UAE corporate tax: Startups, early-stage businesses get enough flexibility in spending

“There is also a provision allowing small companies with a turnover below a threshold (to be defined later) to be exempted from corporate tax,” said Nimish Goel, partner at WTS Dhruva Consultants. “This is 0% on taxable income up to Dh375,000 The tax rates are in addition to the general provisions.

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This is fairly comprehensive legislation and incorporates some of the proposals that Treasury invited in its public consultation paper. An important element is the anti-avoidance provisions aimed at deterring potential tax abuse.

-Nimish Goel, WTS Dhruva Consultants

“Some companies will also be exempted from having their accounts audited and allowed to use unaudited financial statements to prepare for CT liability. The possibility that startups will be exempted from this exemption will be a great relief to these companies. “

Clearly, the UAE authorities intend to keep the CT load as light as possible for new businesses launching or operating in the market. The impression from consultancies and other sources is that more businesses will continue to relocate to the UAE through 2023, with the Gulf region and the wider Middle East expected to maintain above-average GDP growth.

“The UAE has accelerated residency reforms with an eye toward bringing in investment and talent,” said a business-setup consultant. “New startups are being launched, the tech industry is doing some heavy lifting, and freelance-driven project work is on the rise.

“Keeping these businesses CT-light will allow them to grow faster and build their capacity so they can pay their fair share of taxes later on.”

I think the limit of Dh375,000 is reasonable to ease the burden on SMEs and do not expect to increase the limit further in the near future.

– Jitendra Gianchandani of JGG

After the UAE announced a landmark shift to introduce CTs from June 2023, the ministries and other relevant authorities called for an exhaustive public consultation and sought feedback from businesses, consultancies and others.

Much of the resulting feedback has been incorporated into regulations that became law last week. Free zone-based businesses have also gained a clear understanding of where they stand with regard to CT obligations.

“Existing free zone entities will be eligible for a CT rate of 0% on qualifying income,” the decree states.

So, which businesses/individuals with free zone businesses are eligible?

“‘Eligible free zone persons’ are those who maintain sufficient ‘substance’ (ie, have sufficient offices and staff capacity to match income, and have corporate directors present in the state),” JGG chairman Jitendra Gianchandani said. “And they must earn ‘qualifying income’ (income from a business outside the UAE or a business in a free zone or any other free zone) and keep separate books and abide by a fair transfer price.”

The new CT Act states that “corporate tax compliance and administration requirements have been adjusted for different classes of taxpayers in order to recognize the diversity of businesses that will fall within the scope of the new CT regime.

“Furthermore, 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, companies need to go deeper into their due diligence. “The tax will force them to do more due diligence on all such schemes,” said Vijay Valecha, chief investment officer at Century Financial. “It will promote more sustainable investment in the country.

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

Investment funds structured as corporate entities – including real estate investment trusts (REITs) or partnership funds, applying to be deemed taxable for UAE CT purposes – may apply to the Federal Tax Authority for UAE CT exemption, subject to the following conditions being met: requirements.

Wholly-owned UAE investment holding companies – or other special purpose vehicles used by investment funds to deploy capital and hold investments – may also apply to the Federal Revenue Authority for the grant of a CT exemption for investment funds.

Indebted entities will also get relief under the new regime, according to WTS Dhruva’s Goel. “A welcome deviation from the public consultation paper is not to allow interest carry forward over 10 years. This should benefit highly leveraged companies, typically in the real estate and infrastructure sectors.”

The Ministry of Finance has ticked a series of boxes and the FTA is preparing businesses in the UAE to be CT-ready from 1 June 2023.

“The corporate tax law reflects the UAE’s support for the OECD’s inclusive framework on base erosion and profit shifting, its commitment to introduce a global minimum tax for multinational companies, improve tax transparency and prevent harmful tax practices,” the finance ministry said.

But the Treasury has done its part by balancing these global obligations and providing enough space for entities operating in the UAE.

Businesses have the least tax burden at 9% CT…