As the UAE's first corporate tax registration deadline (31 May 2024) approaches, companies and entrepreneurs need to ensure they check their obligations to register as taxable entities.
Introduction to Corporation Tax Law
The registration process under Federal Law No. 47 of 2022 (Corporate Tax Law) is new to the UAE and 2024 will be the first mandatory year for companies to register with the Federal Tax Authority (FTA) as taxable entities. Since this is the first year of such registration, companies and individuals should be prepared for possible additional requirements, such as providing additional documents and/or paying fees, after submitting registration data through the EmaraTax portal (Portal).
Who is required to register?
Individuals
The Corporate Tax Law applies to individuals carrying out business or entrepreneurial activities in the UAE. This includes sole proprietorships or sole proprietorships and individual partners in unincorporated partnerships doing business in the UAE. Generally, if an individual's activities require a business license or equivalent permit from a competent authority, they will be subject to the Corporation Tax Law.
Companies, partnerships and other legal entities
The Corporate Tax Law applies to UAE companies, partnerships and other legal entities incorporated in the UAE, as well as foreign legal entities having a permanent establishment in the UAE or deriving income from UAE sources.
Foreign legal entities that are effectively managed and controlled in the UAE will be treated as registered in the UAE. Limited and general partnerships, as well as other unincorporated joint ventures and associations of persons, will be considered "see-through" for corporate tax purposes. This means that income generated from such businesses will only be taxed in the hands of the partners or members.
Do I need to register?
Branches of UAE companies are considered part of their "parent" company and are therefore not considered separate legal entities and are not required to register or file separate tax returns. However, the head office of such branches is required to register.
In contrast, branches of foreign companies in the UAE will likely need to register through the Portal as their income will be considered taxable. Such companies may qualify for certain tax benefits, which we can advise on on an individual basis. However, tax benefits do not replace the obligation to register as a taxable person under the Corporation Tax Law.
Free zone companies conducting business or business activities in the UAE are required to register through the Portal, even if they may qualify for certain tax benefits.
Foreign individuals may also be required to register as a taxable person through the Portal if they are engaged in a licensed business activity in the UAE. However, wages are not subject to tax, so foreign individuals receiving wages are not required to register through the Portal.
What happens if I don't register?
The fine for late registration as a taxable person is AED 10,000.
In 2023, the FTA conducted 40,000 inspections in local markets across all UAE emirates, an 80% increase compared to 2022. This strengthening of supervision is aimed at combating tax evasion and improving tax discipline. Therefore, companies and entrepreneurs should understand that while corporate tax is new in the UAE, authorities take tax compliance seriously.
Do I need to register if tax incentives apply?
Under the Corporation Tax Act, a company or individual carrying on a business activity is required to register regardless of whether that person can claim tax relief, unless an exemption already applies.
Who should not register?
Companies that may not need to register under current FTA guidance include:
- Companies eligible for automatic registration exemption (details of such companies can be found on the FTA website).
What if automatic release does not apply?
If a company does not fall into one of the automatic exemption categories, it must register through the Portal, regardless of whether it is located in a free zone. Once registered, a company can apply for a tax break that exempts it from paying corporate tax on company income. These benefits include:
- Qualified free zone companies engaged in qualified activities and earning qualified income.
- Qualified public charities.
- State and private pension/social funds.
Additional tax breaks may reduce the tax rate to zero percent:
- Rules of permanent establishment.
- Rules of foreign permanent establishment.
- Double taxation agreements.
What about individuals?
Individuals must register if they are engaged in business or entrepreneurial activity. However, they will not be taxed and therefore not required to register for corporation tax if their income comes from the following sources:
- Salary from the company, including income received for serving as an executive director.
- Personal investment income: for example, income from investments in a joint-stock company.
- Real estate income: income from the rental or sale of real estate.
Although certain types of income may be taxable, individuals may qualify for tax relief and enjoy a more favorable zero percent tax rate if they meet certain conditions, such as:
- Income threshold.
- Withholding tax rate.
- Exempt income.
Conclusion
Corporate tax registration is an important step for all companies and individuals doing business in the UAE. Despite the novelty of this process, compliance with tax laws is necessary to avoid fines and ensure the legal security of the business. Crystal Law Firm is here to help you through the registration process and corporate tax advice to keep your business on the right track. Contact us for more information and professional assistance.