The UAE Corporate Tax (CT) has made a complete shift in year-end strategy compared to the pre-CT era. Businesses are now required to complete their mandatory registration and filing with the FTA to avoid being penalised.
December 31st marks the end of the financial year in the UAE for most business entities. During the time left, all businesses need to complete their accounting, reporting, and tax compliance obligations. Further, they also need to complete audits and maintain extensive records of their businesses proactively to prevent future violations and penalties.
This makes tax planning in the UAE of utmost importance for the current and next financial year.
Why Act Now? (The 60-Day Countdown)
The following reasons make it important to take action during the 60-day period before the financial year ends.
- All your mandatory filings that needed to be completed before the year-end are now complete.
- All records, disclosures, and supporting documents are available and ready for audit and compliance.
- Avoid penalties for your business.
- Tax accuracy is ensured by revisiting provisions, accruals, and depreciation.
- Make estimates for uncertain transactions that may take place within the remaining 60 days.
- The company’s interim financial statements have been correctly recorded and used to estimate its corporate tax liability and year-on-year growth, as required under UAE Corporate Tax rules.
- For Transfer Pricing, conduct a thorough verification of whether the “related party” and “connected persons’” payouts are at arm’s length and ensure proper supporting documentation is available. Then, prepare or update transfer pricing disclosures and supporting files, if applicable. This will prepare your business for the next tax cycle.
Key Areas of UAE Corporate Tax Planning
The essential areas associated with corporate tax planning in the UAE, and a detailed breakdown of how to tackle each of these, are as follows:
Compliance Checks for Finances
For smooth tax planning in the UAE, it is important to proactively keep up with all compliance norms.
Inter-Company Transactions (Transfer Pricing):
Transfer pricing applies to all UAE businesses, for both domestic and cross-border transactions, that engage with “Related Parties” or “Connected Persons”. For “Related Parties”, the ceiling for the aggregate recorded value is set at AED 40 million. For “Connected Persons”, this value is set at AED 500,000. In case these values cross the set threshold, the business needs to provide necessary disclosures.
Verify that all related party transactions (RPTS) have been conducted at arm’s length and are fully documented. For immediate compliance, gather and validate necessary external benchmarks (comparables) for existing RPTs now. Then, draft the required Disclosure Form to be ready for submission alongside the CT Return.
Fixed Asset Register and Depreciation:
The UAE CT Laws disallow/restrict certain expense-related deductions to ensure that relief is obtained only for expenses incurred to generate taxable income. This includes recognising gains and losses on a realisation basis for deemed depreciation on investment property.
Review the Fixed Asset Register of your business and reconcile it with tax rules. Identify all assets that qualify for accelerated depreciation to maximise deductible expenses that you can file. Finalise the reconciliation and prepare a memo to justify any early asset disposals or acquisitions made in the final quarter.
Provisioning and Write-Offs:
Under the UAE Corporate Tax Law, it is important to maintain a detailed record of accounts, recording every deduction, non-deductibles, bad debts, capital expenditure, and carry-forwards.
Scrutinise all outstanding bad debts and ensure write-offs are compliant with CT rules to claim deductions. Then, make sure that all bad debt write-offs are legally documented (e.g., proof of collection attempts or formal liquidation notices) as required by the CT law before the year-end close. Seek the help of Corporate Tax Consultants in Dubai for a more streamlined process.
Free Zone Considerations
Free Zone companies can benefit from the 0% UAE corporate tax (CT) rate. However, the business must qualify as a Qualifying Free Zone Person (QFZP). Further, the income should be considered as that obtained from “Qualifying Activities”, which satisfy the conditions set by the UAE Corporate Tax Law.
These include:
- the manufacturing and/or processing of goods and materials,
- holding of shares and other securities,
- logistics services,
- ownership/operation/management of ships,
- fund management,
- wealth and investment management,
- headquarters services to related parties,
- treasury and financing services to related parties,
- financing/leasing of aircraft, and
- distribution of goods or materials in/from a designated zone.
Qualifying Income Test:
For Free Zone entities, a key task is to confirm that their income meets the Qualifying Income test to secure the 0% CT rate. The case of any non-qualifying income needs to be addressed appropriately and promptly.
Prepare a documented flow chart tracing all revenue streams back to the “Qualifying Income” definition. Ensure the mandatory “adequate substance” requirements (employees, assets, expenditure) are met and documented before December 31st.
Optimising Deductions: Expense Management and Allocation
A key part of tax planning in Dubai, UAE, is ensuring tax optimisation in terms of deductions, expense management, and allocation. This is also a key service that Corporate Tax Consultants in Dubai can help with.
Employee Benefits and Bonuses:
Accounting for your employees, their remuneration, benefits, and bonuses is essential to Dubai tax planning. Finalise and formally approve year-end bonuses and employee benefits before the financial year-end. Recording these expenses now secures the deduction for the current year.
Ensure the Board or appropriate authority formally passes a resolution approving discretionary bonuses. This will make the liability definite and certain before the financial year ends, which is key for accrual-based deduction.
Interest Expense Limitation:
Analyse all interest-related expenses. If the company is highly leveraged, ensure that the net interest deductibility does not breach the 30% EBITDA threshold or violate any other limits prescribed by the UAE Corporate Tax Law.
However, a safe harbour threshold of AED 12 million per tax period is available. Any interest expenses up to this amount are fully deductible, regardless of the 30% EBITDA rule.
To cross-check this, perform the EBITDA calculation now to estimate any non-deductible interest. Be sure to prepare documentation to substantiate the debt-equity ratio and borrowing purpose, maintaining a clear record of everything.
General Expenses:
It is important to ensure all outstanding invoices for expenses incurred this year are either paid or properly accrued before the financial year ends. This will help claim the deduction in the current period. Thus, make sure to review the accruals schedule for the last month.
Verify that accrued expenses that can be tracked back to services received or goods delivered in the current financial year and are not merely general provisions. Further, maintain records for verification and audits for all general expenses.
Planning Forward
Tax Planning in the UAE is incomplete without preparing for the next tax cycle. Through tax planning in Dubai, corporate tax consultants help with the below:
Tax Grouping Evaluation:
Review the benefits of CT Tax Grouping if your organisation has multiple UAE entities. Confirm all criteria (e.g., 95% ownership) are met and document the decision.
If grouping is beneficial, ensure the formal application and documentation (including the common reporting period and financial consolidation commitment) are initiated and ready to be filed by the deadline.
Utilisation of Tax Loss Relief:
If you anticipate a business loss, ensure necessary prior documentation is in place. Track the Tax Loss that the company will have to bear, since these can be used to offset future taxable income.
Be sure to calculate the provisional tax loss figure and check that the books clearly segregate deductible losses from non-deductible expenditures (e.g., fines and penalties)
Digital Readiness and Documentation:
Focus on the state of the company’s accounting records. Tax authorities will demand strong audit trails. Ensure digital systems are ready for CT calculation and filing requirements.
Conduct a final review of all financial data and general ledger mapping to ensure all revenue and expense accounts align with CT law categories. Then, implement a final data retention policy to meet the seven-year record-keeping requirement as per the Corporate Tax Laws.
Corporate Tax Planning At a Glance: What To Do in the 2 Months
A complete list of things that you need to complete as a business before the current business year ends:
- Verify the Corporate Tax (CT) registration for your business.
- Gather documentation necessary for Transfer Pricing and file the necessary paperwork.
- Prepare fixed assets register and account for depreciation accurately..
- Scrutinise all your bad debts and create write-offs.
- Submit Tax Group applications for consolidated filing and loss sharing, only if it is beneficial for the group (business).
- Ensure that you have the necessary documentation as a Qualifying Free Zone Person (QFZP) (if applicable).
- Factor in your employee benefits and bonuses.
- Record all interest-related and general expenses.
- Gather all necessary documents needed for audits and compliance.
- Keep meticulous records for audits and the seven-year record-keeping requirement.
- Migrate your financial and corporate data to digital systems.
- Plan for the next tax year.
Wrapping Up
In the 60 days that you have before the tax year ends, all of the above needs to be completed. While some organisations have an internal team equipped to handle all of these, seeking consultation with a qualified UAE tax advisor immediately to finalise calculations and documentation is always a smart choice.
Is Your Business Ready for the End of the Tax Year?
Ensuring continuous tax readiness is key to avoiding any hiccups during year-end. Plan the next financial year for your business with ease by opting for expert help from corporate tax consultants.
