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Free zone firms will not pay new levy if they do not conduct business in mainland

Tax experts in the UAE said employees will not directly be impacted by this new taxation but there could be an indirect impact if the corporate, in a knee-jerk reaction, raise consumer prices.

The UAE’s announcement on Monday to levy nine per cent corporate income tax (CIT) from June next year will benefit the companies operating in the free zones as they apparently fall outside the scope of the new tax regime.

Tax experts in the UAE said employees will not directly be impacted by this new taxation but there could be an indirect impact if the corporate, in a knee-jerk reaction, raise consumer prices.

Thomas Vanhee, Partner, Aurifer Middle East Tax Consultancy, said the corporate tax regime expresses the government’s efforts to ensure UAE complies with the global tax developments and still be competitive.

He said the introduction of CIT is a direct result of OECD’s ‘Pillar Two’ which is part of the Base Erosion and Profit Shifting (BEPS) project. With a headline rate of nine per cent on taxable income, the UAE tries to strike the right balance by carving out for startups, small businesses and free zone companies, while, at the same time, imposing different tax rates for multinationals.

“With the implementation of CIT, the UAE seems to have also introduced mandatory transfer pricing regulations. Free zone companies are seemingly outside the scope of the new CIT regime, however, it seems that the carve-out is at least subject to certain conditions, such as complying with all regulatory requirements and not conducting business in mainland UAE. We also anticipate that the implementation of CIT will have an impact on the Economic Substance Regulations that were implemented in 2018,” said Vanhee.

Kapil Bhatnagar, International Tax and TP Director at WTS Dhruva Consultants, said with the introduction of corporate income tax, the UAE has laid out a blueprint of the corporate tax regime.

“Prima facie, the proposed regulation seems to be one of the most liberal corporate tax regimes in the GCC region. With a zero per cent tax for start-ups and small businesses, nine per cent for other business and a differential rate for large multinationals show commitment towards investor protection and focus on growth,” he said.

Chirag Agarwal, founder and managing director at Earningo Accounting and Tax Consultancy, said free zone companies shall get the benefit of corporate tax incentives if they comply with all regulatory compliances and do not conduct business with mainland UAE.

“Practically, export-oriented companies in free zones will only get the benefit of corporate taxes. The introduction of CIT is not to hold back the spirit of business in UAE but to reaffirm the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices.”

$25b UAE corporate tax revenues

Anurag Chaturvedi, CEO of Chartered House, said the corporate tax will bring transparency to avoid harmful practices. This

“The lowest tax rate at 9 per cent will put the UAE ahead globally to attract unicorns to make UAE their base. The UAE’s unique offerings not to levy withholding tax on the cross-border transactions while having eased tax planning for dividend and capital gains will keep the real estate and start-up eco-system afloat. Businesses eying to start their tax planning considering global minimum tax and having the lowest tax rate in the world in the UAE will bring increased tax revenue to the UAE. As per the OECD guidance on minimum tax, Global economies will collect over $150 billion in additional tax revenue. UAE will have over $25 billion from tax revenue from the corporate tax,” added Chaturvedi.

Nirav Shah, director of Fame Advisory DMCC, said the UAE is introducing the new tax in a simple and effective way while trying to remain attractive even post-introduction period by levying a 9 per cent tax rate which is very competitive and would be one of the lowest.

“Personal investment vehicles and offshore companies may likely be outside the tax net and free zone may also continue to enjoy tax incentives subject to some conditions.”

Jitendra Gianchandani, Managing Partner, Jitendra Consulting Group, believes that the new tax will help UAE sustain its growth. “The corporates in the UAE has successfully absorbed the VAT, and they will welcome corporate tax as well.”

Employees not directly impacted

Vikas Arora, CEO at CXO Factor, said individuals are exempt from tax on their salary, real estate and investments income.

“Therefore, employees are not impacted by the proposed income taxation directly, although indirectly their living cost may be marginally impacted if consumer prices are increased by businesses to overcome the tax impact. Overall, although there may be an initial knee jerk reaction, medium-to-long-term this is a very welcome approach. With the double tax treaty networks, UAE will be placed further at an advantageous position with a competitive corporate tax rate. This also strengthens UAE’s position in terms of transparency, implementation of OECD guidelines to ensure businesses operate with the correct governance and tax structure,” said Arora.

Manoj Pandey, senior partner – direct tax and COO – MBG Corporate Services Abu Dhabi, said the new corporate tax regime has ramifications in terms of a foreign tax credit, Treaty benefits and tax liability for groups where foreign companies are operating in UAE with different entities in the mainland and free zone and using UAE as the gateway to carry out foreign business internationally. “The applicability of transfer pricing and audited profits, as per internationally accounting standard, means that the documentation and group pricing policy needs to be followed with globally accepted standard and with consistency,” added Pandey.

Pankaj S Jain, managing director, AskPankaj Tax Consultants, said: “CIT regime is a welcome step for UAE economy and its commitment to global standards. The CIT rate is pragmatic and will help businesses in the long run. There is some initial confusions about the effective date. The CIT will be effective for financial years starting on or after 01/06/2023. Learning from Economic Substance Regulations (ESR), if a company has a FY of Jan-Dec, it should mean that CIT will apply for FY starting 01/01/24.

The exemption to SME sector (income up to Dh375,000) is encouraging. The salaries and personal income has been kept out of the tax regime.

Dr. Dhananjay Datar - Chairman and MD - Al Adil Group, said: "The tax structure that has been worked out is a well thought out one. The additional income will lead to enhancement in infrastructural developments. While the fact that individuals will not be subject to corporate tax is a very big announcement, from the corporate perspective, the taxes that will be paid will be judiciously used to provide better standard of living for residents. Special provisions have also been made for SMEs. On the whole, this will fast track many of the major developmental activities. I am sure this will strengthen UAE’s position in the global market."

— waheedabbas@khaleejtimes.com