In a major development for businesses in the UAE, new regulations have been implemented that will affect the conversion of foreign currencies into local currency when calculating corporate tax. These regulations are part of the country’s ongoing effort to increase transparency and simplify tax processes, making it essential for companies to remain informed and adjust to the ever-evolving regulatory environment.
The new currency conversion rules are expected to have a significant impact on financial reporting as well as tax planning, so it’s important to understand the details and impacts of these new guidelines. In this article, we’ll take a look at the essential aspects of these Corporate Tax implications and new currency conversion rules and their impact on UAE businesses.
An overview of new guidelines for Corporate Tax in UAE
Recently, the UAE implemented new guidelines for Corporate tax which came into effect on 1st June 2023. Let us give you a quick glimpse of essential factors that every business must take into consideration in the UAE.
|Corporate Tax rate||0-9%|
|Who is covered in the updated CT regime||Individuals carrying business in UAE, and all kinds of businesses|
|Foreign Tax Credit||Applicable|
|Applicable CT Period||Tax period beginning or after 1st June 2023|
|Tax is payable at||Federal level|
|Withholding Tax||0% on all income|
The United Arab Emirates (UAE) Corporate Tax (CT) on profits generated from the sale of goods or services shall apply to a covered person as of the Tax period beginning on or after June 1, 2023. The law also covers tax on profits of businesses of UAE residents that are generating income either in UAE or via foreign profits. However, the profitability applies to individuals and corporate companies as well.
Keep in mind that there are a few groups of incomes that would be exempt from the implications of Corporate Tax. While foreign profits are liable to the tax in UAE, the UAE Corporate Tax is reduced by the amount of tax paid in a foreign country on your taxable income in the UAE.
Excluding Bahrain, UAE has introduced a low Corporate Tax rate – 9% on taxable income within the GCC region. The income of residents of the Free Zones will remain tax-exempt, provided that they generate up to a certain amount of taxable income or meet certain criteria. This is the reason why taxable income refers to the regime of income exceeding AED 375,000.
Remember, Corporate Tax in UAE is applicable to non-residents as well. The Non-resident would, however, be subject to taxation only with respect to income accruing from UAE Permanent Establishments (PEs) or income accrual from UAE (State Sourced Income).
Usually, an individual in UAE is not liable for Corporate Tax, except when they carry on business or a profession in UAE, in either case, CT will be applicable at a 9% rate if they exceed income of AED 375,000.
Read More about Corporate Tax Services in UAE
Importance of Corporate Tax Calculation in UAE
Every jurisdiction needs compliance and disclosure regarding Corporate Tax calculation. Failing to comply with the rules of these tax implications can lead to financial risk, and also significant commercial risk as it holds the probability of harming the credibility of taxpayers with the general public and the Government.
Conditions determined for Currency diversion in CT calculation.
The Government of UAE has outlined a few conditions in the recently announced decision to seamlessly convert foreign currency into AED for calculating the CT Liability. Let us explore these conditions to understand CT calculations.
The taxable organizations or entities need to convert foreign currency into AED in a specified conversion process:
- As an initial step, use the spot rate published by UAE’s Central Bank as a transaction date if the accounting system of the foreign country permits utilizing this method.
- In case the spot rate doesn’t seem to be practical for you then you can opt for the average monthly exchange rate which is published by the Central Bank. However, make sure these rates provide an accurate estimate of payable Corporate Tax.
- In some cases, spot and exchange rates are not practical to use, then the officials allow entities to use the annual exchange rate published by the Central Bank in UAE.
Continual conversion method
The taxable entities must consistently use their preferred foreign exchange conversion currency method across the tax period.
Maintain a detailed financial record
An integral part of ensuring compliance with currency conversion in the context of CT involves the diligent upkeep of financial records. The taxable entity is required to retain documentation that demonstrates the rationale for selecting a particular currency conversion method, the applied exchange rates, and the procedure followed for all currency conversion transactions..
Changing currency conversion method
In the event that a taxable entity opts to alter their conversion method within a taxable period, they are obliged to both maintain and provide a record that elucidates the rationale for this method change.
Conflicting Provisions of CT Calculation
Article 3 of the decision specifically declares that any conflicting or contradictory provisions will be invalidated, ensuring the consistent and uniform application of the new guidelines for Corporate Tax across the UAE.
The implementation date of Corporate Tax
The Corporate Tax implications were enacted on June 1, 2023. The official publication of the new guidelines in the Official Gazette serves as a formal notification to all impacted entities.
These guidelines represent a crucial stride towards streamlining corporate tax compliance in the United Arab Emirates and enhancing transparency for businesses operating within the country. Taxpayers are urged to review and adapt their practices to align with the new regulations for full compliance.
The recent Corporate Tax updates in the UAE aim to achieve two significant objectives: simplifying the business tax procedures and establishing fairness and transparency. These changes empower companies to confidently navigate the global market while fostering an equitable and predictable environment for all stakeholders. Staying informed and adhering to these regulations enables a seamless transition.
To serve the esteemed organization, N R Doshi & Partners has qualified and experienced tax professionals with a thorough understanding of corporate law. Reach out to us to know more about the new guidelines of Corporate Tax.