Dr Nabeel Ahmed, Senior Partner at one of the leading management consultant firm, One DVS explains in detail the new regime of corporate tax and its impact on businesses and the startup community in the United Arab Emirates
How would you describe the startup landscape in the UAE?
The answer very intuitively would be that the startup landscape in the UAE has not looked better. However in the case of UAE it is the many international ratings and reports which reflect my sentiment. The findings and indicators of the World Investment Report 2022 issued by the United Nations Conference on Trade and Development (UNCTAD) ranking UAE first in the Arab world and 19th globally in Foreign Direct Investment (FDI) inflows, only reiterates the fact that UAE is on the right path towards achieving its ambitious goals of strengthening the national economy and increasing its global competitiveness.
Also, UAE in line with its vision of launching 20 unicorns over the next 10 years, for which the country has addressed the necessary economic, legal, and social legislations and it continues to provide international best practices for supporting entrepreneurs and nurturing them with an aim to attract skilled talent, which in my opinion are steps in the right direction.
Kindly share the key provisions of the proposed corporate tax law in the country.
I can only think of the brilliant physicist Albert Einstein’s quote that “Everything should be made as simple as possible, but not simpler”. To reduce the entire legislation into a few points would be a futile exercise, however here a some of the key takeaways of UAE Corporate Tax (CT) law:
- UAE CT rate of 9% will be imposed on Taxable Income greater than AED 375,000.
- Taxable Income would be all incomes earned by a Resident Person and UAE-sourced incomes earned by a Non-resident Person. Exemptions to persons earning income by way of dividends/profit distribution and qualifying deductions are offered/allowed by the UAE CT Law.
- Certain persons such as government entities, businesses engaged in extraction/non-extraction of natural resources, qualifying investment funds etc are exempt from CT.
- The CT Law suggests accounting profits as the base for determining the Taxable Income subject to certain key adjustments (reliefs, exemptions, deductions etc).
- On satisfaction of prescribed conditions, certain reliefs are provided to small businesses, wherein a Taxable Person shall be treated as not having taxable income if the revenue of the Taxable Person does not exceed AED 3 million for tax periods commencing on or after 1 June 2023 and the same revenue limit continues to apply only to subsequent tax periods ending before or on 31st December 2026.
- Withholding Tax (WHT) is not applicable on transactions carried out between two Resident Persons and 0% WHT is applicable on certain UAE-sourced incomes of Non-resident Persons to the extent it is not attributable to their Permanent Establishment (PE).
- Tax Losses can be set-off up to a limit of 75% and the balance/ unused Tax Losses can be carried forward to future periods indefinitely.
- Under UAE CT Law, parent company and subsidiaries can form a Tax Group which is treated as a single Taxable Person for CT purposes upon satisfaction of certain conditions.
- Transactions carried out between related parties are to be tested on Arm’s length principles. The methods prescribed under the CT Law are similar to those prescribed under the OECD guidelines.
- The due date for CT Payments and filing of Tax Return for a Tax Period is 9 months from the end of relevant Tax Period. No Advance Tax is required to be paid as per the CT Law.
Are there going to be any different tax regimes for free zones and mainland UAE?
If I am given an option to utilising two words to describe the nuanced manner that the tax regime deals with Freezones and Mainland it would be “delicate balance”. No, there are no different tax regimes for Free Zones and Mainland. The CT law is applicable to all the seven Emirates, with certain exemptions as allowed in the UAE CT law. However, the Free Zone Persons (FZPs) that meet the conditions to be considered a Qualifying Free Zone Person (‘QFZP’) can benefit from a CT rate of 0% on their qualifying income if the following conditions are met:
- Maintains adequate substance in the UAE;
- Derives “qualifying income” (to be specified through Ministerial Decisions);
- Complies with the Arm’s length principle and transfer pricing (TP) documentation;
- Has not elected to be subject to CT;
This move by the Federal Tax Authority (‘FTA’) has been done, knowing that Free Zones have been attractive destinations for foreign direct investment making, it easier for companies to do business in the UAE and for housing entrepreneurs.
What are the provisions for exemptions and what all expenses will be exempted under the new tax regime?The CT regime exempts dividends and other profit distributions received by a Taxable Person from a UAE tax resident entity (i.e. Local dividends). Further, dividends and other profit distributions received from a foreign entity in which a ‘participating interest’ is held, will be exempt from UAE CT. Participating interest is said to be held in an entity where a Taxable Person meets all of the following conditions:
- An ownership interest is greater than or equal to 5% in the shares or capital of an entity
- Ownership (or the intention to hold) greater than or equal to 12 uninterrupted months
- Entity in which participation interest is held is subject to CT in its jurisdiction at a rate greater than or equal to 9%.
- Not more than 50% of the direct and indirect assets of the Participation consist of ownership interests or entitlements that would not have qualified for an exemption from Corporate Tax if held directly by the Taxable Person.
- Further, the CT Law also exempts in the hands of a Resident Person the net income of its foreign Permanent Establishment that is subject to tax at a rate greater or equal to 9% in its home jurisdiction.
Expenditure that is operational expenditure and is not of capital nature that is incurred exclusively for business purposes and for earning Taxable Income will be deductible.
Entertainment expenses are allowed as deductions up to a cap of 50% of the amount incurred and interest expense deductions are capped at 30% of the Taxable Person’s earnings before interest, taxes, depreciation, and amortization (EBITDA).
The amount of net expenditure disallowed in the tax period may be carried forward and deducted in the subsequent (10) ten tax periods in order in which the amount was incurred. However, the interest capping rules will not apply to banks, insurance businesses, and other person who maybe specified through a Ministerial Decision.
What steps do startups need to take to comply with the provisions of the new proposed corporate tax law?
The first few steps matter in any endeavour and especially when a new tax regime is coming into force it is important to be reminded of some important compliances.
- Primarily, all businesses except those exempted via Ministerial decision No. (43) of 2023 concerning exemption from tax registration, for the purpose of CT in the UAE should make themselves known to the authority by registering and obtaining a Tax registration number (TRN). There should be a clear assignment of roles among business verticals as to who will be accountable for the accounting of income taxes (tax or finance team).
- Secondly, businesses need to ensure that tax accounting is covered during the assessment years to reduce complexity and compliance costs. The UAE CT regime uses the accounting net profit (loss) stated in company’s financial statements as the starting point for determining the Taxable Income. For this purpose, the financial statements should be prepared in accordance with the accounting standards accepted in the UAE. International financial reporting standards (IFRS) are commonly used by businesses in the UAE.
- Thirdly, a taxable person must be able to support the information given in a CT return and must provide the authority with any such record, information, documents and maintain all records and documents for a period of seven years following the end of tax period to which they relate. Therefore, it becomes absolutely imperative that business are equipped for record keeping of documents for a minimum of seven years. These are some of the measures that will equip startups to comply with the new tax provisions.
What impact do you see on the startup ecosystem?
Reiterating my previous statement, there is no better time than now to begin one’s entrepreneurial journey in the UAE. To soften the impact of CT on the startup ecosystem, we have seen exemption provisions in the CT law, and with the recently announced Ministerial Resolution No. (73) of 2023 (Resolution) regarding Small Business Facilities (SBF) wherein Taxable Persons shall be treated as not having any taxable income if the revenue of the Taxable Person does not exceed AED 3 million for tax periods commencing on or after 1 June 2023 and ending before or on 31st December 2026.
This is a very encouraging sign for startups because the amount saved on tax can be used in the operations of the enterprise. There is also anticipation in the market that one could expect to see more details on applicable relief applications, ahead of the June 2023 rollout.
What advice would you like to give to startups and individuals planning to start a new business?
It is my firm belief that, ease of doing business is the most crucial factor which businesses look into while starting their entrepreneurial journey or expanding one’s business operations. Political stability, business friendly policies, good infrastructure, access to talent and markets are some of the vital factors which contribute to the decision-making criteria for entrepreneurs in selecting a base for their innovation.
The launch of ‘Projects of the 50’, a series of developmental and economic projects to accelerate UAE’s economic growth and diversification, covering key sectors such as, economy, entrepreneurship, advanced skills, digital economy, space and advanced technologies with a goal to transform UAE into a comprehensive hub in all sectors and establish its status as an ideal destination for talents and investors is a brilliant initiative by the UAE government.
So also introduction of incubation programmes that equip promising startups with strategic partners, advisors, and investors to the recently launched Area 2071, Hub71 and Fazaa Center for Business Incubators and Accelerators, are among the many initiatives undertaken by the UAE government in encouraging young people to achieve and manage their innovative ideas as startups to enter the field of entrepreneurship and to help the start-up community in the region.
With more than 40 multidisciplinary free zones, where expatriates and foreign investors can have full ownership of companies, characterised by their highly efficient infrastructure, and distinct services enabling smooth workflows, saving businesses considerable time and effort, UAE continues to remain a conducive environment for business setups.