What the UAE’s corporate tax means for SMEs

Understand a company's revenue stream to know the beneficiary’s identity from a taxation perspective

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

Many owners of small and medium enterprises (SMEs) often have multiple revenue streams with different legal structures.

These entrepreneurs may understand their investments well. However, the introduction of corporate tax in the UAE means that these should be revisited.

There are nine types of persons defined in the corporate tax decree law and it is possible to be many at once.

Like the children’s game Guess Who, as you systematically examine the particulars of a revenue stream, you understand the beneficiary’s identity from a corporate tax perspective.

I liaised with Peter Wilson, an international tax expert from PB First, to write this column.

We can put two persons at the heart of our understanding: natural persons and juridical persons. The former includes myself and the latter includes the legal entity I work for.

Since Emiratis solely can trade as natural persons, theoretically only they should be affected by corporate tax. Everyone else must operate through a trading entity.

With the Ministry of Finance recently gazetting a ministerial decision on the Determination of Tax Residency and coupled with the corporate tax decree law, some things might not be clear to some.

Take this example. Albert, a UAE visa holder living onshore, owns a business in a qualifying free zone that only trades with similar businesses, supplemented with an occasional offshore deal.

His business is a juridical and free zone person, whereas Albert is a natural and resident person.

Albert can elect that his business is not subject to corporate tax. However, it must conduct an annual external audit.

Albert provides non-executive support to businesses in three non-UAE countries. For this, he receives Dh600,000 ($163,376) per annum.

As his services are imported into those nations, he is not subject to their taxes and, for the purposes of this example, no local withholding tax applies.

Will Albert be liable for UAE corporate tax for these activities?

In the UK, there is something called badges of trade. In simple terms, think of it as the duck test. If it walks, sounds and looks like a duck, it’s a duck.

The corporate tax decree law defines what constitutes a business and, in particular, what a business activity is. But it does not specify the categories of business or business activity that will attract the tax.

Considering the above information, is Albert trading?

Unless the government clarification says otherwise, it is not unreasonable to suggest that what he is doing is business.

The new tax residency rules confirm that Albert is a tax resident in the UAE. As he is also a natural person, he should have a suitable trade licence to conduct his overseas business activities.

Say Albert has a long-stay visa: green or gold. Using this, he can apply to get a work permit. This should ensure his non-executive work can be conducted legally from the UAE.

If such a permit is unincorporated, it does not limit liability.

Not unlike a sole trader, Albert is inherently wrapped up in his permit. A natural/juridical person chimera.

Is his permit onshore or offshore? If it’s onshore, then Albert will have to pay corporate tax on his non-executive income. If it’s offshore, like his entity, it can be avoided.

How is it possible that it could be one or the other? One answer is that it depends where Albert lives.

Some areas contain both onshore and offshore elements. Building A is legally onshore, the one across the road may not be.

I said earlier that non-Emiratis cannot trade in their own name as natural persons.

What happens if Albert receives income from abroad that is not interest, not dividends and not from a qualifying fund?

UAE to introduce federal corporate tax from June 2023 — in pictures

The latter might have been an exempt person, and if it was, then its beneficiary would wear the same guise.

But it is not. Therefore, their beneficiary is in receipt of monies that appear to constitute taxable business revenue.

Hence, here we have an example of where a non-Emirati could be a natural person and still subject to corporate tax.

This article is not exhaustive. There are a number of other persons detailed in the decree law that I have not discussed.

With regard to those that I have, this column only touches on elements of what is possible.

It is only the beginning of the conversations many of you need to start having.

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