Tim Elliot: Welcome to Lawgical, the U.A.E.’s first, and still only regular legal podcast. My name is Tim Elliot. As always, I’m at the Dubai-based legal firm, HPL Yamalova & Plewka. We’re in Jumeirah Lakes Towers here in Dubai, and I’m with Ludmila Yamalova, the Managing Partner. Nice to see you.
Ludmila Yamalova: Good to be here with you, Tim.
Tim Elliot: Ludmila, we are recording on June 1, 2023. June 1, 2023 heralds a new era. Corporate tax has been officially – I was going to say launched. It’s not quite the right word. It’s introduced today. This is kind of day one, I suppose, of people trying to understand what the tax means, the threshold, the rate, and I guess, also how to register. Those are the things I wanted to talk to you about today. Just briefly really, it’s incumbent on lots of different people, and we’ll talk about who it is, to register for corporate tax from today’s date, isn’t it? Let’s run through registration.
Ludmila Yamalova: Yes. First of all, what we’re talking about is what is otherwise known as the U.A.E. corporate tax law.
Tim Elliot: Yes.
Ludmila Yamalova: Kind of a scary phrase, especially for all of those who have lived and worked and run businesses in the U.A.E. for however many years. Until recently, the word tax was nonexistent in our vocabulary apart from the VAT, which is the value-added tax which was introduced in 2018, and that was enough of a shocker back then, but we have absorbed it and accepted it as just moving along with the times, but since the VAT is not a direct tax, it didn’t really affect us so much personally, at least for many.
Now this is something different. This is now the U.A.E. corporate tax law. Now this particular tax does affect in particular businesses and people or natural persons directly. This is a direct tax versus an indirect tax which is VAT. This menacing concept, in a word or phrase, was introduced by virtue of the U.A.E. Federal Decree Law 47 of 2022 on the taxation of corporations and businesses. That is the name of the law. The law was introduced in 2022, but as you rightfully said, it will start applying the application or who it’s going to start applying to will kick in after in 2023 and in particular it will start applying for any businesses as of June 1, 2023, which is right now for any businesses whose fiscal year, financial year, starts in June. For all those businesses for whom the fiscal year starts in June, then as of today, they will now, technically speaking, be subject to the U.A.E. corporate tax law, and we are going to go through what that means. But for now, it’s more procedurally, rather than substantively, the definition of being subject to it. Yeah, if you are a business and your fiscal year is June every year, so today’s the day when you are now officially subject to the U.A.E. corporate tax and, also as part of that, you will need to register with the U.A.E. relevant authorities in the government.
Now for all those businesses for whom the fiscal year starts on the calendar year, i.e., January 1st, they will become subject to this law as of January 2024. So, today is not the day, the D-Day for all of the businesses in the U.A.E. It is really only for those whose fiscal year starts as of June. For all the other businesses, including, for example, our business, we operate on a calendar year, so we will become subject to this law as of January 2024.
Tim Elliot: You can register now is the point. The platform, EmaraTax, is that right?
Ludmila Yamalova: Correct. Maybe it’s not so much the obligation yet, but the ability to register became available on May 15, 2023. The registration is done through what’s called the EmaraTax platform, which was launched by the U.A.E. Federal Tax Authority (FTA). But at present, at least as of May and as of today as well, the registration is only open for private companies or public joint stock companies. It is not yet available for free zones, so any businesses that are based in free zones, they cannot yet register. But certainly, the ability for those businesses, for free zones to be registered will become available later in the year. This is another topic maybe for another day, but this does exactly mean what I just said, which is free zone companies and free zone businesses, even though they’re based in free zones, they are still subject to this law to an extent, and they still have to register with the authorities, with the FTA through this EmaraTax platform, even if they’re in free zones.
Similarly, the registration for other categories of taxable persons, such as natural persons, who are conducting business or business activity, will also be open later. For example, if you’re a freelancer, you also ultimately would have to register and you will be subject to this law, and you will have to, as part of being subject to the law, you will have to register. You may not have to pay tax. We’ll come back to it. But you are subject to the law because you are a business even if you are just a freelancer, and you will have to register. But right now, the D-Day of June 1, which is today, it does not quite apply to let’s say, as a natural person, because the system is not open or the free zone companies. Our firm is based in a free zone, so we also cannot register yet. It’s a rolling system. The services are being bolstered and refined as we go through the process, so right now it’s open to, once again, private companies and public joint stock companies, but as time goes on, more and more businesses will be able to register.
Just a little bit about this platform, the EmaraTax platform, it’s a government platform. It’s just not to be misunderstood. It’s not a private service. It is a government platform, and integrates entities such as the U.A.E. Central Bank, the U.A.E. Pass, which we’ve talked about before and we know and we have a special podcast episode on just the U.A.E. Pass and why it’s important, and voila, this is another example of why the U.A.E. Pass is important. You register and this is integrated. Your ability to integrate and register for this EmaraTax platform is linked with your U.A.E. Pass and the U.A.E. Central Bank and to basically other government services. We haven’t really used it ourselves because it’s not available to us, but at least by, according to representations of the various government authorities, the whole EmaraTax platform is meant to be intuitive and easy to use and with various help options and will even be available for mobile soon, all obviously with the objective of providing you no excuse not to register. It’s going to be very easy to register and very easy to receive answers so that you have zero excuse to claim that, I didn’t understand, and I couldn’t register. Yes. That is the registration. It is now open for many businesses and certainly all those businesses who fiscal year starts as of June 1 are already subject to this corporate tax.
Tim Elliot: Okay. Let’s talk about the tax rate and the thresholds, 9% is the headline figure, isn’t it?
Ludmila Yamalova: Yes. So, 9%, for those of us who didn’t even have tax in our vocabulary, is a lot.
Tim Elliot: The T-word.
Ludmila Yamalova: Exactly. Yes. I don’t want to say it out loud too much. But for those of many other businesses and for many other individuals who are doing business as natural persons, for example, 9% for them is still not very much if you compare it to other countries. That’s the other side of the argument. You can compare it to certain European countries or Nordic countries where the tax rate can go up to 50% to 60%, and 9% is fairly moderate, but yes, the tax rate is 9%. It applies not to all businesses. Not all businesses have to pay. It only applies to any income for all of those businesses whose income is more than 375,000 dirhams, which is about $100,000 per year.
Tim Elliot: Yeah.
Ludmila Yamalova: It applies to all, what is called, taxable persons, and they could be legal or natural. In other words, it could either be a company with a license, or it could be a natural person just for example, you, Tim Elliot, operating on your own, but you’re wheeling and dealing and doing business without any kind of license necessarily, but you’re doing business that is an example of a natural person. As long as you are doing business, you are subject to it, even though you don’t have a legal entity on the basis of which you are operating and wheeling and dealing. But it doesn’t apply to all your income. It is only income that you make over the threshold. In other words, over 375,000 dirhams. Let’s say if you are making 250,000 dirhams a year, or 300,000 dirhams, you don’t need to pay any tax of 9%, so it is 0%. Your income is subject to 0%. So (1) the 9% only applies to those who make over 375,000 dirhams and (2) it only applies on the margin, on anything above 375,000. For example, if you are making 375,000 dirhams, you’re still at zero. But if you are making 400,000 dirhams, you have to pay 9% on the margin, the difference between 400,000 and 375,000 dirhams, so you are only paying 9% on the 25,000 dirhams. That’s an important caveat, that it’s not all your income that is covered. It is only just basically the margin.
It’s called an income tax, not a revenue tax, which is important. For example, and this is obviously a lot more substantive topic and we can dedicate a subsequent podcast to these subtopics of this very large and complex and nuanced area of law which is very new to all of us. But in general terms, when it’s called an income tax, it means you are taxed on the income, not your revenue. For example, as a business, you could make a million dirhams a year, but that’s not your income. It’s your revenue. The money that you receive from your various clients, but it’s not all income because you need to offset all your expenses from the revenue. The income is basically when you all your revenue and offset your expenses from it. It is whatever that margin is, that is your income, at a very high level. It is not like, just because you are a business and you make a million dirhams, all of a sudden, oh my gosh, I have to pay 9% on a million dirhams. Not at all. But that also means that all businesses who have not been doing this yet, will have to significant changes to their bookkeeping practices and their accounting and internal practices and they will have to be very vigilant in terms of keeping track of all of their expenses to allow them to ultimately offset the expenses from the revenue to make sure they have clearly documented and substantiated income base. That is definitely going to lead to some significant changes in businesses’ way of operating.
Tim Elliot: That’s an interesting point to highlight actually. There is also some tax relief for small businesses under the new law, Ludmila.
Ludmila Yamalova: Yes. There is a specific – by the way, the corporate tax law that we talked about, it is Law 47 of 2022 that is the main law, but this main law, if you want to visualize it, it’s going to be like a spider web of regulations that will comprise ultimately the U.A.E. corporate tax legal framework or platform. It is this main law, this substantive law, but as part of the substantive law there are different regulations, circulars, amendments, clarifications, guidelines, decrees, and so on and so forth that will be issued as part of this main substantive law. Those regulations, those guidelines, those amendments and clarifications, some of them have already been issued, and there will be many more that we know are in discussion or in draft form. Ultimately, we don’t look at this as just Law 47 because it is just the beginning. It is just going to create the skeleton, if you will, and then all the meat on the bone will be an ongoing process as more regulations will come forward.
The small business relief is an example of one of these regulations. It was issued by virtue of a Ministerial Decision 73 of 2023, just this year, and it is called the Small Business Corporate Tax Relief that is based on this Ministerial Decision that is an add-on to the corporate tax law. As per this Small Business Corporate Tax Relief, certain businesses, small businesses, or taxable persons whose income is below 3 million dirhams, for each reportable period, they are not to be subject to the 9% corporate tax. They are subject to basically 0%. If you are a business whose income is 3 million dirhams, you will only be paying 0%, but anything above 3 million, you will pay 9%.
However, you do need to apply for this small business relief. You have to be a qualifying, either a free zone person. So a member of some sort of multinational enterprise groups, and there are some exemptions as well, certain kinds of companies, bigger companies, for example, what’s called multinational enterprise groups, if you are a subset of one of these groups, you cannot benefit from the small business relief because you’re actually part of a much larger group, so there are a few exemptions there as well. But in order to benefit from this tax relief, businesses have to apply, and they have to apply during the applicable period. In other words, it’s not by default. Just because you are making less, or within the 3 million dirhams income threshold, does not mean that you automatically don’t have to pay tax, or you are a 0% rate. No, no. You have to specifically apply for that small tax relief in order to benefit. If your income starts going above 3 million dirhams, then obviously you need to start paying the 9%. That is basically the small business relief plan.
Tim Elliot: Finally, I just wanted to ask you about obligations. Corporate tax in the U.A.E. is, as of today, part of the country’s legislative framework. So, what do we need to know to understand that framework? What’s important to point out?
Ludmila Yamalova: There are a few big guidelines. There are several thresholds in terms of being subject to the corporate tax law.
(1) It applies to all businesses in whatever form, natural form or legal form. As an example, let’s say for my business I have a license to practice and I am a legal entity and a legal business. You, for example, if you are a freelancer, let’s say a web designer or song writer, if you are a freelancer you may or may not have a legal license, but if you do not have one, that does not exclude you from this law. You are still in a freelance business, so you are called a natural person. Of, for example, if you own multiple properties in your own name, but you manage them as a business. That is an example of you being a natural person, but you have a business, so you are subject to this law.
(2) It includes all businesses and applicable natural and taxable persons within the U.A.E., which specifically means free zones. All companies in free zones are subject to this law, irrespective of the nature of the business or your income or income threshold. I’m talking about being subject to the law. You are all subject, all the small free zone companies in Ajman, Fujairah, and Ras Al Khaimah, and Umm Al Quwain, wherever they may be, they are also subject to this law. Just because they’re in free zones does not make them not subject to the law. There was quite a bit of speculation and there was a lot of debate on whether free zones will actually fall under this law, and the answer is that they will. There are a few exemptions and exceptions and caveats, but as a general rule, they are all subject to the law.
Now what does it mean for all these taxable persons? This includes legal and natural persons, but the law uses the general term, taxable persons. That is how the law refers to the likes of you and me. All these taxable persons have to register with the FTA.
You could be a free zone business in Umm Al Quwain that has basically just had your little company for purposes of having a visa for yourself and your family, or you could own a consultancy or web design company and you have 100,000 dirhams a year in a free zone. It does not matter, as long as you are a business and a taxable person, you are required to register with the FTA. But the registration, as we mentioned earlier, depends on when your fiscal year starts. If it is mid-year or June, then you have to start registering now, except there are certain businesses that are not able to register yet, but for all others, they will have to register as of January 2024.
All of these businesses are subject to the law. As part of being subject to the law, they have to register with the FTA, and more importantly, they all have to submit tax returns at the end of the year. That is important. That applies to the small mom and pop free zone licenses or consultancies that just exist there purely for visa purposes, and there are many like that. They will all have to register with the FTA, and they will all have to submit tax returns at the end of the year.
However, in terms of the paying of the tax itself, it only applies to those taxable persons who actually have an income over the threshold. You have over 375,000 dirhams, except obviously the small businesses that apply for the small business relief that are within the threshold of 3 million dirhams. Only those would have to pay the 9%. In other words, just because you’re in a free zone and you have a freelance license and you made 100,000 or 150,000 dirhams a year, or make nothing at all from that particular business, you still have to register with the FTA, and you still have to submit your tax return. You just don’t have to pay any tax.
Tim Elliot: And you need a tax registration number from the Federal Tax Authority, the FTA you mentioned.
Ludmila Yamalova: Correct. Yes, and that will be part of when you register. You will need to have that tax registration. Now there are a few other decrees, circulars, and ministerial decisions and such that are coming, but one of the other ones we are talking about are the audited financials. There have been some recent clarifications that not all companies, not all businesses, not all taxable persons will have to provide and keep audited financials. Having audited financials means that you have professional accountants that every year actually audit your books and sign off on them officially. They say only businesses that are making more than 50 million dirhams a year will be required to actually have audited accounts. Others just have to have their own kind of bookkeeping and their own accounts, but they are required to actually have an auditor to audit their accounts.
Tim Elliot: To sign them off.
Ludmila Yamalova: Yes. This is a very recent clarification that was just issued recently, and it is an example of how the law continues to evolve and more and more of these clarifications and nuances are being hashed out as we go through the process. But in general, this is our reality now, certainly as of January 1, 2024, all taxable persons, all businesses will be subject, will have to be registered, and will have to start keeping their books with that in mind, because at the end of 2024 and by mid-2025 they will have to start actually paying the tax to the authorities. This is our new reality. It is interesting because it will change the business dynamic in the U.A.E. tremendously, but at the end of the day, obviously the authorities in the government views it as a positive and perhaps logical evolution in its development as a country and as a business. This is the beginning of, I’m sure, many more podcasts that you and I will have to do on this topic. We are all learning this as we go through the process. This is literally hot of the press. Today is the first day, and this is why we are doing it today, to commemorate June 1, 2023 as the first day where businesses in the U.A.E. with a fiscal year starting as of June, right now are officially subject to the U.A.E. corporate tax law. Congratulations to those businesses. (Laughing).
Tim Elliot: There is going to be a lot more to talk about on this topic. That’s for sure. That’s another edition of Lawgical. As Ludmila said, U.A.E. corporate tax law, and we are recording this on June 1, 2023, the first D-Day, or T-Day. I’m not quite sure how we should term it. There you go.
Ludmila Yamalova: T-Day it is.
Tim Elliot: As ever, thank you for watching, listening, or both if you’ve done both. Thanks to our legal expert, the Managing Partner here at Yamalova & Plewka, Ludmila Yamalova. Thanks for your expertise.
Ludmila Yamalova: Thank you, Tim, always for your very engaging and capable discussion.
Tim Elliot: You can find us at LYLAW on social media: Facebook, Instagram, TikTok, LinkedIn. You can find all the podcasts at LYLawyers.com or on your favorite podcast platform. If you’d like a legal question answered in an episode of Lawgical or to talk to a qualified U.A.E. experienced legal professional, just click on the Contact button at LYLawyers.com.
