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UAE Corporate Tax in 2023: Why correctly structuring your business operation is now crucial.

Adding to the UAE's efforts to become a global hub, the nation announced The Federal Law No. 47 of 2022 on the Taxation of Corporations last week. Under the new tax regime, UAE businesses become subject to corporate tax on their first financial year that starts on or after June 1 2023.

Gulf nations, known for their low taxes, attract many worldwide to live and work through its various offerings, and for some, it may seem like a negative factor on the bottom line of businesses. However, OpenHub Director Nathan Gatland states, "The introduction to UAE corporation tax will promote a healthy and controlled growth for longer periods, eliminating short cycle bubbles, while stabilising and strengthening the economy."

In addition, introducing corporate tax will improve individual companies' financial accounts through auditing and true accounting mechanisms promoting transparent investment opportunities for individuals. Government redistribution of corporation tax funds will also positively impact various sectors like infrastructure, technology, transport and medicine.

Start-ups will receive an income threshold exemption for corporation tax of AED 375,000 ($102,000) in all UAE jurisdictions. This applies to all UAE companies, not differentiating 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 Freezone is suitable for companies. Mr Gatland helps navigate how to choose the company UAE jurisdiction for 2023 with some important questions.

As a new company, you should derive the following:

  1. What is your 1-5 year plan with your new business? Growth, locations, commercial activity.

  2. What is your desired business activity on your trade license?

  3. Who are your clients now and in the future? And where are they located?

For an existing company:

  1. How much revenue is currently generated from the UAE vs international clients?

  2. What are your 1-5 year growth plans for your business?

  3. Where is your office presently located? Is this important to you?

How to structure effectively in 2023 to maximise your bottom line?

To structure a company effectively and maximise your bottom line, businesses must analyse the current revenue percentage split between UAE and international clients and how this will evolve in the next 1-3 years based on their growth plans. This will also help you identify and formulate future sales and marketing opportunities.

There may be scope for compartmentalising your business divisions to perform mutually exclusive commercial activity 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 your trade licence. 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.

How can I get prepared for UAE corporation tax in 2023?

Most UAE jurisdictions do not currently require 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 1st July 2023, so all company stakeholders and internal departments are aligned on best practices ahead of time.

It's imperative 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. You will then already be a client of the Federal Tax Authority and should entail a smoother transition enrolling for corporation tax with a previous track record and TRN number with the authorities.

Mr Gatland adds, ‘’I believe the most important advice ahead of the government changes will be based on your future 1-5 year commercial strategy. No one plans on not reaching their growth plans and this should be coupled with proactive corporate structuring and internal policies from now, rather than reactive measures which will in turn, be more expensive promoting longer procedures by not getting it right from the start.’’

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