How can your business maximize payroll deductions under corporate tax?

Why is Managing Employee Salaries of Greater Importance?

The formal legal requirement of proper records and payroll disbursement has always been a key requirement under the UAE Labour Law. This was further strengthened under the Federal Decree – Law No. 33 of 2021 effective from 2nd February 2023. 

With the introduction of Corporate Income Tax, management employee salaries and payroll obligations is now an additional legal requirement under Cabinet Decision No. (74) of 2023 on the Executive Regulation of Federal Decree-Law No. (28) of 2022 on Tax Procedures. 

This article discusses business compliance obligations and the scope of administrative penalties.

Corporate Tax Obligations

In January 2022, the Ministry of Finance (MoF) announced introducing and implementing the UAE Federal Corporate tax (CT) on the net profits of businesses, effective for financial years starting on or after 1 June 2023. The law stipulates that a taxable person or business will be subjected to a 9% corporate tax.

The UAE Corporate Tax (“CT”) law has incorporated provisions for the deductibility of certain expenditures, specifying the degree to which they will be deductible from businesses’ taxable income.

As per Article 28 of the Federal Decree-Law No. 47 of 2022, companies are permitted to reduce taxable income by certain necessary & ordinary business expenditures. Any expense wholly and exclusively incurred for business purposes, including employee salaries, is allowed as a deductible expense. Hence, it is essential to maintain accurate and updated master files that include all employee data, such as salary details, employment contracts, attendance records, and any supporting documents related to salary processing.

Administrative Penalties Related To Record Keeping Violations

The UAE’s Ministry of Finance has issued Cabinet Decision No. (75) of 2023 regarding administrative penalties for violations related to the Federal Decree-Law No. 47 of 2022 on the taxation of corporations & businesses.

Monetary sanctions have been put in place to ensure that businesses in the UAE are complying with Corporate Tax Law. Penalties range from Dh500 to Dh20,000, depending on the nature and severity of the violation. For instance, failure to keep the required records and other information specified in the Tax Procedures Law and the Corporate Tax Law can result in Corporate Tax Penalties in UAE of Dh10,000 for each violation, Dh20,000 in each case of repeated violation within 24 months from the date of the last violation.

The implementation of such penalties is effective as of 1 August 2023. Complete list of CT Violations and Administrative Penalties

UAE Labour Law Obligations

The UAE Federal Decree – Law No. 33 of 2021 explicitly stipulates obligations for all employers to maintain contracts and accurate employee records under Articles 53 & 54. In addition, Articles 55 – 64, an employee must be paid with a payslip within two weeks after the end of each period. Payment shall be made either through cash or WPS if required.

For any mainland business, WPS is a mandatory legal requirement requiring an electronic salary transfer system to pay workers’ wages via banks, bureau de change, or any other registered financial institution.

WPS was introduced in the UAE to protect workers’ rights and ensure compliance with labour laws, addressing essential topics related to delayed and unpaid salaries, improved employee compensation transparency, and accountability in salary payments, which positively impacted the overall economy of the UAE.

In compliance with the WPS requirements, employers in the UAE are ordered to submit payroll information if requested and maintain accurate records for a specified period, typically five years. Read more about WPS:

Summary

Payroll management is integral to any business as it helps improve employee engagement and morale and ensure company compliance with regulatory requirements. Inadequacy of proper records and other required information and incorrect calculation of employee salaries and taxes put companies at risk of future labour disputes and government penalties. In addition to compliance, effective and efficient payroll management makes good business sense and can save up to 5%  in payroll costs through better controls.

How We Help Clients

Tax laws and regulations are evolving, and certain industries or sectors may have specific rules or requirements. Therefore, consulting with an experienced tax professional and labor law professional will ensure you mitigate risks under UAE taxation and labour laws.

At SimplySolved, we provide the necessary assistance and guidance to ensure the complete optimization of tax strategies and obligations, assure compliance and minimize risks of administrative penalties.

SimplySolved provides complete Back Office Accounting, Tax Advisory, Employee Management & Payroll Outsource Services for Businesses. Our service is all-inclusive and scalable to operate your company’s financial, Tax, HRM & Payroll operations, including state-of-the-art cloud UAE FTA & MOHRE compliant platforms.

About SimplySolved

At SimplySolved, we save your time, resources, and costs. Whether you need help with Outsourced Accounting, Finance, VAT, Corporate Tax, Employee Management & Payroll and ERP & E-Commerce Integration. we have the expertise and solutions to help.