ll unpack the essential elements of the new corporate tax regime and explore how businesses can position themselves for success in the UAE’s evolving tax environment.

A Shifting Landscape: The Introduction of Corporate Tax

When the UAE announced the introduction of a corporate tax at a rate of 9% on taxable profits exceeding AED 375,000, it marked a fundamental change for businesses operating within its borders. Companies with profits below this threshold continue to benefit from a 0% tax rate, a clear nod to supporting smaller businesses and start-ups. However, larger companies must now adapt to the new requirements, many of which align with OECD standards.

This move is seen as part of the UAE’s broader strategy to diversify its economy and align with global standards. The introduction of corporate tax came hand-in-hand with ongoing refinements and updates to ensure that businesses are operating under a robust and fair system.

Understanding Free Zones Under the New Regime

The introduction of corporate tax in the UAE brought significant attention to the status of free zones, which historically operated under their own set of rules. Many businesses initially assumed that as long as their activities were conducted outside the UAE mainland, they would remain outside the scope of corporate tax.

However, the Federal Tax Authority (FTA) quickly clarified the framework, introducing the concept of "Qualifying Free Zone Persons." To benefit from the 0% corporate tax rate, businesses must meet stringent criteria, including conducting qualifying activities and meeting economic substance requirements.

For many free zone entities, the most challenging aspect has been ensuring that income is derived from qualifying activities, as outlined by the FTA. Additionally, businesses conducting mainland operations or failing to meet the specific conditions risk losing their preferential tax status.

This shift has prompted a reassessment of business structures and operational models. As the distinctions between free zones and mainland operations become increasingly complex, companies must remain proactive in ensuring compliance with the new tax regime.

Transfer Pricing: A New Reality

For businesses that have multiple entities or engage in cross-border transactions, the introduction of transfer pricing has been another critical area of adjustment. Transfer pricing regulations require businesses to ensure that transactions between related parties are conducted at arm’s length—that is, reflecting fair market value.

This may sound simple in theory, but in practice, it can add significant complexity to business operations, especially when documenting transactions across borders or within multiple UAE entities. Companies are now required to provide extensive documentation to demonstrate compliance with these new rules. For those unprepared, the administrative burden can be substantial.

Guidance on transfer pricing requirements continues to evolve, with the latest update in November 2024 specifying that the Transfer Pricing Schedule in the corporate tax return must be completed if the total value of transactions with Connected Persons (including their Related Parties) exceeds AED 500,000. However, not all transactions with Connected Persons need to be disclosed. The schedule must only include details for each Connected Person whose aggregate payments or benefits exceed AED 500,000.

As tax expert Steven Ireland notes, “The key to navigating transfer pricing is documentation and justification. Businesses need to ensure that they can clearly show how they arrived at fair market values for related-party transactions.”

Increased Compliance Costs: A Necessary Investment

The new corporate tax regime has not only introduced changes in tax filing requirements but has also led to increased compliance costs for businesses. Companies must now invest in tax advisory services, update their accounting systems, and ensure their internal processes are robust enough to meet the new requirements​.

For smaller businesses, this can be a challenging transition, especially if they were previously operating in a tax-free environment. However, these investments are crucial, not just for compliance but also for future growth. Efficient systems and accurate record-keeping will not only help businesses avoid penalties but can also provide a clearer financial picture, allowing for better strategic decisions.

Ireland emphasises, “Compliance is not just about avoiding penalties; it’s about building systems that benefit your business in the long term.”

Deadline Extensions: A Temporary Solution

In the first year of the new corporate tax regime, one of the most notable developments was the extension of tax filing deadlines for certain businesses. This wasn’t a blanket extension but a targeted measure aimed at addressing delays in the tax system’s readiness. While the extension provided much-needed breathing room for some sectors, it also highlighted the need for businesses to plan for potential disruptions​.

As Ireland points out, “The extension was a practical solution, but it underscores the importance of preparing for the unexpected. Businesses should build flexibility into their tax planning to accommodate any future delays or changes in the system.”

Impact on Free Zone Entities and Corporate Structuring

The new corporate tax regime has significantly impacted how businesses approach corporate structuring. Free zones, once seen as clear paths to tax exemption, now require businesses to meet stringent conditions to qualify for the 0% tax rate.

Companies need to review their structures, especially if they operate in both free zones and the mainland. Failure to meet economic substance requirements or engaging in non-qualifying activities could lead to the imposition of corporate tax​.

Ireland advises businesses to reassess their corporate structures to ensure they are optimised for the new tax environment. “It’s essential to understand the nuances of the new rules. Simply being in a free zone is no longer enough to guarantee tax exemption.”

Common Questions: What You Need to Know

What Expenditure Can Be Claimed as a Deduction?

Businesses can claim deductions for expenses that are wholly and exclusively incurred for the purpose of generating taxable income. This includes salaries, rental costs, and other operational expenses. However, non-deductible items, such as fines, must be carefully documented​

How Should Director Salaries Be Handled?

Director salaries must comply with transfer pricing rules and reflect fair market value. Businesses must be prepared to justify these payments to avoid scrutiny from the tax authorities​.

Is a Free Zone Entity Still Tax Exempt?

Only entities that meet specific criteria, such as engaging in qualifying activities and maintaining economic substance, can benefit from the 0% tax rate in free zones.​

Businesses must regularly review their compliance to ensure they qualify for this exemption.

Practical Steps for Businesses Moving Forward

As the UAE continues to refine its corporate tax regime, businesses need to be proactive in their approach to compliance. Here are a few practical tips:

• Engage Professional Advisors: Tax regulations can be complex, and seeking professional advice can help you navigate the nuances of the new regime.
• Update Compliance Systems: Invest in accounting and compliance systems that are designed to handle the increased requirements under the new tax regime.
• Reassess Corporate Structures: Review your business structure, especially if you operate in both free zones and mainland UAE, to ensure optimal tax efficiency.
• Stay Informed: The UAE’s tax landscape is evolving, and staying up-to-date with legislative changes is essential for long-term success.

‍Conclusion

The first year of the UAE’s corporate tax regime has brought both challenges and opportunities for businesses. As the landscape continues to evolve, staying proactive, investing in compliance, and optimising corporate structures are critical to ensuring success in this new tax environment. By doing so, businesses can navigate the changes while positioning themselves for growth in the years to come.