How to Structure Your Business for Lower Corporate Tax in UAE?

UAE has implemented a standard 9% corporate tax for eligible companies with taxable income exceeding AED 375,000, while concurrently providing ongoing tax incentives and reliefs to support the business. Corporate tax planning involves making smart choices about your business structure, income allocation, and expense management to comply with the tax laws and reduce your tax liability. In this blog post, we will discuss some key aspects and strategies of effective corporate tax planning.

Choosing the Right Business Structure for UAE Corporate Tax

The structure of your business for UAE corporate tax is important with a significant impact on your tax obligations and opportunities. There are two main types of groups that you can form with your subsidiaries or affiliates for corporate tax filing purposes:  qualifying groups and tax groups.

Qualifying Groups

A qualifying group is a group of companies that share a common parent company that owns at least 75% of each subsidiary. All the companies in the group must file their corporate tax returns, but they can transfer their losses to other group members to offset their profits to reduce the tax burden and efficiently utilize their losses. However, forming a qualifying group is not as simple as meeting the ownership threshold. The satisfaction of certain conditions is mandatory as stated below:

• There must be the same accounting standards and period for the parent entity and all its subsidiaries.
• The parent company and all the subsidiaries must be resident in the same state or have a permanent establishment in the state.
• The parent company and all the subsidiaries must not be exempt or qualifying free zone persons (more on that later).

Tax Groups

A tax group is a more advanced form of a qualifying group, where the parent company owns at least 95% of each subsidiary. In this case, only the parent company needs to file a corporate tax return, and it is responsible for paying the tax on the consolidated income of the group. This can simplify your tax compliance and administration, as well as eliminate the need for intercompany transactions. Some of the challenges are in the way of forming a tax group, such as:

• The parent company and all the subsidiaries must meet the same conditions as a qualifying group, except for the ownership threshold, which is higher.
• The parent company and all the subsidiaries must agree to form a tax group and notify the tax authority in writing.
• The parent company and all the subsidiaries must remain in the tax group for at least three years unless there is a change in ownership or other circumstances.

Managing Deductible Expenses

Another key aspect of corporate tax planning is managing the deductible expenses to reduce the corporate tax liability that is subject to restrictions or limitations. You need to understand the rules and criteria for deducting your expenses and keep proper records and documentation to support your claims.

Common Deductible Expenses

Some of the common deductible expenses for corporate tax purposes are:

• Interest Expenses: You can deduct the interest expenses that you incur on loans or borrowings that are used for your business activities, subject to a cap of 30% of your earnings before interest, tax, depreciation, and amortization (EBITDA). However, there are some exceptions, such as interest on loans from related parties or loans that are part of a tax avoidance scheme.
• Entertainment Expenses: The entertainment expenses can be deducted that incur for business suppliers, partners, employees, and customers, by considering them reasonable and necessary for the business. However, the deductibility rate varies depending on the recipient of the entertainment. For example, entertainment expenses for your employees are fully deductible, while those for your customers, suppliers, and business partners are only 50% deductible.

Restrictions on Deductibility

Some of the restrictions on deductibility that you need to be aware of are:

• Interest Expenses on Loans from Related Parties: You cannot deduct the interest expenses on loans from related parties, such as your parent company, subsidiaries, or affiliates unless you can prove that the loan is not part of a tax avoidance scheme and that the interest rate is at arm’s length. This is to prevent you from shifting your profits to low-tax jurisdictions or reducing your taxable income artificially.
• Specified Transactions Involving Related Parties: You cannot deduct the expenses that you incur from certain transactions involving related parties, such as the sale or purchase of goods or services, the transfer or use of intangible assets, or the provision or receipt of financial assistance. These transactions are subject to transfer pricing rules, which require you to report them to the tax authority and justify that they are conducted at arm’s length. This is to prevent you from manipulating your prices or terms to gain a tax advantage.

Taking Advantage of Free Zone Incentives

One of the most attractive options for corporate tax planning is setting up your business in a free zone. A free zone is a designated area that offers various economic incentives and exemptions to businesses that operate within its boundaries:

Some of the incentives are listed below: -

• Corporate Income Tax Exemption: You can enjoy a full or partial exemption from corporate income tax for a certain period, depending on the type and nature of your business activities. However, to be eligible for this exemption, the stipulated criteria are required to be satisfied, for instance:
  • Qualifying activities, such as services to related parties, headquarters, fund management, financing, distribution regulated reinsurance, logistics, manufacturing of the goods, holding of securities and shares, processing of goods, operation, and ownership of ships, leasing and financing of aircraft
  • Status of qualifying free zone person (QFZP), which means that you are established in an approved designated zone, have a valid license for qualifying activities, have adequate substance in the designated zone, and do not engage in excluded activities, such as banking or insurance.
• Customs Duty Exemption: An exemption partially and wholly from customs duty may be availed while exporting/importing goods within the free zone. However, you must comply with customs regulations and procedures, such as obtaining the necessary permits and certificates, declaring the value and origin of the goods, and paying the applicable fees.
• Other Incentives and Exemptions: You can also benefit from other incentives and exemptions, such as lower registration and licensing fees, relaxed foreign ownership and capital repatriation rules, streamlined labor and immigration processes, and access to world-class infrastructure and facilities.

Applying for Small Business Relief

Suppose you are a small business or a SME operating in a free zone, You may have entitlement for small business relief, which can be availed on the satisfaction of certain conditions. This relief is designed to support the growth and development of small businesses and SMEs in the state. To qualify for this relief, you need to meet the following criteria:

• Your revenue must be equal to or below AED 3,000,000 in the relevant tax year.
• For the specific financial year, the business may not be engaged in any of the qualifying activities as a QFZP (Qualifying Free Zone Person).
• You must not be part of a multinational enterprise group that has a consolidated revenue of more than AED 50,000,000 in the relevant tax year.

On the satisfaction of conditions along with submission of a declaration within the stipulated time, a business also needs to keep complete accurate records of business activities and revenue and activities to provide the tax authority if needed.

Utilizing Business Restructuring Relief

If you are undergoing corporate restructuring within a qualifying or tax group, you may benefit from business restructuring relief, which allows you to transfer your assets to other group members without triggering any tax consequences. This relief is intended to facilitate the reorganization and rationalization of your business operations and improve your efficiency and competitiveness. To avail of this relief, you need to satisfy the following conditions:

• You must comply with the applicable state laws and regulations regarding the transfer of assets, such as obtaining the necessary approvals and consents, paying the relevant fees, and registering the changes in ownership and title.
• You must have a permanent establishment in the state or be resident in the state at the time of the transfer of assets.
• You must not involve any exempt or qualifying free zone persons in the transfer of assets unless they are part of the same qualifying or tax group.
• You must have a valid economic reason for the restructuring, other than obtaining a tax benefit.

On the satisfaction of conditions along with submission of a notification within the stipulated time, a business also needs to keep sufficient evidence and documentation to support its claim and provide them to the tax authority upon request.

Claiming Tax Loss Relief

Tax loss relief is a mechanism that allows you to offset your tax losses against your future taxable profits, reducing your tax liability in subsequent years. To improve liquidity and cash flow, it will be helpful in a weak financial year. However, there are some rules and limitations that you need to follow when claiming tax loss relief, such as:

• You can only carry forward your tax losses for a maximum of five years, after which they will expire and become unusable.
• You can only offset your tax losses against your taxable profits from the same source or activity unless you are part of a qualifying or tax group, in which case you can offset your tax losses against the group’s consolidated taxable profits.
• You cannot carry back your tax losses to previous years unless you are part of a tax group, in which case you can carry back your tax losses for one year, subject to certain conditions and restrictions.
• You cannot transfer your tax losses to other entities unless you are part of a qualifying tax group.

Effectively mitigating corporate tax liabilities requires strategic planning, an indispensable element of sound business governance. Embracing the myriad strategies and considerations elucidated in this manual empowers organizations to optimize their tax positions while adhering to regulatory mandates. For personalized assistance and expert guidance in corporate tax planning initiatives, partnering with experienced tax professionals like corporate tax uae, possessing deep insights into local regulations and industry best practices, is highly recommended.