Dubai And UAE Foreign Investors Must Prepare For New Tax Rules Effective June 1st

Foreign investors in the UAE must start preparations to be in compliance with the new tax reporting regime. 

The United Arab Emirates has announced Federal Law No. 47 of 2022 on the taxation of companies.  Under the new regime, UAE registered businesses become subject to corporate tax in their first financial year that starts on or after June 1, 2023. The previous tax regime was at 0%.

However, introducing corporate tax will improve individual companies’ financial accounts through auditing, and true accounting mechanisms promoting transparent investment opportunities for individuals. It also brings the UAE more into line with other global standards, while the rate charged, 9% is still lower than the recommended 15% global average and considerably less than in developed economies such as the United States at 21% or European Union averaging the same. Government redistribution of corporation tax funds will also positively impact various sectors like infrastructure, technology, transport and healthcare.

There is some relief available for startups, who will receive an income threshold exemption of Dh375,000 (US$102,000) in all UAE jurisdictions. This applies to all UAE companies, and does not differentiate 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.

These are pertinent questions to bear in mind:

Start Ups

• 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? Where are they located?

Existing Businesses

• How much revenue is currently generated from the UAE as opposed to 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 maximize your bottom line, businesses must analyze 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 compartmentalizing 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 license. 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.

Preparing for Corporate Tax Liability

Most UAE jurisdictions do not require the 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 is vital 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.

This means you will then be correctly registered with the UAE tax regime and should see a smoother transition enrolling for corporate tax with a track record and TRN number with the authorities.

It is also important to assess your business prospects based on your 1–5-year commercial strategy as this helps both you and the government plan for your business development. It can also assist with applying for future incentives. This should be planned out now and should be coupled with proactive corporate structuring and internal policies from the start of 2023, rather than relying on reactive measures later, as these could result in more expensive compliance procedures and missed deadlines come June 1st. There are just five months now to get these structures in place.

For assistance with business planning and upcoming tax planning and compliance in the UAE, please contact Maria Kotova, of Dezan Shira & Associates. The firm has 31 years of experience in handling tax affairs for international investors throughout Asia and maintains a Dubai office in the UAE. Email: dubai@dezshira.com

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