How will the UAE’s corporate tax affect larger businesses?

Multinational companies, SMEs and Emirati family businesses face unique challenges in tax implementation

The UAE introduced the federal corporate tax with a standard statutory rate of 9 per cent, which will go into effect for businesses whose financial year starts on or after June 1 this year. Pawan SingShow more

Companies already established in multiple jurisdictions will approach the UAE corporate tax with general familiarity.

However, each face their own difficulties and can be broadly categorised into three camps.

Let’s start with large Emirati family businesses.

Related party transactions must be conducted at arm’s length. This ensures that taxes due to the Ministry of Finance are not unreasonably offset against losses elsewhere.

In a country where one million people are Emirati, these companies are statistically more likely to be familial.

The decree law defines a related party as being related within the fourth degree of kinship or affiliation — grandparent to great-grandchild or individual to second cousin twice removed. Yes, it’s vertical and horizontal.

From a business-ownership perspective, there is a threshold that must be reached for related party transaction rules to come into play.

However, the test is not one individual to another; it is the shareholdings of an individual’s stock.

You add each individual element of ownership together to see whether the threshold is reached.

We are in a time where both the reins of power and ownership are being passed on to growing families. This is by choice or the passing of individuals.

Businesses may sometimes have different ownership structures, meaning the related party position can vary from one transacting entity to the other.

Not only is today’s solution complex, as inheritance occurs, it’s also a moving target.

In camp two are companies operating in two to five jurisdictions. Many upper-end SMEs are in this camp.

Very often, this situation arises due to a business’s decision to split, for example, sales, manufacturing and intellectual property.

Keep in mind their size belies their unlikely existence in multiple jurisdictions. These structures are often driven by supply chain limitations, home country connections, legal traditions and the all-important end-game liquidity event. That’s a future sale of the business in everyday parlance.

The decree law stakes a position on tax domiciling groups as a whole. This means separate entities could be deemed as headquartered in the UAE.

As such, the financial performances of the entities are combined and rolled into one UAE-reporting company.

As part of this, there are tests to be passed to avoid double taxation.

Given the UAE’s competitive corporate tax rate of 9 per cent, double taxation agreements (DTAs) should mean no additional tax burden.

However, that assumes the corporate tax is levied in the other countries where these companies are established.

While the general agreement on pillar two, which dictates a global minimum 15 per cent corporate tax, should theoretically have been actioned by the end of this year, there are countries that have not yet begun the process.

Two new ongoing tasks, which are complex, may now need to be managed: formal group financial consolidation and tax planning. The regulatory reporting that will result is taken as given.

Treasury, the management of a company's finances, will also be affected. Settlement of potential additional tax liabilities and the onboarding and maintenance of employees to navigate the new regime must be paid for.

What should be apparent is how the UAE looks more like the US or the UK as each year passes — add in anti-money laundering regulations and economic substance reporting (ESR).

We are on the early stages of a journey, not the end. This is what growing up quickly, at a corporate level, looks like.

This brings us to the final camp, where large multinational companies (MNCs) reside.

In many ways, they should be the least affected. Ultimately, it’s just one more taxable environment to manage.

Yes, there will need to be transfer pricing exercises conducted, although these should already be in place as part of a company's annual ESR, now in its fourth year as a requirement.

DTAs will need to be dusted off to understand what effect the changes might have. Are we likely to see some changes to the DTAs in place as a result of the UAE's corporate tax?

Taking the UAE in isolation, the question for MNCs is: Why 9 per cent and not 15 per cent?

Do they decide to formulate one solution ahead of the tax launch, with additional measures planned should the rate move upwards?

Does the 6 per cent difference matter that much? In an MNC environment, depending on their tax-planning sensitivity, it can mean a great deal.

The larger effect could be on decisions to delay executing business plans, or worse, failure to activate plans or opportunities lost to other markets.

David Daly is partner at Gulf Tax Accounting Group in the UAE