Corporate Tax in the UAE: Ask all the right questions

Hypothetically, let us imagine Barack Obama coming to the UAE to make a speech at a private event. Now, imagine Novak Djokovic coming to the UAE to play a tennis match, or Tom Cruise coming to shoot a movie. Could you believe that the tax implications on Novak and Tom will be different from that of Barack.

As per its tax treaties with other countries, the UAE is entitled to impose tax on the income derived by such overseas citizens by exercising the activities of an entertainer in the UAE. Even though there is no personal taxation in the UAE, corporate tax could still apply on specified business activities conducted by an individual, resident or expatriate, in the UAE if the yearly earning exceeds Dh1 million.

Considering the organic growth of businesses in the UAE, certain legacy practices suddenly appear as tax-inefficient and could pose significant costs in the future. Businesses need to pay special attention to the tax efficiency of their operations.

Salaries paid to owners taxable?

UAE VAT is not applicable on wages of an individual. As per the cabinet decision, wage is what is given to the employee in consideration of their services under the employment contract (including allowances and bonuses).

As per MoF’s frequently asked questions (FAQs), employment may include a continuing service relationship where all or most of the income of the individual is derived from one customer, and the service income is essentially remuneration for the natural person’s labour. The employment/salary income should be derived from one customer (aka employer).

Many business owners have already started drawing out salaries from the multiple companies owned by them. It needs to be asked whether such transactions would be considered as wage or as business income, if drawn from multiple companies. Can the owner wear a hat of an employee? The anti-abuse rules will also have an impact on such transactions.

Disqualifying Income – the free zones’ vulnerability

The Public Consultation Document (PCD) contained an important policy objective i.e. prevent free zone businesses from gaining an unfair competitive advantage compared to businesses established in mainland UAE. PCD stated that if a free zone entity earns any mainland sourced income (other than qualifying and non-qualifying incomes mentioned above), the entity will be disqualified from 0 per cent tax rate in respect of all its income.

For example, if a free zone entity provides installation services in the mainland, or if a free zone business provides services both to overseas clients and also to mainland/FZ clients, would they forfeit their entire tax exemption?

The CT decree law does provide that free zone entities will have to meet conditions prescribed by the Minister of Finance to qualify for the tax exemption (0 per cent tax rate). Considering the policy objective to prevent unfair tax advantage, it should not be ruled out that free zone entities could be disqualified if their business operations include certain mainland activities or other prescribed activities.

Personal assets in company’s name

Business owners often consider only the principle activities of the company such as manufacturing/trading/services for reviewing the CT impact. All activities conducted and assets used/held by a company will be considered as activities conducted, and assets used/held, for the purposes of business.

There is no apparent exemption proposed under the CT laws for the companies earning income from the real estate properties. Accordingly, the income/gains from the real estate held by companies could be taxed in the future.

Clear expectations and delivery

For the action plan/assessment studies, it is important for businesses to evaluate if they are getting clarity on the following – what needs to be done, how it needs to be done, why it needs to be done, when it needs to be done, and who will do it. The 4Ws and 1H approach does not require a prior tax experience among the businesses. For stakeholders assisting the business in tax implementation, following the above approach is equally important along with an indemnity to stand by the recommendations.

The ‘what needs to be done’ holds significant importance. The businesses cannot be left to fend for themselves, or know what to do by giving a generic statement such as ‘the company should ensure the compliance with transfer pricing documentation (or any other xyz provisions)’. It will take only a minute to recommend a person to cook to satisfy his/her hunger, what the person really needs is to know what ingredients to mix, their proportions, and how to cook (and perhaps how not to burn food).

Ask the right questions

The answers already exist out there, are you asking the right questions? Businesses should take note of their tax positions and ask questions regarding the impact of forthcoming corporate tax on their tax policies.

– The authors, Pankaj S. Jain and Deepak Bansal work with AskPankaj Tax Advisors, which provides bespoke tax advisory services to the UAE and to multinational businesses

Corporate tax events in the UAE

With the objective to share tax insights and raise awareness on corporate tax across various sectors, Gulf News in association with AskPankaj is organising three seminars on corporate tax in the UAE.

● Sharjah: Tuesday, May 23 Hotel Holiday International, Sharjah

● Dubai: Thursday, May 25, DoubleTree by Hilton Dubai M square Hotel & Residences, Dubai

● Abu Dhabi: Monday, May 29, The Westin Abu Dhabi Golf Resort & Spa

Scan the QR code to register and get discounted tickets for Dh799. Tickets for group bookings are available for Dh749