How UAE is transforming as a center to grow businesses in Arab world

How UAE is transforming as a center to grow businesses in Arab world

According to the IMD World Competitiveness Ranking for 2022, the UAE is the most competitive nation in the Arab world.

One of the few remaining large, expanding economies that is still tax-free is the United Arab Emirates, which is well-known on a global scale. 

Recently, a number of high-net-worth people have emigrated to the UAE. The abundance of free zones that made it possible to establish Free Zone Enterprises (FZEs) and the ease of conducting business there have raised the UAE’s identity.

The OECD’s Two-Pillar strategy was released in 2021. 141 nations, including the UAE, endorsed the Inclusive Framework when it was released by the OECD. The Inclusive Framework stated that at least 15% of an enterprise’s profits must be subject to corporate tax. 

The UAE made the initial move by issuing FAQs in January 2022. This started the process of changing the UAE’s tax system from one that was tax-free to one that followed the standards set by the rest of the world.

The proposals essentially state that all entities (corporate or otherwise) that do business must pay taxes at a rate of 9% for accounting years beginning after June 1, 2023. Businesses who operate internationally and have annual sales of more than €750 million must pay taxes at a different rate that will be established. To comply with the OECD’s recommendations, this rate is anticipated to be 15%.

Currently, anytime a new tax is planned to be imposed, there is concern that it may reduce the destination’s competitiveness. There is general consensus, however, that the UAE’s introduction of corporate tax will give legitimacy to the enterprises operating there, that the Gulf country will join a larger global framework, and that the introduction of taxes does not reduce its competitive edge.

Apart from the fact that the taxes are very low at 9% and 15%, the consultation document’s tax system stands out as being fairly straightforward. Taxes will need to be paid on the amount of accounting profits. All businesses operating commercially in the UAE as well as foreign companies that are governed and managed from the UAE will be required to pay taxes. Legal entities established in the UAE would be required to pay taxes there on their worldwide income, while others would only be required to pay taxes on their income earned within the UAE.

The government’s ongoing pledge to uphold contracts made with Free Zone Enterprises and keep their income exempt from corporation tax is encouraging. So, if a Free Zone Enterprises deals with or conducts business in the mainland, measures have been added to tax the income from the mainland and/or to disallow the associated expenses. These provisions need to be carefully considered, and organizations that run both in Free Zone Enterprises and on the mainland may need to take a deeper look and reorganize their business models.

The UAE will continue to have tax-free overseas dividends and capital gains, as well as dividends from firms based there, in order to entice businesses to use it as a holding company jurisdiction. However, those using the UAE as a holding company jurisdiction must be aware of the restriction on interest deduction, which only allows for a maximum of 30% of Ebitda.

The provision about grouping is an important set of provisions that would simplify compliance and lessen the burdens of tax. Corporate tax groups may be formed by businesses with a common share ownership of at least 95%. Regarding the transfer of losses among group firms, there are a few unusual provisions. In general, taxes are paid on 75% of the book earnings, with the remaining 25% being offset by brought-forward losses. Transfers of businesses and reorganizations are exempt from tax under certain circumstances.

Finally, it is highly supportive that there are no obligations for withholding taxes or paying advance taxes.

All firms conducting business in the UAE must now consider whether their current organizational structures are adequate in light of the introduction of corporation tax. There would be many factors to take into account. To earn an interest deduction, one could need to restructure their debt and equity. They might also need to think about how to hold their assets and charge rent, where to put their intellectual property, and how much to charge in royalties, among other things. 

Despite losing its reputation as a tax-free country, the UAE will nevertheless gain from increased openness and recognition as a fully compliant global jurisdiction, and with the right architecture, firms may ensure that the burdens of corporate tax are minimized.

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