What is Corporate Tax?
Corporate Tax is a tax charged on the profits made by companies and businesses. In simple terms, it is a tax on the money a company earns after deducting all their expenses.
The United Arab Emirates (UAE) introduced Corporate Tax starting from June 2023. Now, companies operating in Dubai need to pay Corporate Tax if they earn a profit.
Let’s break down some key aspects of Corporate Tax to help businesses prepare:
Who has to pay Corporate Tax?
- Local companies registered in Dubai
- Foreign companies with a branch or office in Dubai
- Free zone companies that don’t meet certain exemption criteria
Who is exempt?
- Small businesses with profits below AED 375,000
- Qualifying free zone companies meeting specific rules
- Companies involved in certain exempt activities
Corporate Tax Rates in Dubai
There are three tax rate slabs applicable based on the annual profits of a company:
- 0% tax for profits up to AED 375,000
- 9% tax on profits between AED 375,001 to AED 400,000
- 15% tax on profits exceeding AED 400,000
The rates are low to support businesses. Let’s explore how the rates work:
0% rate
If a company earns less than AED 375,000 in profits, they won’t have to pay any Corporate Tax. This benefit is for smaller startups and businesses.
9% rate
The 9% rate applies to profits between AED 375,001 to AED 400,000. Only the portion of profits within this bracket are taxed at 9%.
15% rate
Any earnings over AED 400,000 are taxed at the highest rate of 15%. Large companies with substantial profits fall in this category.
Understanding Tax Compliance Process
Let’s look at the key steps involved in complying with Corporate Tax requirements:
Registration
All companies liable to pay tax must register with the Federal Tax Authority before the end of June every year.
Quarterly tax payments
Advance tax payments are to be made by the 15th day of the month following each quarter based on estimated tax liability.
Annual tax return
The return for the whole financial year is to be filed along with payment of any remaining balance taxes by end of June every year.
Record keeping
It is mandatory to maintain books of accounts and documents for 5 years to facilitate any audit by the tax authority.
Proper planning is needed to understand documentation requirements and stick to the compliance timelines.
Optimizing Cash Flow with Expense Management
One way to prepare financially is optimizing cash flow through effective expense management:
- Track spending in real-time across departments and locations on a single platform.
- Analyze spending patterns to curb unnecessary or redundant costs benefiting the bottom line.
- Claim input tax credit and maximize tax savings by classifying expenses as per regulations.
- Integrate systems to export expense data into tax return for a smoother filing process.
The right technology helps gain complete visibility and control over spending to optimize working capital.
Preparation for a Possible Tax Audit
Tax audits may happen within 5 years from filing returns to validate compliance. Some common audit areas include:
- Large purchases and capital expenditures
- Reimbursements and advances to employees/owners
- Related party transactions
- Consistency in reported revenues
Maintaining supporting documents like invoices, payment receipts, contracts in an organized manner can facilitate providing information smoothly during audits to avoid penalties.
Conclusion
Corporate Tax compliance is important for businesses in Dubai to remain legitimate. Taking proactive measures like understanding fiscal requirements, institutionalizing financial processes and monitoring spending can help minimize tax-related risks. With the right preparations, companies can adapt efficiently to tax reforms as well.
FAQs
You can claim input tax credit for taxes paid on business purchases like raw materials, services, etc. by maintaining invoices and filing the credit amount in your tax returns.
Tax obligations remain the same except return filing due date which moves to the end of the sixth month from your financial year end. Quarterly advances are also aligned accordingly.
You may apply for limited extension by making a request and payment of applicable fines before due dates. It is best to avoid extensions and comply within prescribed timelines.
