Entrepreneurs: Plan for these taxes when starting a business in UAE

Dubai: Entrepreneurs play a key role in any economy. They not only have the skills necessary to anticipate current and future needs and bring good new ideas to market, they need to brace for any tax regulations that come their way and ensure they are compliant right from setting up the venture.

“When creating a new business, one thing is clear. Although an entrepreneur bears most of the risks, he enjoys most of the rewards too. The entrepreneur is seen as an innovator, a source of new ideas, goods, services, and business or procedures,” said Masher Suleiman, a tax planning associate in Abu Dhabi.

“Tax planning is key to running a successful business in the UAE. By understanding the tax landscape, leveraging exemptions and deductions, staying compliant with reporting requirements, businesses can reduce their tax liabilities and increase profitability.”

UAE entrepreneurs and their tax mandates

The notion of an entrepreneur is normally associated with new start-up businesses. 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.

“In most countries, the tax rules for businesses are very different than the tax laws for individuals and entrepreneurs, who only pay taxes in accordance with his/her business activity,” said Brijesh Meti, a UAE-based consultant who decodes tax norms for UAE corporates.

“All aspects of tax payment – from filing to withholding to receiving a refund – are the same for those considered entrepreneurs, as those who are not. So a basic understanding of the UAE taxation system is indispensable, as you scale up a business that is compliant with the rules and regulations.”

What are the tax requirements for UAE entrepreneurs?

When starting a business in the UAE, there are several taxes and fees to consider, depending on the type of business and its location:

1. Corporate Tax

As of June 2023, the UAE introduced a federal corporate tax on business profits, aside from special rates possibly applying to specific industries (such as oil and gas or banking) and business structures.

2. Value Added Tax (VAT)

The UAE has a 5 per cent Value Added Tax (VAT) on most goods and services. “Businesses must register for VAT if their taxable supplies and imports exceed Dh375,000 per year. Below this threshold, registration is optional but may be beneficial depending on business needs,” noted Meti.

“Businesses must file VAT returns quarterly or annually, depending on their turnover. It’s crucial to maintain detailed records of all transactions to comply with VAT regulations.”

3. Customs Duty

If you are importing goods into the UAE, customs duties are generally 5 per cent of the value of goods, though some goods may have higher or lower rates, depending on the product. “Free zones often offer exemptions from customs duties if goods are not sold directly into the UAE market,” Meti added.

How entrepreneurs comply with VAT

“Since the implementation of VAT, thousands of companies in the UAE were mandated to register for VAT, provided that they meet the criteria for registration,” explained Suleiman.

“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 [small and medium enterprises] 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, as listed out by Meti.

• 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 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.

• VAT de-registration

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 violations, 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 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.

How entrepreneurs prep for corporate tax

“Primarily, the corporate tax rates are: Zero per cent on annual profits up to Dh375,000; 9 per cent on profits exceeding Dh375,000,” explained Suleiman.

“Companies operating in designated free zones may still benefit from exemptions or reduced corporate tax rates, but this will depend on the specific free zone and whether the company meets its requirements for doing business in that zone.”

When preparing a business for corporate tax in the UAE, entrepreneurs should keep the following points in mind, as listed out by Suleiman:

• Maintain accurate records of revenues, expenses, and deductions to determine your taxable profits correctly. Ensure you understand what qualifies as allowable deductions (e.g., business expenses, salaries, etc.).

• If operating in multiple jurisdictions, be aware of transfer pricing regulations and ensure transactions between related entities are at arm's length.

• Stay updated on filing deadlines for corporate tax returns to avoid penalties and fines.

• Maintain accurate financial records and accounting books to support tax filings and audits.

“The UAE has also Economic Substance Regulations (ESRs), which require certain businesses engaged in activities like banking, insurance, and intellectual property to have substantial activities in the UAE to avoid being subject to additional taxes,” he added.

“Lastly, be aware of potential penalties for late corporate tax filings, incorrect tax payments, or failure to comply with tax regulations. By keeping these factors in mind, entrepreneurs can ensure their business is ready for the corporate tax regime and compliant with UAE tax laws.”