Violations and Penalties under the Corporate Tax Law in the UAE

Introduction

Corporate tax is one of the most prominent sources of revenue for governments worldwide. According to the OECD’s Corporate Tax Statistics 2023, the average corporate tax revenue across 116 jurisdictions, in 2020, was 15.1% of total tax revenues and 3% of the Gross Domestic Product (GDP) on average. Similarly, the UAE’s newly introduced corporate tax is set to be an important contributor to the government's revenue. With an ambitious forward-looking vision such as “We The UAE 2031” and the UAE's federal budget from 2022-2026 being AED 290 billion—which, according to the Federal Debt Management Office, is “the largest spending budget in the country's history”—corporate tax becomes important. It is also significant given the UAE’s efforts to diversify its economy away from the oil sector. Introducing Corporate tax also reaffirms the UAE’s commitment to meeting international standards of tax transparency.

Source: FDMO, UAE

The Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, as amended by Federal Decree-Law No. 60 of 2023, governs the corporate tax in the UAE. Businesses falling under the ambit of the corporate tax law must adhere to the regulations as well as other concomitant enforcing regulations to stay compliant and avoid administrative penalties. In this article, we will delve into understanding the UAE’s corporate tax and look in detail at the violations and penalties under the Corporate Tax Law in the UAE.

Understanding the UAE’s Corporate Tax

Corporate tax has come into effect in the UAE from June 1, 2023, and businesses have become subject to it from the beginning of their first financial year that starts on or after this date. Corporate tax applies to both locally incorporated companies and those incorporated abroad but “effectively managed and controlled” in the UAE. For entities under the scope of the Corporate Tax Law, a 9% rate is applicable on annual profits exceeding 375,000 AED.

Additionally, "Natural Persons" with annual turnovers exceeding AED 1 million from business and business-related activities are also subject to corporate tax, although employment income and personal investment and real estate earnings are not. Certain organisations, such as government or government-controlled entities, enjoy exemptions, while the Qualifying Income of Qualifying Free Zone Persons benefits from a 0% rate under UAE’s Corporate Tax Law. The UAE also held a public consultation to gather stakeholder views on integrating GloBE rules into the UAE corporate tax system for the adoption of a Global Minimum Tax of 15% on the consolidated profits of Multinational Enterprises with annual revenues over 750 million Euros. ?

Violations and Penalties under Corporate Tax Law

Cabinet Decision No. 75 of 2023, which came into effect on August 1, 2023, details the administrative penalties associated with each violation related to the application of the Corporate Tax Law. A table summarising the violations and corresponding administrative penalties is given below for ease of understanding; however, for detailed information, the referred Cabinet Decision should be consulted.

Source: Cabinet Decision No. 75 of 2023

In the context of understanding the penalties under the Corporate Tax Law, the Federal Decree-Law No. (28) of 2022 on Tax Procedures and its Executive Regulation through Cabinet Decision No. (74) of 2023 are important. For example, the above table mentions that failure to maintain required records will lead to penalties under the Corporate Tax Law and Tax Procedures Law, however, to know about the details of record keeping the Executive Regulation of Tax Procedures Law should be consulted.

Registration for Corporate Tax

The Cabinet Decision No. 10 of 2024, amending Cabinet Decision No. 75 of 2023, added another violation to the above list. According to the amendment, a penalty of AED 10,000 will be imposed on businesses that fail to submit their corporate tax registration applications within the timelines specified by the Federal Tax Authority.

On 22nd February, 2024, the Federal Tax Authority issued Decision No. 3 of 2024, specifying the timeline for corporate tax registration that came into effect from 1st March, 2024. According to the Decision, all entities that will be subject to corporate tax must register their business based on the month their licence was issued, irrespective of the year in which it was issued. The details of the deadline for submitting the tax registration application can be found here. For businesses to which the licence was issued in the month of May, the deadline for submitting the tax registration application will be July 31.

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Conclusion

The importance of corporate tax is paramount in fulfilling the vision the UAE has for itself. It is also essential for businesses that fall under the ambit of Corporate Tax Law to fulfil their responsibilities in complying with the regulatory requirements. An administrative penalty for a violation of the Corporate Tax Law can have repercussions beyond the penalties imposed. It can potentially damage the reputation of an organisation. Being well-organised, having a detailed understanding of the nuances of Corporate Tax Law and its associated regulations, and systematically adhering to strict deadlines are important for businesses moving forward.

Find out how AKW Consultants can help you determine your taxable income, minimise your tax liabilities, and ensure that you remain compliant with the UAE Corporate Tax Law and avoid penalties in the process.

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