The impression from consultancies and other sources is that 2023 will continue to see more business relocations to the UAE, with the Gulf and wider Middle East expected to maintain higher than par GDP gains. Image Credit: Shutterstock

Dubai: Startups and early-stage businesses in the UAE have got themselves sufficient leeway as to when they should start paying the newly introduced 9 per cent corporate tax (CT), effective from June 2023.

The CT updates suggest that early-stage companies incurring costs and having startup losses in the initial years can ‘carry forward their losses indefinitely which they can subsequently set off with profits in the later years’.

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“There is also a provision that will allow small companies whose turnover is below a threshold - to be defined later - to be exempt from corporate tax,” said Nimish Goel, Partner at WTS Dhruva Consultants. “This is in addition to the general provision of 0 per cent rate of tax for taxable income up to Dh375,000.

This is fairly comprehensive legislation and incorporates a fair bit of suggestions invited by the Ministry of Finance on its Public Consultation Document. A significant inclusion is the anti-avoidance provision that aim to arrest potential tax abuse.

- Nimish Goel at WTS Dhruva Consultants

“Some companies would also be exempted from getting their accounts audited and permitted to use non-audited financial statements for preparing CT liability. There is a possibility that startups could fall under this exemption, which would be a big relief for such companies.”

Clearly, the UAE authorities are intent on making the CT load as light as possible on new businesses launching or operating in the market. The impression from consultancies and other sources is that 2023 will continue to see more business relocations to the UAE, with the Gulf and wider Middle East expected to maintain higher than par GDP gains.

Easing the CT load for new businesses

According to the UAE Ministry of Finance, the 0% threshold for taxable profits up to and including Dh375,000 has been done in ‘recognition of the vital role of start-ups and small businesses in the economy’.
And the 9% standard rate ensures that the Corporate Tax regime is among the ‘most competitive in the world and will strengthen the UAE’s position as a global business and financial centre’.

“The UAE’s speeded up residency reforms with an eye on bringing in investments and talent,” said a business set up consultant. “New startups are getting launched, the tech sector is seeing some heavy activity, and the freelance-driven project work is picking up.

“Keeping the CT load light on these businesses would allow them to grow, faster, and build themselves to be in a position to pay their share of taxes later.”

I think the Dh375,000 limit is reasonable to give relief to the SMEs, and don't expect to see an increase the limit further in the near future.

- Jitendra Gianchandani of JGG

Feedback gets integrated

After the UAE announced its landmark shift to introducing a CT from June 2023, the concerned ministry and other allied authorities had called in exhaustive public consultations and feedback from businesses, consultancies and others.

A lot of that feedback thus generated has been woven into the regulations that became law last week. Free zone based businesses too have been given clarity on where they stand vis-a-vis their CT obligations.

“The existing free zone entities will be eligible to benefit from a 0 per cent CT rate on qualifying income,” the Decree states.

Free zone incentives

So, which businesses/individuals with free zone operations qualify?

“‘Qualifying free zone persons’ are those who maintain adequate ‘substance’ (I.e., have adequate office and staff capacity to match income and have company directors’ present in the state),” said Jitendra Gianchandani, Chairman of JGG. “And they have to be earning ‘qualifying income’ (income from business located out of the UAE or business within the free zone or any other free zone) and maintain separate books and comply with fair transfer prices.”

Free zone enterprises and their CT obligations

A free zone person with a branch in mainland UAE will be taxed at a regular CT rate.
The free zone person can continue to benefit from the 0% CT if the income from mainland UAE is limited to ‘passive’ income. Which means income from interest and royalties, and dividends and capital gains.
The 0% CT rate will also apply to any transactions between free zone entities and group companies in mainland UAE.
CREDIT: RNI Consulting

Due diligence

The new CT Decree states that the ‘Corporate Tax compliance and administration requirements have been tailored to suit different categories of taxpayers, in recognition of the diversity of businesses which will come within the scope of the new CT regime.

“Additionally, the Corporate Tax regime provides generous relief for intra-group transfers and restructurings, and allows group companies to use each other’s available tax losses.”

When it comes to new investments, businesses will need to go deeper on their due diligence. “The tax will force them to do more diligence on all such plans,” said Vijay Valecha, Chief Investment Officer at Century Financial. “This will promote more sustainable investments inside the country.

“This can support development projects inside the country, on infrastructure, healthcare, etc., and help to improve the overall quality of life for citizens in the UAE.”

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Investment funds

Investment funds structured as corporate entities - and this includes Real Estate Investment Trusts (REITs) or partnership funds that apply to be treated as a Taxable Person’ for UAE CT purposes - can apply to the Federal Tax Authority to be exempt from UAE CT subject to meeting certain requirements.

Wholly-owned UAE investment holding companies - or other Special Purposes Vehicles used by an investment fund to deploy capital and hold investments - too can apply to the Federal Tax Authority for CT exemption granted to an investment fund.

Debt-heavy businesses

According to Goel at WTS Dhruva, debt-heavy entities too are in for relief under the new regime. “ A welcome deviation from the Public Consultation Document is allowance of carry forward of interest disallowed for a period of 10 years. This should benefit heartily leveraged companies, typically in real estate and infrastructure.”

A whole of boxes have been ticked by the Ministry of Finance and the FTA is preparing businesses in the UAE to get CT-ready from June 1, 2023.

“The Corporate Tax Law reflects the UAE’s support for the OECD Inclusive Framework on Base Erosion and Profit Shifting in its commitments to introducing a global minimum tax for multinationals, enhancing tax transparency and preventing harmful tax practices,” states the Ministry of Finance.

But by balancing those global obligations with offering enough room for entities operating in the UAE, the Ministry of Finance has done its part to the full.

And at 9 per cent CT, the lightest of tax load on businesses…