UAE corporate tax: Will the one-size-fits-all approach work?

All legal entities, what the tax law calls juridical entities, must register for corporate tax. Nick Donaldson / The National

One of the most memorable questions I recall being asked in 2017 came from three individuals who operated using a single shared trade licence. All ran very different consultancies, but this approach undoubtedly saved each of them money.

Except, beginning in 2018, how would they account for VAT? Individually, they might not reach the threshold, but collectively bound together in a juridical entity, they easily cleared Dh375,000 ($102,110) in revenue.

As joint shareholders, each was individually liable for all the debts of the business should the other two be unable to settle their specific debts or share of them.

Many of these co-operative entities didn’t survive the highlighting of risks they were not necessarily aware they already bore, even before the advent of VAT.

What goes around comes around, but never in exactly the same form.

Corporate tax, which went live in the UAE on June 1, 2023, is set to open a Pandora’s box in multiple forms.

Today, rather than throwing in your lot with a couple of entrepreneurial contemporaries, there are entities that can legally house the professional services you provide.

This is a testament to the continuing positive evolution of doing business in the UAE.

A single entity licenses individuals to commercialise their skills and contract with willing businesses. Let’s call this facilitator The Hub.

Individuals effectively become employees of The Hub – employees without a minimum salary. As these people do not own the entity, they’re not solely or jointly liable for the debts of The Hub.

When these individuals win a contract for services, it’s The Hub that contracts with the end customer. This may seem like control is being ceded, but there are some advantages to consider.

Many entrepreneurs starting out have difficulty with potential customers who cannot understand why they are not registered for VAT.

As that requires turnover, it becomes a chicken-and-egg conundrum. Just because an entity is not registered for VAT does not mean it is not the best partner for the solution required.

The Hub is already registered for VAT and as it is contracting with the end customer, it also conducts all the accounting. Additionally, it completes, files and settles VAT submissions.

Entrepreneurs, driven by cost pressures, get no external back-office support. Keep in mind that these people went into business because they had a specific skill to market.

For our purposes today, and it is typically so, The Hub permits its component members to trade anywhere in the UAE: onshore and offshore.

As The Hub is a consolidation of different businesses, its revenue is financially material. It is from here that entrepreneurs need to apply some thought. For example, everyone will share the same accounting year, which doubles as your corporate tax year.

It would appear highly likely, given the amount of its constituent parts, that The Hub will be deemed as a non-qualifying entity and must pay 9 per cent corporate tax on all its taxable profits.

How does The Hub share this annual corporate tax cost that is payable? Does it set aside a sum on a monthly basis based on a calculated accumulator? Do all invoicing entities in a period share the calculated amount on a proportional basis related to their invoicing?

Does a credit note issued in a later period mean that negative income in a month results in a rebate payment?

Are all those in The Hub going to get management reports detailing both individual and consolidated positions?

UAE introduces federal corporate tax from June 2023 – in pictures

• 

  The UAE issued its federal corporate tax law that will levy a headline 9 per cent rate on taxable income exceeding Dh375,000. Silvia Razgova / The National

• 

  Taxable income below the aforementioned threshold will be subject to a 0 per cent rate of corporate tax. Chris Whiteoak/ The National

• 

  No corporate tax will apply on salaries or other personal income from employment — be it in the government, semi-governmental, or private sector, the Ministry of Finance said. Chris Whiteoak/ The National

• 

  Businesses will become subject to the UAE corporate tax from the beginning of their first financial year that starts on or after June 1, 2023. Victor Besa / The National

• 

  The UAE corporate tax regime builds from best practices globally and incorporates principles that are internationally known and accepted. Victor Besa / The National

What processes are going to be in place for the inevitable swarm of queries that will likely flood in initially and then on an continuing basis?

I’m an accountant. As such, I can quickly get my head around whatever approach might be taken.

That said, I couldn’t be trusted to wire a plug safely. For that reason, I understand that there will be a lot of people who may quickly get lost in whatever corporate tax-compliant soup is cooked up.

What if one entity’s taxable profits mean that no corporate tax is due at all, for instance, if they are under Dh375,000? Part of a larger whole, the entity would have to pay its share of the 9 per cent The Hub must pay.

Worse, what if an entity’s revenue were all qualifying revenue, meaning that regardless of the amounts of profits, as a stand-alone entity, it would have no corporate tax to pay.

Do we face a future where The Hub splits in two, taking qualifying revenue entities with it, so no tax is paid?

Given the nature of a business can change and allowing for the 5 per cent de minimis onshore allowance under tax law, how could you even administer this?

Today I have dived into just one part of our commercial fabric. Have you really thought about the potential issues your business might face?

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