Entrepreneurs and VAT: What to keep in mind when you’re starting a business in the UAE?
The regulations in the UAE is tailor-made to suit the investor requirement of saving tax
Dubai: An entrepreneur is an individual who creates a new business, bearing most of the risks and enjoying most of the rewards. The entrepreneur is commonly seen as an innovator, a source of new ideas, goods, services, and business or procedures.
Entrepreneurs play a key role in any economy. These are the people who have the skills and initiative necessary to anticipate current and future needs and bring good new ideas to market.
Entrepreneurs who prove to be successful in taking on the risks of a start-up are rewarded with profits and continued growth opportunities. Those who fail, suffer losses and become less prevalent in the markets.
Entrepreneurs and global business tax burden
The notion of an entrepreneur is normally associated with new start-up businesses.
In most countries, the tax rules for businesses are very different than the tax laws for individuals and entrepreneur only pays taxes in accordance with his business activity.
All other aspects of tax payment – from filing to withholding to receiving a refund – are the same for those considered entrepreneurs as those who are not.
UAE has mainly two business jurisdictions for setting up companies – The Mainland and the Free Zone. It is governed by different business laws and levies certain taxes accordingly.
There are only very few taxes levied in the UAE, which is the Value-Added-Tax (5 per cent), the Excise Tax for certain commodities (Tobacco, Energy Drinks, etc.), and the Tourism & Municipality Tax for Hotels. UAE also has a corporate tax only for foreign banks and oil companies.
UAE is free from Income tax, tax on capital gains as well as profits, inheritance tax, tax on income from the property sale, etc. The tax-free environment for businesses is luring investors to start a company in the UAE.
As an entrepreneur, a basic understanding of the UAE taxation system is indispensable as you scale up a business that is compliant with the rules and regulations of the country.
What other tax-related factors drive entrepreneurs to start a business in the UAE?
1. Ease of setting up business
UAE has many prospective offers to attract investors and its one of the most established commercial and business hub of the Middle East.
The government support, business and tech infrastructure, banking services, financial structure, innovation, access to the global market, etc. are various factors that are attracting the investors to this region.
Moreover, the liberal policies across the majority of industries will drive in more investors to the UAE. The import-export market significantly contributes to the income growth of the UAE.
UAE has many enterprise-friendly measures like 100 per cent foreign ownership, 100 per cent profit repatriation, world-class infrastructure, ease of business setup, tax benefits, and so on.
2. Free trade and tax saving agreements with other countries
UAE has a very low taxation rate, and the investors can enjoy the benefits of tax savings while conducting business operations locally as well as internationally due to the tax-saving agreements of UAE with other countries.
The Free Trade agreements with multiple countries and waiver in Customs Duty fee for Free Zone companies are making UAE a perfect trading destination for international investors.
Also, numerous logistic and economic trade experts have often reiterated how by virtue of the UAE’s location between the east and the west of the world, it acts as a perfect logistics hub to facilitate international trade.
3. Double Taxation Agreement Treaty
UAE has 94 agreements in place with other nations to avoid double taxation on overseas investments. The Double Taxation Agreement is to promote cross-border trade and investment flows.
It also protects taxpayers from double taxation and invites more investors to choose UAE for setting up their business and enjoy the tax benefits.
Companies and high-net-worth individuals residing in the UAE can apply for the Tax Residency Certificate and claim the benefits of the Double Taxation Avoidance Agreement (DTAA).
Does your start-up need to register for Value Added Tax in the UAE?
Since the implementation of Value Added Tax (VAT), thousands of companies in the UAE were mandated to register for VAT, provided that they meet the criteria for registration.
Entrepreneurs have now become more cautious and compliant on their tax obligations because failure to do so puts their businesses in a critical position.
And while existing companies may have already undergone the initial VAT registration as soon as it took effect in January 2018, newly setup start-ups and SMEs are more prone to incurring violations if they lack the knowledge and understanding of the new taxation system of the country.
So, if you have a business setup in the UAE, here’s everything you need to know to determine whether you need to register for VAT or not.
• Mandatory VAT registration
A mandatory VAT registration applies to your business if the taxable supplies and imports have exceeded that mandatory threshold of Dh375,000 in the last 12 months.
Additionally, if you anticipate that your business will exceed the mandatory threshold of Dh375,000 in the next 30 days, then you need to register for VAT.
• Voluntary VAT registration
Voluntary VAT registration is particularly applicable to your business if the value of your supplies or taxable expenses has exceeded the voluntary threshold of Dh187,500 in the last 12 months.
At this point, you may or may not choose to register for VAT if your business meets the voluntary criteria. You may also opt to register for VAT if you anticipate that your business will exceed the voluntary threshold of Dh187,500 in the next 30 days.
• Applying for VAT Deregistration
When you are a VAT-registered business and eventually stops generating taxable supplies or if the value of your taxable supplies is less than the voluntary registration threshold of Dh187,500 over the last 12 consecutive months, then you must apply for VAT deregistration to the Federal Tax Authority (FTA).
The same VAT deregistration application must be made when the total value of your anticipated taxable supplies or expenses in the next 30 days will not exceed the voluntary registration threshold of Dh187,500.
It’s also important to note that application for deregistration must be made within 20 business days from the occurrence of the aforementioned circumstances.
• VAT Registration and Deregistration Violations and Penalties
A penalty of Dh20,000 is imposed on businesses for failure to submit a registration application within the timeframe specified by the tax law.
A penalty of Dh10,000 is imposed on businesses for failure to submit for de-registration within the timeframe specified by the tax law.
Once your business is registered for VAT, you are also mandated to maintain a book of accounts where all your financial transactions are accurately recorded.
Failure to keep a record of accounts is a violation of the law that will cause you a penalty of Dh10,000 for the first time and Dh50,000 for each repeat violation.