In 2023, the UAE introduced a 9% corporate tax for eligible companies with taxable income exceeding AED 375,000. Before this change, the UAE has long been known as a tax-free haven. Now, the federal corporate tax brings a significant shift in the UAE’s business scene, pushing businesses to find methods to reduce corporate tax liability in UAE.
The corporate tax rate for businesses in the UAE is still globally competitive. However, companies now need to plan strategically to maintain profitability and minimise the amount of corporate tax your business is liable for.
In this article, we’ll explore the various strategies to save corporate tax in the UAE. From understanding the fundamentals to leveraging tax-saving opportunities, we’ll provide you with a comprehensive guide to minimising your tax liability while adhering to legal requirements.
Understanding UAE Corporate Tax
The UAE’s corporate tax system is designed to be straightforward and business-friendly. Here are the key points to know before you optimise tax savings for business in UAE:
- UAE Corporate Tax Rate: The standard corporate tax rate is 9% in the UAE.
- Taxable Income Threshold: Businesses with taxable income up to AED 375,000 are subject to a 0% rate, effectively exempting small businesses and startups.
- Applicable Entities: The tax applies to most businesses and commercial activities operating in the UAE, with some exceptions.
- Exceptions: Certain entities, such as government entities and extractive businesses, are exempt from the corporate tax.
- Free Zones: Businesses operating in UAE free zones may be eligible for various tax incentives.
- Implementation Date: The corporate tax regime became effective for financial years starting on or after June 1, 2023.
Understanding these fundamentals is crucial for developing an effective tax planning strategy to minimise business tax liability for corporations in the UAE.
How to Reduce Corporate Tax Liability in UAE?
UAE businesses have different options available that they can utilize to reduce corporate tax. Some of them are structuring your company, optimizing for deductible expenses, and hiring tax agents who can also help you stay compliant with all UAE tax regulations and avoid hefty fines and penalties.
Let’s explore all possible ways on how you can lower the corporate tax for which your business is liable.
1. Structure Your Business for Lower Corporate Tax
The structure of businesses can have a significant impact on minimising tax liabilities for corporations. The UAE corporate tax system recognizes two main types of business groups for tax purposes:
1. Qualifying Groups:
- A Qualifying Group is formed when a parent company owns at least 75% of each subsidiary.
- Each company in the group must file its own tax return, but it can transfer losses between group members to reduce corporate tax liability.
2. Tax Groups:
- A Tax Group is a more integrated structure where the parent company owns at least 95% of each subsidiary.
- Only the parent company files a consolidated tax return for the entire group, making the compliance process much simpler and smoother without the need for intercompany transactions.
Choosing between a Qualifying Group and a Tax Group depends on your business’s level of integration, the flexibility you require, and your long-term plans. Consulting with professional corporate tax consultants in Dubai, UAE can help you determine the most suitable structure for your organisation.
2. Optimising Deductible Expenses
Maximising your deductible expenses is a crucial strategy to minimise business tax liability for corporations in the UAE. The UAE corporate tax system allows various types of deductible expenses, including:
1. Interest Expenses:
You can deduct interest paid on loans used for business purposes. This deductible expense is subject to a cap of 30% of your earnings before interest, tax, depreciation, and amortisation (EBITDA).
2. Entertainment Expenses:
Expenses for entertaining business partners, clients, and employees are deductible. However, the deductibility rate varies – 100% for employee entertainment and 50% for client/partner entertainment.
3. Travel Costs:
Business-related travel expenses, such as airfare, accommodation, and local transportation, are generally deductible.
4. Advertising and Marketing:
Costs associated with promoting your business, including digital marketing and print advertising, are typically deductible.
5. Depreciation:
The cost of assets used in your business can be deducted over time through depreciation, with different depreciation rates for various asset types.
6. Rent and Utilities:
Costs for your business premises, including rent and utilities, are deductible.
7. Salaries and Employee Benefits:
Wages, salaries, and most employee benefits are considered corporate tax deductible expenses.
However, there are some restrictions on deductibility, such as related-party transactions and personal expenses. Hence, you must maintain detailed records to justify expenditures while applying for deductions.
3. Hire A Registered Tax Agent in the UAE
It is complex to reduce corporate tax liability for businesses in the UAE. It can be a challenging endeavour for businesses that are new to dealing with corporate taxes.
Hiring a registered tax agent in the UAE can be immensely beneficial to minimise the tax burden of a company, and for several other reasons:
1. Expertise in UAE Tax Law
Corporate tax professionals, such as Avyanco specialise in UAE tax regulations and can provide expert advice tailored to your business.
2. Comprehensive Tax Management
Tax experts help you manage your overall taxation-related tasks, including reviewing financial statements, monitoring cash flow, and forecasting tax liabilities.
3. Risk Mitigation
Tax agents can help you avoid costly mistakes by:
- Identifying potential compliance issues
- Keep you updated about all the compliance requirements for business ahead of time
- Reviewing transactions to minimise tax risks
4. Maximising Deductions and Credits
Tax agents are skilled at identifying all possible deductions and credits your business might be eligible for to avoid overpaying.
5. Time and Resource Savings
Reducing business tax in the UAE can be time-consuming and complex. By hiring a tax agent, you can focus on running your business while we take care of your tax liability.
When choosing a tax agent, look for proper certification, relevant experience, a good reputation, and clear communication. Hiring a tax agent involves a cost for sure. However, the potential savings and peace of mind they provide often outweigh this expense.
4. Leveraging Free Zone Incentives to Reduce Business Tax in UAE
The UAE’s free zones offer various incentives to businesses, attracting foreign investments. With the introduction of corporate tax, understanding and leveraging free zone incentives becomes even more crucial. Some of the key benefits include:
- Corporate Tax Exemptions: Many free zones offer exemption from corporate, provided the business engages in qualifying activities and maintains the status of a Qualifying Free Zone Person (QFZP).
- Customs Duty Exemptions: Free zones typically offer exemptions from import and export duties, which can significantly reduce costs for businesses involved in international trade.
When considering a free zone, it’s important to evaluate factors like:
- Nature of your business
- Market access
- Cost structure
- Long-term plans
Some businesses opt for a hybrid model. They set up a free zone entity for activities that benefit most from the incentives. And they also register a mainland entity for activities that require a local presence.
5. Exploring Small Business Relief Options
The UAE’s corporate tax system includes provisions to support small and medium-sized enterprises (SMEs) through Small Business Relief. This relief is designed to minimise business tax liability for corporations in UAE:
Eligibility Criteria:
- Revenue must be equal to or below AED 3,000,000 in the relevant tax year
- The business must not be engaged in excluded activities
- Not part of a multinational enterprise group with consolidated revenue exceeding AED 50,000,000
Benefits:
- Simplified compliance procedures
- Potential for reduced tax rates or exemptions
To benefit from this relief, businesses must determine their eligibility. They must submit a declaration with tax return and present accurate records of revenue and operations (if required).
Maximising the benefits of Small Business Relief involves:
- Closely monitoring your revenue
- Focusing on eligible activities
- Regularly reviewing your group structure
As your business grows, make a plan to develop a business structure that helps you reduce the corporate tax liability in Dubai, UAE in case you no longer fit the relief’s eligibility criteria.
Also, if you are starting fresh, company structuring in UAE plays a vital role in optimising tax savings.
6. Utilising Business Restructuring Relief
Business Restructuring Relief allows tax-free asset transfers within groups:
Eligibility conditions:
- Must be within a qualifying or tax group
- Entities must have a UAE presence
- The ownership structure must remain substantially the same
- Must have a valid economic reason beyond tax advantages
- Assets must stay within the UAE taxation system
Covered scenarios:
- Asset transfers
- Business divisions
- Mergers
- Share exchanges
Process:
- Plan the restructure
- Notify tax authorities
- Document the process
- Ensure ongoing compliance
Benefits:
- Delay paying taxes to a future period
- Flexibility in group structure
- Improved cash flow management
While applying for Business Restructuring Relief to reduce corporate tax liability for businesses in UAE, ensure all documents are complete and error-free.
7. Implementing Tax Loss Relief Strategies
Tax Loss Relief optimises tax savings for business in UAE by offsetting losses against future profits. You can carry forward losses for up to 5 years. Group relief is also available for qualifying and tax groups. However, the losses can only be carried forward against profits from the same source/activity.
To ensure you get maximum benefits from this relief, you must strategically time significant expenses. You can also explore group relief options if applicable and consider accelerating income in profitable years.
Limitations:
- Cannot carry back losses (except in specific group scenarios)
- Restrictions on loss transfers between entities
Additional Tax Planning Tips
Here are some additional tips to reduce corporate tax liability in UAE:
- Keep detailed records of all business transactions
- Plan major purchases carefully, considering depreciation benefits
- Pay taxes before deadlines to avoid penalties
- Stay updated about changes in tax laws
- Review your business structure for tax efficiency regularly
- Explore available tax credits and incentives
Conclusion
To reduce corporate tax liability for businesses in the UAE, you need a comprehensive approach. You must combine the understanding of the tax system, strategic business structuring, expense optimization, and the utilisation of available incentives and reliefs.
An experienced tax professional will help you develop the right strategies to save corporate tax in the UAE. They will keep you informed about the evolving tax compliances and help you understand the new corporate tax regime.
At Avyanco Auditing LLC, our team of expert Corporate Tax Advisors is dedicated to helping businesses develop tailored strategies to minimise business tax liability for corporations in the UAE. Contact us today to learn more about how we can assist you in maximising your tax efficiency.
Let’s work together to ensure your business grows in the UAE’s evolving financial environment!
