Tim Elliot
Welcome to Lawgical, the UAE’s first, and still the only, regular legal podcast. My name’s Tim Elliot. I’m with the Managing Partner of the Dubai-based legal firm Yamalova & Plewka, here in Dubai, and it is Ludmila Yamalova I’m with. Nice to see you.
Ludmila Yamalova
Good to be here with you, Tim.
Tim Elliot
Now, in this episode of Lawgical, we’re going to be talking corporate tax law once again. We talked about this very recently. It’s just come into effect, Ludmila, on June 1st. We recorded an introductory look then. Now, as we record this, we’re a few weeks on. I guess it’s good to start with a reminder of where we are, the ins and outs of UAE corporate tax law right now.
Ludmila Yamalova
Well, where we are is that as of June 1, 2023, the UAE corporate tax is, in fact, in effect. Now we have a corporate tax. Before, we just had draft laws, expected laws, and the actual law, but it hadn’t really come into effect until June 1st. It is now in effect.
It doesn’t yet apply to everyone. It only applies to businesses whose financial year starts in June. For all other businesses whose financial year matches the calendar year, they will be subject to this law as of January 2024. But the law is final—it’s here.
Not only that, the law continues to grow like an amoeba. It’s like a spiderweb. Since the original corporate tax law was introduced, there have been numerous decrees, resolutions, regulations, executive orders, and clarifications. This little organism continues to grow and expand. It’s certainly not going away.
I have to tell you, when we first heard about a corporate tax law potentially being introduced, we were all in denial. Then, when it was formally announced, we thought, “It won’t actually happen.” Then, when it was published, we said, “Okay, but it’ll be delayed.” Well, it ain’t so. It’s here, and it’s here to stay. It’s developing into a complex body of law, and it’s not going anywhere.
Tim Elliot
This is true. Are you anywhere near acceptance yet? Are you just out of denial? How are you doing?
Ludmila Yamalova
I’m still a little in denial or willful ignorance. (Laughing.) For my business, our fiscal year is the calendar year, so we’re not formally subject to it yet. But we’re very aware of it (1) because of what we do in the industry, (2) for our clients, and (3) because I’m a US citizen. As a US citizen, I’ve always had to pay US taxes no matter where I live or work.
As long as I’ve been in the UAE, I’ve had to declare and pay taxes to the US, so I’ve never had a break. It’s not like I’m unfamiliar with the concept. To add to that, when VAT was introduced, it was like a soft introduction into the tax world for businesses. By now, businesses have adapted bookkeeping, auditing, and accounting practices, as well as proper invoicing and receipts. At least the language of taxes is more familiar now.
Tim Elliot
It’s so interesting because wherever you go in the world, the t-word is always a dirty word—tax. It’s something you don’t mention except under your breath.
Ludmila Yamalova
We were very proud for a long time not to have that dirty word in our vocabulary in the UAE, but now it has seeped in.
Tim Elliot
You made an interesting point just now: not everyone needs to register right now. You said you’re not subject yet because it depends on your tax year, doesn’t it?
Ludmila Yamalova
Correct. As a starting point, every business will eventually have to register with the Federal Tax Authority (FTA) and file annual tax returns. But not every business will have to pay tax—only those that meet the income threshold.
For now, the law applies to businesses whose fiscal year starts in June. These businesses should already have registered with the FTA. They don’t need to pay tax until the next fiscal year, but they should register.
For businesses like ours, whose fiscal year is the calendar year, we have until January to register. Registering early can help us familiarize ourselves with the system as it evolves.
Tim Elliot
That’s about the extent of my knowledge, based on the podcast we did three weeks ago. Aside from the 9% tax rate, is there anything new?
Ludmila Yamalova
There’s plenty, and it’s evolving constantly. Tax laws tend to grow and change, and the UAE corporate tax law will be no different.
Today, we’ll focus on the application of corporate tax to free zones. Free zones have historically offered benefits like no requirement for Emirati sponsorship and being tax-free for 50 years. Now, with the corporate tax law, there’s been a lot of confusion. Does tax-free status still apply?
Free zone businesses must still register with the FTA and file tax returns. Whether they pay tax depends on their type of income and operations. For free zone companies, qualifying income is taxed at 0%.
Tim Elliot
What does qualifying income mean?
Ludmila Yamalova
It depends on where your income comes from. Income generated within the free zone, income from other free zones, or income from outside the UAE is taxed at 0%. However, income from the UAE mainland is taxed at 9%.
For example, if a free zone restaurant generates revenue from in-zone dining or free zone catering, it’s taxed at 0%. But if they deliver to the mainland, that revenue is taxed at 9%.
Tim Elliot
Keeping track of this is going to be a big challenge.
Ludmila Yamalova
Absolutely. Businesses will need robust bookkeeping and accounting systems to monitor income sources. Compliance costs will increase, and accounting and auditing services will be in high demand.
Tim Elliot
And for free zones like DIFC and ADGM, which are independent jurisdictions with their own laws?
Ludmila Yamalova
The corporate tax law applies to all free zones, including DIFC and ADGM. These free zones may have their own laws for employment, contracts, and courts, but corporate tax is a federal law and applies uniformly across the UAE.
Tim Elliot
I feel we’ll revisit corporate tax law many times in the future.
Ludmila Yamalova
Undoubtedly. There’s much more to unpack, and it will continue evolving.
Tim Elliot
That’s another edition of Lawgical, corporate tax law, an update. As ever, thank you for watching, listening, or both, and thanks to our legal expert, Ludmila Yamalova.
Ludmila Yamalova
Thank you, Tim.
Tim Elliot
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