EXPANDING YOUR BUSINESS IN THE UAE? CONSIDER THESE TAX IMPLICATIONS BEFORE

The year 2019 has brought a series of changes to the UAE, a hub for businesses with several tax benefits. What has changed? The business-friendly nation has introduced Value Added Tax at a uniform rate of 5% on the majority of the goods.

Though the tax rate itself is minimal as compared to other countries (20% UK, 13% Canada and average 18% in India); businesses will need to comply with a new taxation system. This has also compelled businesses to reform their policies on how they deal with customers and suppliers. This has led to revising the pricing-structures, cashflows, and business processes.

Along with VAT, UAE has already implemented the excise tax in October 2017.

The rates of excise tax in the UAE will be:

  • 50 percent for carbonated drinks
  • 100 percent for tobacco products
  • 100 percent for energy drinks.

So, let us read through the regulations and understand how a new business, or expanding a business in UAE can be affected by these developments.

Why the UAE for business and business-expansion?

Investors have considered UAE as the first port of call for exploring business opportunities in MENA region for diverse reasons like:

  • The Emirates do not impose any capital taxes or personal taxes and have no exclusive taxation policies for expats as they are treated as citizens in case of personal or capital income taxes.

  • UAE offers a low-cost entry into the market as there is no minimum requirement for setting up a business establishment or a branch office, just the necessary application processing fees, standard fees and account opening deposits needed to be made for starting business operations.

  • Although certain restrictions are laid out on company ownership for the non-GCC nationals, free trade zones are also provided to allow foreign companies to enjoy 100% foreign ownership rights and nil taxes and almost 15 to 50 years of tax holidays.

 

The UAE is still the best bet for any business looking to find a foothold in the MENA region. Stable politics, fair economic regulations, strong rule of law and a growing multi-ethnic expat population make UAE in general and Dubai in particularly a cosmopolitan hotspot.

UAE and Taxes: The VAT Factor

Being a tax-free zone for the majority of the nation’s history, UAE implementing the Excise duty and VAT came out as a big change.

The new tax regime came into existence to broaden the revenue sources to other income streams from oil and hydrocarbons. The regulations decree the businesses with over AED 375,000 income in taxable supplies and imports to file the VAT returns, whereas businesses with AED 187,500 income in taxable supplies and imports are given a voluntary choice to file for the VAT returns. The fact to be noted here is:

  • Businesses operating in the free trade zone areas are exempted from VAT.
  • Currently, 23 free zones are not subject to the VAT conditions, and they lie outside the applicable area of VAT. The standard VAT percentage of 5% will not be applicable on supplies of goods in these designated zones subject to certain exceptions.
  • The labor accommodation in these areas will also be exempt from VAT as such services are treated as a residential property.

Also, the government has issued a rule in favor of the foreign businesses, stating that they will be able to avail the VAT refund provided that:

  • Foreign companies must not be having any fixed establishments in any of the GCC states where VAT is being implemented.
  • The foreign entity shouldn’t be a taxable person in the UAE.
  • The foreign body should also be registered in the jurisdiction in which it lies with a competent authority.
  • The home country of the foreign entity must implement VAT, and should be providing VAT refunds to UAE businesses in similar circumstances.

The VAT adds a burden of compliance, but the low taxation rate along with input structure ensures that it is not an impediment in selling in UAE. For pure import-export purposes, a free zone company would make a better commercial sense.

Other Tax Implications to Look for While Expanding Business in the UAE

There are no corporate taxes levied on generated income except for foreign bank subsidiaries, who have to pay 20% of their annual income and the oil and gas companies that are taxed at progressive rates up to 55%.

This means the parent companies enjoy the privilege of retaining the entire income earned, which might be subject to taxes in their home countries. The dividends earned are also free from taxes. Similarly, capital gains are also not subject to any taxes, unless generated by foreign bank branches and oil and gas companies.

The main reason behind this is to draw foreign capital in the country and to allow ease of business for foreign companies who are thinking of establishing their base in the UAE. Other considerations for a corporation are:

  • No capital duty is levied except limited registration and/or attestation charges.
  • There is no payroll tax, but the social security contribution of 12.5% by the employer and 5% by the employee is required for the pension scheme.  
  • No stamp duty is levied, although companies operating in free trade zones are charged with administrative fees for transferring shares in other companies in the UAE.
  • Excise duty will be levied on importing and manufacturing of excisable goods that include tobacco products, carbonated soft drinks, and energy drinks.

It has no capital or income tax, a major draw for businesses. But you still need to ensure you comply with all the relevant rules and regulations. With nominal registration fees and charges, UAE is your logical base for the Middle East and West Asia.

Conclusion

The recent turn of events and an overall VAT and excise duty implication in the country has increased compliance obligations for business. But at the same time, it has made the financial environment more robust and reduced the government dependence on traditional revenue sources — the oil and hydrocarbons. The Gulf nation will, anyway, remain one of the most desired locations for expanding business operations due to absolute zero income tax and ease of operations for foreign entities.  

Feel free to consult RSM UAE to discuss your taxation and compliance concerns.  RSM is one of the world's leading audit, tax and advisory service network, recognized for innovative solutions across the globe.