Tax was the only one of life’s inevitabilities that most SME businesses trading in the UAE did not have to be wary of. Then VAT came in at the beginning of 2018. Predicted by experts but hoodwinking many in the market, the introduction of a 5% levy on goods and services sparked concern that businesses would struggle to comply and that their customers would hold back on spending.
Cue, a slew of offers on vehicles to encourage buyers to dip in before the new tax came into place. While that entrepreneurial push was largely successful, many distributors were still knocking off the 5% months later to get rid of stock. The lesson then, for all, is that when it comes to tax there’s no hiding place and now is the time to get ready for the 1 June, 2023 when all businesses’ net profits will become subject to UAE Corporate Tax (from the beginning of their first financial year that starts on or after 1 June 2023.)
In the past, individual emirates have balanced their own tax decrees and the need to stimulate their economies with Free Zones acting almost as tax havens that incentivised establishing businesses within their boundaries with a slew of benefits. That situation now changes particularly for businesses drawing an income from within the UAE.
The UAE’s ministry of finance issued a set of guidance in December in an effort to provide clarity and formalise its Federal Decree-Law on Taxation of Corporations and Businesses. So, what’s the damage? In short, the UAE’s Corporate Tax regime will levy a standard rate of 9% for taxable profits exceeding AED375,000. Profits up to and including that threshold will be taxed at a 0% rate to support small businesses and start-ups.
That threshold will prove crucial for many fleet owners but, for context, an amount that equates to $100,000 is still relatively low versus, say, the value of a new vehicle. But there could be other ways to lower your exposure and negate the impact on your business.
The Ministry of Finance itself describes the new tax as an important milestone in building an integrated tax regime that aligns it with other countries (it says the law places in line with the OECD Inclusive Framework on Base Erosion and Profit Shifting which introduces a global minimum tax for multinationals, “enhancing tax transparency and preventing harmful tax practices”) but still supports the strategic objectives of the UAE and enhances its global economic competitiveness, “as well as provides the national economy with sufficient flexibility to deal with and support international financial systems within the framework of the UAE’s established partnerships.”
In the post-World Expo 2020 market, the UAE has recognised that it also needs to protect a diverse economy and the importance of driving sustainable development. It says that it involved relevant stakeholders through public consultation and took into account feedback and views in the final design of the Corporate Tax regime. The Ministry believes that the 0% threshold for taxable profits up to and including AED 375,000 will also protect the vital role of start-ups and small businesses in the UAE’s economy. The 9% standard rate certainly ensures that the Corporate Tax regime is amongst the most competitive in the world and experts agree that it will strengthen the UAE’s position as a global business and financial centre.
The ministry has noted that exemptions from Corporate Tax are highly targeted. Natural resource extraction activities in the country are exempt from Corporate Tax; however, they remain subject to existing local emirate-level taxation which pre-dates the new rules. Other exemptions are available to organisations such as government entities, pension funds, investment funds and public benefit organisations due to their vital importance and contribution to the social fabric and economy of the UAE.
Existing free zone entities will be eligible to benefit from a 0% Corporate Tax rate on qualifying income. Eg, if that income is from outside the UAE.
Other noteworthy details include rules that state that the Corporate Tax will not be applied to salaries or other personal income from employment, whether it is earned from work in the government, semi-governmental or private sector. Interest and other personal income earned from bank deposits or savings programmes are also not subject to Corporate Tax, as well as investment in real estate by individuals in their personal capacity.
According to Vikas Panchal, general manager – Middle East, Tally Solutions, says the UAE has always been at the forefront of innovation and change and describes the new rules as a positive transformation for the country’s alignment with global community for taxes.
“While there are several apprehensions about the implementation of corporate tax, it is to be noted that most SMEs have adapted to digital transformation with the introduction of VAT a few years ago which will enable them towards a seamless transition to this new tax implementation,” says Panchel.
Overall, the corporate tax announced by the UAE government will be a guided approach for the UAE’s SME community, that will benefit in a higher business valuation, more investors, and increased opportunities.
“This issuance is a significant milestone in the history of the country and a major boost for the national economy. The 0% threshold for taxable profits up to and including Dh 375,000 in recognition of the significant role that start-ups and small businesses play in the UAE’s economy, and the 9% standard rate ensures that the UAE’s Corporate Tax regime is amongst the most competitive in the world.
“This will further strengthen the country’ position as a global business and financial centre. Overall, the corporate tax announced today will be a guided approach for the UAE’s SME community, that will benefit in a higher business valuation, more investors, and increased opportunities.
“For a smooth transition to the corporate tax era, having a powerful integrated business management software should be the top priority for SMEs in the UAE. This can help generate quick business reports across accounting, inventory, and compliance along with easy management of daily financial transactions. Moreover, it is advisable to take guidance from accounting and tax experts to ensure 100% compliance.,” he said.
He argues that firms like his can have an important role to play in helping businesses across the UAE with corporate tax both in terms of assisting them understand it and its implications as well as providing simple software which will make compliance easy.
Varis Sayed, founder of Fincasa Capital, also welcomes the move.
“The 9% corporate tax will be a boon for the UAE economy in that it will provide the government with a new source of revenue and, in effect, help reduce its heavy reliance on oil receipts,” argues Sayed.
“We expect that it will strengthen the confidence of investors in the national economy’s growth prospects, seeing the government’s willingness to implement changes vital to globalize the local business culture and making the country internationally pioneering.”
Sayed continues: “The law will not only help make the UAE more prepared for a post-oil world, but it will also enable the country to move closer to its goal to become the top nation in the next 50 years. We will extend all the support to entice more international investors to come to the UAE shores and take advantage of the many opportunities here.”