The nine per cent standard tax rate to be applied to the accounting net profits of taxable entities/persons, though being one of the lowest in the world. The affected entities will have to consider the impact very carefully so to adequately revise all components of their balance sheet on the base of the kind of establishment they have and the area they operate in, the business being conducted to check on possible exceptions, the target markets, the cost structure, etc.
There are still quite a few aspects of the tax law that needs to be clarified, but we can already identify a few points, which are relevant to all stakeholders involved in the process, from the corporate entities, to sole establishments, to all those directly or indirectly connected/dependant on such entities.
First of all, the corporate tax will be applied above Dh375,000 of annual net profit of the taxable person with all the net profit below such threshold remaining non-taxable. Such a set up will protect all those entities like the sole establishment in which the vast majority of the players will sit below or just above the limit. This will prevent the corporate tax to impact beyond measure on the small existing operations and, coupled with the possibility to carry losses forward to the next financial years (up to 75 per cent) will avoid an unsustainable impact on early stage startups which constitutes a vital sector of the economy which the UAE leadership is rightfully adamant to safeguard and incentivise.
Another very important aspect of the upcoming regime is the confirmation of the exemption for the free zone establishments, provided that they are compliant with all the legal requisites, the most important of which is the provision of not conducting business on Mainland.
This is an existing requirement, which often has been disregarded, but that now will be carefully scrutinized. As mentioned, it will be necessary to carefully analyse the business generation and the area in which such flow is generated, prompting to a review of the set up and structure of the entity.
This aspect is also confirming the reliability of the UAE as a jurisdiction, which is a determining factor for investors. By granting a sizable exemption period, the trust of investors is reinforced as they are confirmed in their consideration of the UAE as jurisdiction of choice, a jurisdiction that “holds on to its word”. It also sustains and safeguards the great investments done to develop the freezones.
Another aspect that has been remarked is the impact of the proceedings of the tax application on the UAE in respect to its strategic goals. This is indeed a very important aspect of the process, which will provide founding, in my opinion, also to the vision and focus the UAE leadership has proven to have in respect to all those who have chosen to make of the UAE their home, the place to live and thrive along with their loved ones.
Besides the above undoubtable benefit which alone would justify the implementation of the tax regime, we should also consider the impact it will have on the standing on the UAE on the world economic stage and the help it can give in the next evaluation of the FATF, possibly leading to a prompt delisting of the UAE from the so-called grey list. While taxation is not directly linked to the AML deficiencies which are at the base of grey listing, the FATF Committee has demonstrate a strong sensibility to fiscal and taxation matters, as we experienced in the case of Malta.
I have been elaborating during the last few months on the negative consequences of the decision by FATF and the increasing difficulties it poses to business and individuals. Following such analysis, the positive impact of a delisting from the FATF grey list is evident to both the jurisdiction as a whole and the individuals working and living in it. A strategic objective to be pursued by all means.
We can definitely conclude that the new corporate tax is not to be underestimated in terms of the impact on the profitability of the businesses it will be applied on, but I do think that this move by the UAE leadership was timely and, as highlighted above, wisely taken, besides being no further deferable.
Roberto d’Ambrosio is chief executive officer at Axiory Global. Views expressed are his own and do not reflect the newspaper’s policy.
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