Stock - UAE Corporate Tax
The introduction of corporate tax will improve individual companies' financial accounts through auditing. Image Credit: Vijith Pulikkal/Gulf News

Adding to the UAE’s efforts to become a global hub, the nation announced Federal Law No. 47 of 2022 on the taxation of corporations. Under the new regime, UAE businesses become subject to corporate tax in their first financial year that starts on or after June 1, 2023.

Gulf nations, known for their low taxes, attract many to live and work through their various offerings, and for some, this may seem like a negative factor for the bottom line of businesses.

However, the introduction of the UAE corporate tax will promote a healthy and controlled growth for longer periods, eliminating short-cycle bubbles, while stabilising and strengthening the economy. In addition, introducing the corporate tax will improve individual companies’ financial accounts through auditing, and true accounting mechanisms promoting transparent investment opportunities for individuals. Government redistribution of corporation tax funds will also positively impact various sectors like infrastructure, technology, transport and healthcare.

Startups will receive an income threshold exemption of Dh375,000 ($102,000 approximately) in all UAE jurisdictions. This applies to all UAE companies, not differentiating between business activity, nationality or citizenship of the founders and owners.

With the new laws and regulations in place, the key question is whether the UAE mainland or a free zone is suitable for companies.

As a new company, keep these pointers in mind:

* What is the 1-5 year plan of your new business?

* What is your business activity?

* Who are your clients now and in the future? And where are they located?

For an existing company:

* How much revenue is currently generated from the UAE vs that from international clients?

* What are your 1-5 year growth plans for the business?

* Where is your office currently located? Is this important to you?

To structure a company effectively and maximise your bottom line, businesses must analyse the current revenue percentage split between UAE and international clients and how this will evolve in the next 1-3 years based on growth plans. This will also help identify and formulate future sales and marketing opportunities.

There may be scope for compartmentalising your business divisions to perform mutually exclusive commercial activities and operations. This could then be parented by the introduction of a UAE holding company, which would act as a catalyst for future investment or exit strategy for sub-divisions. Another key element would be your current office location and business activity listed on the trade licence. How important is this to you, your employees and clients?

The cost of moving or expanding to a new jurisdiction may not always outweigh the initial bottom line saving.

Getting prepared for corporate tax

Most UAE jurisdictions do not currently require submission of financial accounts or audited accounts. This will change to ensure a true evaluation on corporate tax qualification by the Federal Tax Authority (FTA). Therefore, it would be beneficial to implement these procedures internally ahead of June 1, 2023, so that all company stakeholders and internal departments are aligned on best practices ahead of time.

It’s imperative that your UAE corporate bank account is opened and fully operational and you are not operating commercially from a personal UAE or international bank account. If you do not currently meet the mandatory VAT threshold, but expect to reach this within the next 1-6 months based on your revenue projections, it would be worthwhile obtaining your TRN number on the voluntary threshold instead.

You will then already be a client of the FTA and should see a smoother transition enrolling for corporate tax with a track record and TRN number with the authorities.

The most important advice ahead of the changes will be based on your future 1-5 year commercial strategy. No one plans on not reaching their growth targets and this should be coupled with proactive corporate structuring and internal policies from now, rather than reactive measures which will in turn be more expensive coupled with longer procedures by not getting it right from the start.