UAE Corporate Tax: Businesses will find it is all quite straight-forward

The announcement highlighting options for UAE businesses to adjust for ‘opening balances’ on their corporate tax has a welcoming effect for the real estate development market.

As well as for long-term investors in their ability to choose whether to ‘mark to market’ their opening balances or whether to apportion the gains over the holding period.

Given earlier guidelines for ‘related party’ transactions and transfer pricing, for small developers as well as for investors who waded into the refurbishment/redevelopment space of the property market, it is increasingly probable that a Bramblett-like structure can be used for the transfer and buildup of undeveloped land. And for re-developments.

On re-development projects, the option of depreciation can also apply, and there are different criteria in different countries. Such structures in more advanced tax jurisdictions face scrutiny on a number of fronts, but the essential thrust of this query is whether the transfer has been conducted on an arms-length basis. And for which the Federal Tax Authority has already clarified the criteria.

FTA serves up flexibility for investors

The structure allows for a distinction between capital assets and ‘stock in trade’.

While there will be a continual series of updates and guidelines from the FTA, the flexibility that has been given to long-term investors and developers alike is welcoming in that it fosters and nurtures a mindset of long-term capital formation, which has been at the heart of the economic development.

This has been demonstrated by the wide latitude given on the adjustment of opening balances given to corporates, giving them the option of either marking to market or holding them at cost. A decision that can be arrived at by looking at the duration that the asset has been held, thus acknowledging the advantages of long-term investing.

The long-term investor is characterized by inactivity, rather than ‘busyness’, but it is a hard mindset to adapt. This mindset, wherever applicable, has been manifested in the balance-sheet of individual homeowners, small investors and famlly offices that have allocated capital in the capital markets as well as in real estate.

The reality of tax

The taxation regime (a presumptive system) implemented by the UAE was perhaps inevitable, given the globalized world we live in and the steady march of the country towards the top in terms of attracting both talent and capital.

The Middle East and the UAE are the hotspots for corporatization, and the taxation system that has come along brings with it the same ethos of flexibility and competitiveness baked into the very ethos of the country. It is undeniable that there will be an adjustment period (similar to what happened with VAT).

While there will be a heyday for the accountancy, legal and consultancy services related to this area - and a greater emphasis on accounting policies SMEs must adopt - it fosters an era of greater disclosure that allows for capital formation from a disclosure perspective.

Ease of capital raising

With the incentives in place for small businesses, it will allow for greater degree of capital raising as there is a convergence towards common standards. In areas such as transfer pricing to policies such as depreciation and qualifying income.

Structuring efficient entities will become the norm, and standards will be tightened, with an emphasis on details that will benefit the ecosystem at large.

This is a hard argument to swallow at first glance, as ‘tax-free’ jurisdiction was long considered a selling point. However, the system that has been unveiled is progressive in nature, with simplicity at its core, continuing to nurture asset formation and business activity that has long been the hallmark of the country.

Quick adjusting to new realities

It further diversifies the economy from oil revenues, and in doing so, reduces the correlation of asset prices to the vagaries of fossil fuels.

With the population burgeoning in the UAE, the newer entrants are perhaps more familiar with taxation regimes. And in many cases have expressed little or no concern for the upcoming year.

For those who have been around longer, there is some sense of melancholy, tied up with some sense of anxiety as to pricing, impact and incidence of tax liabilities. Everyone would prefer to not pay taxes, but any relative comparison of tax regimes shows that the UAE comes out at the top in terms of its flexibility, encouragement to facilitate business, as well as in its simplicity.

In an increasingly complex world of business, there is comfort to be derived in being able to avoid the myriad and byzantine-like tax regulation structures that plague most other parts of the world, implying significantly lower costs of compliance.

Ongoing corporate and business activity has reflected this optimism.