How to file an application for corporate tax on free zones businesses
Each free zone has its own framework. Based on these frameworks, the income of the free zone persons will not be subject to corporate tax for a specific period
Free Zones are a crucial part of the UAE economy and have a key role to attract foreign investment that plays a pivotal role in the development of the country. Keeping in view the importance of the free zones special rules have been proposed in the corporate tax (CT) public consultation document for the businesses registered in the free zones (hereinafter referred to as ‘free zones persons’).
Each free zone has its own framework. Based on these frameworks, the income of the free zone persons will not be subject to corporate tax for a specific period. According to the consultation document, the CT regime will honor the tax incentives being offered to the free zone persons subject to the condition that free zone persons maintain adequate substance and comply with all regulatory requirements.
To understand the proposed application of CT on the free zone persons, we have considered all possible options and classified the transactions into the following four categories.
Income from businesses in the rest of the world
It has been proposed in the consultation document that the income earned from transactions with businesses located outside of the UAE will be subject to zero per cent corporate tax. The consultation document is silent about the income earned from transactions with individuals located out of the UAE, which we believe will be subject to the same zero per cent corporate tax.
Income from businesses in the same free zone
The consultation document highlights that the income earned from trading with businesses located in the same free zones will be subject to zero per cent corporate tax. The document is silent about the income earned from transactions with individuals located in the same free zones, which we believe will be subject to the same zero per cent corporate tax, but we will have to wait for the law for further clarification regarding this.
If the free zone person is located in the designated zone for value-added tax (VAT) purposes and selling goods to the mainland person on INCO term where delivery of the goods is being given in the designated zone and the mainland party is clearing the goods in its own import code, still designated zone person can benefit from the zero per cent corporate tax.
Income from the persons in other free zones
The consultation document is clear about the proposed application of the corporate tax on the income earned from persons located in other free zones, and these transactions will be subject to zero per cent corporate tax.
Income from persons on the mainland
Free zone persons may have transactions with persons located on the UAE mainland. It is clearly stated in the consultation document that if the mainland entity and free zone person are part of the same CT group, then income earned by the free zone persons will be subject to zero per cent corporate tax. However, to ensure the CT neutrality of such transactions, payments made to the free zone person by a mainland group company will not be an allowable expense to calculate the taxable profits of the group.
If the mainland business and free zone person are not part of the same CT group, then the legal structure of the free zone person is critical. Like, if the free zone person has a branch on the mainland, then the income of the free zone person will be taxed at the regular CT rate on its mainland sourced income, whilst continuing to benefit from the zero per cent CT rate on its other income. However, if the free zone person has no branch on the mainland, then free zone person can continue to benefit from the zero per cent CT rate of its passive income from mainland persons. The passive income would include interest and royalties, dividends and capital gains from owning shares in mainland UAE companies.
Where a free zone person earns income from the mainland persons which is subject to a zero per cent CT rate, such income would be subject to a withholding tax of zero per cent.
UAE readies for GCC’s lowest tax regime as global corporates brace for tariff hikes
The median corporate tax rates in leading economies worldwide fell to a new low of 25.1 per cent in 2021, which is nearly three times of the nine per cent tax rate that the UAE is going to implement from June 2023
Businesses worldwide are bracing for higher tax costs as cash-strapped governments seriously consider increasing taxes on corporates following a period of low tax regime, according to a study by a leading accounting network.
The median corporate tax rates in leading economies worldwide fell to a new low of 25.1 per cent in 2021, which is nearly three times of the nine per cent tax rate that the UAE is going to implement from June 2023.
The study by UHY, the international accounting and consulting network, says that with the Covid-19 pandemic leaving a gaping hole in the public finances of countries around the world, the trend of declining corporate tax rates worldwide is likely to be over for the foreseeable future.
“Countries around the world have wanted to remain competitive by keeping the tax burden on companies as low as possible in recent years. The cash strapped governments of 2022 will likely now be considering increasing taxes on corporations,” said Subarna Banerjee, chairman of UHY.
He said public finances will have to be shored up somehow and corporations can be an easier target politically than individuals. “Businesses worldwide should be prepared for their tax costs to begin to rise in the coming years.” Several countries have announced their intention to raise the tax rate. The UK already announced its intention to raise corporation tax rates to 25 per cent from April 2023, more than two percentage points higher than the European average.
President Joe Biden has also pledged to raise federal corporate income tax to 28 per cent, after it was cut to just 21 per cent by his predecessor Donald Trump in 2017.
Global corporate tax rates have been steadily decreasing over recent years, with the G7 average for a business recording profits of $1.0 million falling from 32 per cent in 2014-15 to just 26 per cent in 2020-21. Many countries sought to incentivise businesses to invest in their economies with attractive tax rates. France, often seen as a higher tax European economy, has lowered its headline rate from 31 per cent to 26.5 per cent in just the past three years.
The UAE, typically renowned as a low-tax jurisdiction, recently introduced corporate tax at one of the lowest rates across the globe — nine per cent — for financial years starting on or after June 1, 2023. “This measure is in line with the UAE’s ambition to establish a more transparent local economy while continuing to retain its attractiveness as a global hub for foreign investment,” the study said.
With the SME and start up sector constituting up to 94 per cent of the UAE economy, the UAE leadership has ensured the economic engine of the business landscape is empowered towards growing strategically while striking a balance in meeting compliance and regulatory obligations that protect businesses in the long haul, said the study.
“In the realm of multinationals, UAE will adhere to the global minimum tax rate of 15 per cent, which 136 countries have agreed to under the aegis of the Organisation for Economic Cooperation and Development (OECD),” it said.
James Mathew, chief executive and managing partner of UHY James Chartered Accountants, said the introduction of corporate tax in the UAE clearly reiterates the nation’s commitment towards aligning its economic environment with global best practices.
“However, the investor friendly corporate tax rate of nine per cent is indicative of the country’s efforts in cementing its position as a destination of choice for foreign investment while building a foundation on tenets of regulatory compliance, legislative obligations, and robust AML (anti-money laundering) measures.”
Mathew said corporate tax will bring a positive ripple effect into play in the UAE economy.
“The arrival of corporate tax in the UAE in 2023 has already put into motion discussions around effective tax planning,” he said.
“SME’s make up 94 per cent of the UAE economy and almost two thirds of the SMEs feel constrained due to lack of access to finance at a reasonable cost. With the introduction of VAT in the UAE in 2018, banks adopted a favourable approach in channelising finance to SMEs and now with corporate tax coming into force, the SME sector will stand to gain significantly with measures that increase the transparency factor of their business,”
Star Tech: Why Dubai has become a magnet for entrepreneurs
Majed Al Suwaidi, Managing Director, Dubai Media City explains to Khaleej Times about what makes the Emirate a one-stop destination for startups and entrepreneurs.
Majed Al Suwaidi, Managing Director of Dubai Media City, shares deep insights into the Emirate’s ease of doing business that’s striking a big chord with global innovators and entrepreneurs. in5, an enabling platform for entrepreneurs and startups, also falls under his remit.
Edited excerpts from an exclusive interview:
How conducive is the current landscape in Dubai for startups and entrepreneurs?
The landscape in Dubai is truly ripe for entrepreneurs to realise their ambitions. Dubai has become a magnet for entrepreneurs, thanks to our leadership’s vision and more than two decades of enabling ecosystems boasting world-class infrastructure, a business-friendly environment to fuel success and a culture that embraces innovation.
There are several government-backed initiatives enriching the opportunities available for startups and small and medium enterprises (SMEs).
The Ministry of Economy’s Entrepreneurial Nation has set a goal to nurture 20 unicorns by 2031, alongside a number of incentives for new businesses, while the 10-year Golden Visa and GoFreelance packages further entice independent individuals from around the world to choose Dubai as a place to live, work and invest in the emirate.
Business incubators like in5 further enhance prospects for aspiring entrepreneurs and creatives in technology, media and design by providing valuable launching pads or inventive ideas and business models.
We offer expert advisory and mentorship, access to investment opportunities, networking events and workshops that insert our startups within some of the city’s most active business districts as well as creative facilities with industry-standard equipment. By continuing to invest in our offerings, infrastructure and platform to meet the market’s evolving needs, we hope to boost business growth and reaffirm Dubai’s economic competitiveness on a global scale.
What is a unicorn?
To be considered a unicorn, a business needs to reach an investor valuation of $1 (Dh3.67) billion or more. It’s quite an ambitious goal, but it’s not impossible. Dubai’s robust technology ecosystem and world-class infrastructure play a vital role in helping nurture unicorn companies, such as Careem, which was acquired by Uber in 2019 for $3.1 (Dh11.39) billion. Soon after, Dubai-based Emerging Markets Property Group (EMPG) and OLX Group merged their Middle East and North Africa (MENA) and South Asia operations, Bayut and Dubizzle, resulting in a business valued at Dh3.6 billion.
In 2019, Cisco acquired Voicera, which had initially acquired in5-based startup Wrappup in 2018. Wrappup specialises in using Artificial Intelligence (AI) technologies to transcribe and convert audio recordings into notes. The startup was founded during a hackathon competition organised by in5 in 2015, and in the short span of four years, attracted the interest of the Silicon Valley giant.
Dubai has supported a number of start-ups. How are they faring?
We’re proud to support a number of very promising startups in our community that are leaving quite an impression on their industries. Last year, our startups successfully secured over Dh1.4 billion in funding, and that number is rapidly rising as we attract more and more investments. Agri-tech startup, Desert Control, is listed on Euronext Growth Oslo, a multilateral trading facility operated by the Oslo Stock Exchange, while in5 alum Derq has partnered with driverless technology pioneer Motional to pilot autonomous vehicles with smart infrastructure in Las Vegas. There is much action and promise brewing in our incubator, demonstrating the region’s entrepreneurial spirit.
What are essential traits that put you on track to becoming a unicorn?
Unicorns are traditionally tech-savvy startups that disrupt their market, rewriting how people interact with a certain kind of product or service. Careem is an example which is close to home — the company changed the nature of private transport in the region by bringing cabs directly to a consumer’s doorstep at any time and location, while being upfront about costs.
While that might be a lofty founding ambition, you can work towards this by being dedicatedly consumer driven. Identify a specific problem people within your target market face and work towards creating an effective solution for it. Take inspiration from your own experiences and inconveniences and research whether a satisfying product or service exists in the market that addresses it. Unicorns are efficient, focusing iterations on being cost-effective and including only the most essential components in early stages to seek feedback from consumers.
There is no one-size-fits-all solution, but these are key traits that help put startups on the right track.
What frequent mistakes do startups make in early stages?
It’s necessary for startups to lay strong foundations from the beginning. One of the things that make or break a business is the right set of stakeholders, including employees, strategic partners, and investors. Finances are understandably tight, especially in the early stages of setting up, but creating a strong team is an essential cost for long-term growth. Of course, it’s important to find people with the necessary skill set and expertise, but it’s equally as important to choose members whose drive and values match yours. Bring everyone on the same page so you can collaborate effectively to achieve growth in the long-term.
Another is to create a product or service without identifying what problem or challenge it helps solve. Conduct first-hand research of your audience and the challenges they face so you can develop solutions based on actual needs. Don’t forget to heed the feedback you receive and adjust your business model and user experience accordingly, even before launching. Follow up future iterations with the same feedback and improvement loop to ensure a desirable product
Finally, and perhaps most importantly, is being realistic about your goals and strategies. Be ambitious, be driven and aspire to succeed, but that comes with setting achievable goals for your business and remaining steadfastly dedicated to achieving sustainable growth and attracting investors. Fuel your passion to succeed and remain persistent – you might face setbacks in the journey but remain resilient. If after numerous iterations the feedback is still low, pivot and keep moving forward.
Incubators like ours play a pivotal role in helping young entrepreneurs and start-ups avoid the common pitfalls. We are committed to providing our members regular and up-to-date advisory in line with international best practices, as well as regional know-how, so they can make educated decisions for their future.
What must startups keep in mind as they prepare to scale their business?
Networking is essential for any business, whether you are an established organisation or just getting started. A large, strong network will aid you in finding potential investors, business partners and board members as well as industry leaders and C-Suite figures who can guide you and facilitate valuable opportunities for collaboration.
Businesses part of our incubator have the benefit of in5’s annual calendar of networking events and expert-led discussions to forge these critical relationships. We not only offer startups hundreds of hours of advisory and mentorship with a steering committee of representatives from some of the leading organisations in the world, but also nurture a community of future-minded businesses that can rely on each other for support at different stages of their journey. Plus, startups are located within larger business ecosystems such as Dubai Internet City, Dubai Design District and Dubai Production City, offering them unrivalled access to some of the biggest players in tech, design and media.
Another essential relationship is with your early customers and consumers. Heed their feedback, collate the data you gather from their experiences and adjust your product — their loyalty and endorsement can go a long way. Data is essential, especially in technology. Identify ways you can securely collect data from your users and let that guide how you pitch to investors, devise your marketing and traction plans, and move forward into proceeding growth phases.
Dubai to enhance its position as a global liveability hub
Under the terms of the agreement, DET and HSBC will promote to HSBC customers and employees the unparalleled quality of life in Dubai, its position as a global investment hub and the diverse features of the destination that everyone can enjoy
Dubai’s Department of Economy and Tourism (DET) and HSBC Bank Middle East have signed a memorandum of understanding (MoU), paving the way for increased cooperation in further enhancing Dubai’s position as a global liveability destination.
Under the terms of the agreement, DET and HSBC will promote to HSBC customers and employees the unparalleled quality of life in Dubai, its position as a global investment hub and the diverse features of the destination that everyone can enjoy.
The MoU also envisages collaboration in marketing activities designed to promote events and experiences across the tourism ecosystem to further amplify the city’s position as a leading international business, leisure and events destination.
Issam Kazim, chief executive officer, Dubai Corporation for Tourism and Commerce Marketing; and Abdulfattah Sharaf, CEO of HSBC UAE and head of International, HSBC Bank Middle East Limited, signed the MoU.
“We are pleased to partner with HSBC, a global brand that has played a significant role in the development of Dubai’s business, banking and finance sectors, in showcasing our multi-faceted business and tourism offering,” Issam Kazim said.
“This MoU reflects the trust and confidence reposed in Dubai by multinational corporations and will further enhance our efforts to support the aim of our visionary leadership to make Dubai the most sought-after international city and the most attractive location to live and work in,” he said.
“Our partnership with HSBC is also testament to the continued efforts being made in collaboration with our stakeholders to leverage the city’s strategic location, world-class infrastructure and its position as one of the world’s safest destinations to attract multinationals, entrepreneurs, investors and tourists to Dubai,” Kazim added.
Abdulfattah Sharaf said: “Opening up a world of opportunity is our purpose at HSBC and it is what we have been doing every day for our customers in the UAE since we became the first bank to open our doors for business here more than 75 years ago.
“In that time the UAE has built itself into a global trade and logistics hub, an international financial market, a leader in Sustainable Finance, a magnet for innovation, and a focus of global wealth creation. HSBC has been with the UAE on every step of that journey and this MoU reflects our commitment to the future of the UAE and our ambitious plans for growth here.”
With an increasing number of international firms choosing Dubai as their base of operations, DET and HSBC will work closely to support these companies with the aim of making it easier for them to set up their business in the city.
DET and HSBC will further elevate the city’s standing as a global liveability hub by highlighting and promoting the initiatives launched by Dubai to ease barriers to entry for business and leisure travellers, as well as the long-term residency initiatives that have been launched to offer pathways for deeper engagement and longevity with Dubai.
These include the new visas and programmes such as Golden Visa targeting investors, entrepreneurs and specialised talents, the five-year multi-entry visa for employees of multinational companies, and the Virtual working and Retire in Dubai Programmes.