The Ministry of Finance and the Federal Tax Authority (FTA) have issued clarifications regarding corporate tax ahead of its implementation on June 1, 2023. These clarifications aim to provide guidance and ensure smooth compliance with the new regulations.
Maximum Cap on Interest Deductions
The UAE's Ministry of Finance has set a maximum cap on the interest that can be deducted by companies engaged in business activities in the UAE under the corporate tax law. The deduction for net interest expenditure is limited to either 30% of adjusted EBITDA or a safe harbor amount of Dh12 million.
Tax Grouping
Entities in which the UAE parent company owns 95% or more can form a tax group and will be treated as a single entity for corporate tax purposes. The parent company must hold at least 95% of the voting rights and shares in each UAE entity. Tax grouping simplifies the calculation and reporting of taxable income, allowing the parent company to file a single tax return based on the aggregated profit or loss of the group.
Unincorporated Partnerships
The Ministry of Finance clarified that unincorporated partnerships are generally not subject to corporate tax unless they are considered corporate entities. In the latter case, individual partners are taxed based on their share of the partnership's income. An unincorporated partnership that elects to be treated as a taxable entity must notify the Federal Tax Authority of any changes in the partnership composition.
Registration Requirement for All Companies
All companies operating in the UAE, including those in free zones and the mainland, are required to register for corporate tax and file tax returns, regardless of their exemption status. Companies should update their accounting methods to comply with the new corporate tax guidelines. The implementation dates vary based on the financial year end, with different deadlines for companies whose financial year ends on May 31, 2023, and December 31, 2023.
Views from Businessmen
Prominent business figures have expressed their opinions on the UAE's corporate tax policies. Bharat Bhatia, CEO of Conares, sees the policies as advantageous for emerging businesses and SMEs, streamlining operations and promoting transparency. Paras Shahdadpuri, chairman of Nikai Group, stated their readiness for the implementation of corporate tax and their commitment to adapt and contribute to the UAE's success. Karthik Jayaraman, managing director of WayCool Foods and Products, sees the Ministry of Finance's decision on small business relief as a positive development and a sign of the government's support for small businesses, encouraging investment, growth, and innovation.
Overall, the UAE's new corporate tax regulations aim to provide clarity, streamline processes, and reinforce the country's position as a leading business and investment hub.
