Corporate Tax in the UAE: Asking All the Right Questions

Hypothetically, let’s imagine Barack Obama comes to the UAE to speak at a private event. Now, imagine Novak Djokovic coming to the UAE to play tennis, or Tom Cruise to make a movie. Can you believe Novak and Tom would have different tax implications than Barack?

Pursuant to tax treaties with other countries, the UAE is entitled to tax the income of such overseas citizens engaged in performing arts activities in the UAE. Although there are no personal taxes in the UAE, corporate tax may still apply to certain business activities in the UAE by individuals, residents or expatriates, if their annual income exceeds AED 1 million.

Given the organic growth of businesses in the UAE, certain legacy practices suddenly appear tax inefficient and could be costly in the future. Businesses need to pay particular attention to the tax efficiency of their operations.

UAE VAT does not apply to personal salaries. Salaries are given to employees in consideration of their services in accordance with the employment contract (including allowances and bonuses), as determined by the Cabinet.

According to the MoF’s Frequently Asked Questions (FAQ), an employment relationship may include a continuing service relationship in which all or a substantial part of an individual’s income is derived from a client and the income for services is essentially compensation for the labor of a natural person. Employment/wage income should be from one client (aka employer).

Many business owners have begun drawing wages from multiple companies they own. The question to ask is whether such transactions would be considered salary or business income if from multiple companies. Can a boss wear an employee hat? Anti-abuse rules will also have an impact on such transactions.

The Public Consultation Document (PCD) contains an important policy objective to prevent free zone businesses from gaining an unfair competitive advantage over those established in the UAE mainland. The PCD states that if a free zone entity earns any mainland-sourced income (other than the qualifying and non-qualifying income mentioned above), the 0% tax rate on all its income will be abolished.

For example, if a free zone entity provides installation services in the mainland, or if a free zone enterprise provides services to both overseas customers and mainland/free zone customers, will they lose their full tax exemption status?

The CT Act does state that a free zone entity must meet the conditions set by the Ministry of Finance to be eligible for tax exemption (0% rate). Taking into account the policy objective of preventing unfair tax incentives, it is not excluded that the business operations of free zone entities including certain inland activities or other prescribed activities may be disqualified.

Business owners usually only consider the main activities of the company, such as manufacturing/trading/services, to examine CT impact. All activities carried out and assets used/held by the company will be considered activities carried out and assets used/held for business purposes.

CT law does not propose a significant exemption for companies that earn income from real estate. Therefore, income/gains from real estate held by the company may be taxed in the future.

For action planning/assessment studies, it is important that businesses assess whether they have clarity on what needs to be done, how, why, when it needs to be done, and who will do it. The 4Ws and 1H methods do not require prior tax experience for businesses. For stakeholders assisting businesses in implementing the tax, following the approach above is just as important as supporting the proposed compensation.

“What needs to be done” is very important. Businesses cannot be left to fend for themselves, or know what to do by giving generic statements like “companies should ensure compliance with transfer pricing documents (or any other xyz regulations)”. It only takes a minute to recommend that a person cook to satisfy their hunger, all that person really needs is to know what ingredients to mix, their ratios, and how to cook (and maybe how not to burn food).

The answer already exists, are you asking the right question? Businesses should be mindful of their tax position and ask questions about the impact of the upcoming corporate tax on their tax policy.

– Authors Pankaj S. Jain and Deepak Bansal in partnership with AskPankaj Tax Advisors, which provides bespoke tax advisory services to UAE and multinational corporations

To share tax insights and raise awareness on corporate tax across sectors, Gulf News, in association with AskPankaj, organized three corporate tax seminars in the UAE.

● Sharjah: Tuesday 23rd May at Holiday Inn Sharjah International

● Dubai: Thursday, May 25 at DoubleTree by Hilton Hotel & Residences, M Galleria, Dubai

● Abu Dhabi: Monday, May 29, The Westin Golf Resort & Spa, Abu Dhabi

Scan the QR code to register to get a discounted ticket of Dh799. Ticket price for group bookings is Dh749