UAE businesses are facing critical deadlines to comply with new corporate tax regulations, including the OECD’s Pillar Two framework and domestic minimum top-up taxes. Companies that missed initial registration deadlines have a limited window to file tax returns and avoid penalties, necessitating urgent action and strategic adjustments to their financial operations and tax planning.
Looming Deadlines for UAE Businesses
UAE businesses that failed to register for corporate tax by the initial deadlines now have a critical window to comply. To avoid a Dh10,000 fine, these businesses must file their tax returns for the January to December 2024 period by the end of July. This accelerated deadline, seven months from the end of their first tax period, contrasts with the standard nine-month period for businesses that registered on time.
This initiative by the Federal Tax Authority (FTA) aims to bring all businesses into compliance, particularly smaller enterprises that may have confused corporate tax registration requirements with VAT thresholds. The FTA emphasizes that corporate tax registration is mandatory regardless of sales volume.
Navigating New Tax Frameworks
The UAE’s tax landscape is evolving significantly with the introduction of new frameworks aligned with international standards. Key changes include:
- OECD Pillar Two: This global minimum tax framework, effective January, requires multinational enterprises (MNEs) with global revenues of EUR750 million or more to pay a top-up tax if their effective tax rate in any country falls below 15 percent.
- Domestic Minimum Top-Up Tax (DMTT): The UAE has implemented a DMTT to ensure it collects any shortfall in tax revenue from MNEs, rather than allowing other jurisdictions to claim it. Kuwait also plans to introduce a DMTT in 2025.
These changes necessitate a reassessment of business structures, tax strategies, and reporting systems, especially for companies operating in free zones that previously benefited from zero percent corporate tax rates. Even with free zone benefits, a top-up tax will apply if the effective tax rate falls below 15 percent.
Key Considerations for Compliance
Businesses must proactively address several areas to ensure compliance and optimize their tax position:
- Deductible Expenses: A debate exists regarding the deductibility of input VAT that is recoverable under VAT laws but not actually claimed. Businesses are advised to account for all VAT on purchases and expenses where input credit has not been recovered. Fines and penalties are generally non-deductible, with exceptions for compensation awarded for damages or breach of contract.
- Transfer Pricing: Intercompany transactions will face increased scrutiny to ensure pricing reflects market value. Proper documentation and consistency across jurisdictions are crucial to avoid audits and penalties.
- Increased Reporting Burden: New, more detailed tax filings, including the GloBE information return with over 240 data points per entity, will require upgraded financial systems and tighter internal controls. Businesses must also align country-by-country reporting (CbCR) with the new rules.
- Digitalization: The UAE and Saudi Arabia are advancing e-invoicing systems, with the UAE planning a phased rollout starting July 2026. Businesses must prepare their systems for integration with these digital platforms.
Strategic Tax Planning
Effective tax planning in the GCC goes beyond mere compliance. It involves aligning tax strategies with business goals and regional tax policies. Engaging with tax professionals specializing in GCC regulations is crucial for tailoring strategies that optimize benefits and minimize liabilities. Regular tax health checks are also vital to ensure ongoing compliance and leverage new exemptions or changes in tax laws.
For small businesses, the UAE offers Small Business Relief, exempting those with revenue below AED 3,000,000 from corporate tax, provided they register and elect for the relief in their tax return. Qualifying Free Zone Persons (QFZPs) can also benefit from a 0% corporate tax rate on qualifying income, subject to stringent substance requirements.
Sources
- How should businesses handle deductible expenses?, Gulf News.
- What it means for multinational businesses in the UAE, Gulf Business.
- Mastering the Tax Game: Proven Strategies for Businesses in the UAE and GCC, Entrepreneur.
- Understanding the UAE’s Corporate Tax Rules | Press Release Network, Press Release Network.
- Businesses who failed to register have just 30-plus days to meet deadline, Gulf News.
