UAE tax: How to prepare for corporate tax, what you need to know

Five years on from when the UAE announced value-added tax in 2018, the country is now ready to introduce its latest taxation measure aimed at corporates. Under the new rules, businesses in the UAE will be expected to pay income tax of 9 percent.

While some firms may balk at additional costs, the introduction of tax should be seen as a positive move for both the economy and the wider business community, Casey explains.
“What they are trying to do is make sure that the UAE is seen as a fair player on the global stage, and also with a rate of 9 percent, that’s still much lower than all of those tax efficient locations,” he says.

Small businesses will be broadly exempt from paying any tax though. The country’s small business relief rule will mean firms with under AED3 million in sales will not need to pay. Casey describes this as “one of the more generous” rules of this type globally.

However, while they may be exempt from paying tax, these firms will still need to file tax returns, a fact that many in the UAE’s business community do not seem to have grasped.

“There is a severe lack of awareness. I’ve spoken to probably 500 SMEs, and almost 90 percent of these seem to not be aware that they actually have to do steps to comply,” Casey says.

“[Small businesses] still have to register. They will still have to keep proper accounting records, there’s [a] financial standard in place now, that wasn’t the case before. They’ll have to be filing a tax return.”

Historically the UAE has been an outlier in global taxation practices, namely due to its lack of corporate income tax. While nearly “every other jurisdiction around the world” has similar rules in place as normal practice, in the UAE “most companies have never actually had to do real, proper accounting.”

This has led to a massive knowledge gap among firms on how to comply with the rules, with Casey noting even some basic financial understanding lacking, as he quips the most frequent questions he’s been asked is: “What is a financial year?”

“That’s the sort of knowledge base that we have started with and, to be clear, this is not a criticism. These companies have never had any reason to do this.”

Why the UAE is introducing corporate tax

Corporate tax is a key pillar for the UAE to help diversify its government income base. In particular, with a more diverse source of revenue, the long-term financial stability of the country can be greater assured, in addition to improving the standing of the UAE on the global stage as a destination for business.

The tax is not targeted specifically at small businesses, with Casey arguing that tax is being introduced “because the UAE needs to seen at a global level as a fair player in the global economy. It is not a tax haven like Bermuda, it’s more of a Singapore or Hong Kong.”

“This tax isn’t being introduced to try and gather revenues from the small businesses… there are some generous allowances for small businesses. Instead, it’s very much targeted in terms of who’s going to pay tax – it’s targeted at the higher end of town.”

Overall, in Casey’s mind, the UAE has “done its best to avoid any disruption to the startup and small business sector.” For instance, while small businesses need to file a tax return, they do not need to do an audit when they submit their financials.

Businesses need to prepare now

Casey, a veteran tax expert, has a stark warning for businesses now – fail to prepare at your own peril. Firms that don’t get ready for taxation are going to have what he describes as a “nightmare” of trying to get their accounts in order.

“What you absolutely do not want to be doing as a business owner is waiting until the end of the year and then realising that you have to file a tax return and having to go back and try to compile together all your accounts for the previous 12 months,” he says.

The reasons for this are simple, the first of which is cost. If left too late, a business will need to pay an accounting firm more to prepare the returns, and then secondly, it will take a long time to get the record in order. “It’s going to be a nightmare, and you’re probably not going to get the accuracy either,” Casey says.

Finally, by rushing the process, businesses might overlook key relief and exemption rules, ending up with an increased, and unnecessary burden while missing the most tax efficient outcome.

For businesses that are looking to get ahead of these potential pitfalls, Casey recommends reaching out to a partner to help.

“For a partner that knows what they’re doing, it’s pretty straightforward. We know exactly what documents we need and we know how to get everything up and running, and we can do that for a very affordable price where they don’t need to go to a big four organisation and pay a high amount,” he says.

“Most small businesses aren’t turning over enough to justify that. In most cases, they don’t need to hire an accountant, they can just offload and dump the documents on someone like us and we can take care of it from there.”

The first step towards compliance is tax registration, a procedure which Casey warns can take days for the unprepared. “We know exactly what we need and can request the exact document that are needed on the business type. We’ve done thousands of these already.”

As part of helping the UAE’s business community prepare for corporate tax, Virtuzone has revealed a new pledge to help 10,000 small firms get ready for tax for free.

On why Virtuzone decided to launch the pledge now, Casey points to an overall lack of awareness of the new corporate tax rules.

“There’s two parts to this campaign. One is to educate. There are so many businesses, I would say on our sample size tens of thousands of businesses, that have no idea that tax is going to impact them, what they have to do, and so many businesses that are either not aware or have their head in the sand thinking that because they’re in the free zone it’s not going to impact them,” he explains.

“Obviously the second part is that we are willing to get 10,000 of them up and running and ready for tax for free, and even the businesses that miss out on the 10,000, at least they will now be aware that they have a requirement to do something.”