Significance of UAE corporate tax exemptions for entities that benefit the public

The Federal Tax Authority provides a comprehensive corporate tax guide for Exempt Persons. Nick Donaldson / The National

It is nearly 25 years since I first landed in the UAE and almost 20 years living here full-time. In a few years, I will have lived equally as long here as I have in both Ireland and the UK.

Today, since I am alluding to a balanced existence, let us mix business, pleasure and corporate tax.

It is only since Henry Ford, of the eponymous vehicle company, granted his workers a two-day weekend that the importance of downtime could be examined from a macro economic standpoint.

Mr Ford decided that his extremely busy 80,000 employees needed some downtime to recharge their own batteries. Selfishly, perhaps, he concluded that this might improve productivity.

This was the early days of behavioural science when Henri Fayol's groundbreaking findings on applying a scientific approach to working methods were still being processed.

Additionally, it was deemed impractical to overwork labour to the point where they did not have time to spend the wages they were earning. If you are in the business of selling cars, then it might be useful if your tens of thousands of salaried employees bought some.

Moreover, providing individuals with the opportunity to drive and generate free marketing activity in a rapidly growing sector of the economy would greatly enhance their positive impact.

Widening out the scenario, supporting the larger ecosystem by providing benefits offers a boost to everyone involved.

Essentially, this is how the cycle progresses. It begins with the government unleashing the potential of the market through workable legislation. The market can then fulfil demand in innovative ways.

The consumer takes advantage of products that they both desire and benefit from. In turn, the government collects its share through taxation, completing the economic cycle. This is one version of the great economic game played across the world.

One aspect of this intricate economic game is the classification of certain entities in the UAE as corporate tax exempt. Specifically, qualifying public benefit entities fall under this category.

The name is slightly misleading, as public suggests government – full, semi or quasi. It actually covers any organisation formed to carry out charitable, social, cultural, religious or other activities to benefit the public. A critical component is that there is no profit motive and no persons financially benefiting from its activities.

Does this cover non-financial benefits or rewards in kind? While it does not specifically address these, it is possible for the relevant authorities to intervene and examine the specifics of a particular situation, as with any grey area.

The Cabinet or Minister of Finance has the authority to amend the legislation to address unforeseen future abuses.

This aspect of our society is crucial, as evidenced by Article 9 of the corporate tax law, which clearly outlines the criteria for achieving this categorisation.

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

In addition to the aforementioned activities, Chambers of Commerce play a crucial role in promoting the public good through the support of commercial enterprises. These chambers serve as essential channels for communication and collaboration between the government and the private sector. Have you considered becoming involved in these important discussions?

The process of registering with a Chamber of Commerce can be complex. It involves identifying the appropriate entry point, obtaining approval and recommendation from the Ministry of Finance, and securing agreement from the Cabinet. Once approved, the registration is officially announced in the gazette.

Interestingly, the registration requirements of a new entity that will be exempt as a qualifying public benefit entity do not limit the scope of its activities. This flexibility acknowledges the importance of organisations that are able to pursue multiple objectives, as they are often more adaptable and dynamic than those focused solely on a single issue.

I am not implying that having a singular focus lacks utility. However, in a field that can often progress slowly, it may be more efficient to pursue various avenues of purpose simultaneously.

At its essence, an organisation must prioritise the advancement of social welfare or the generation of public benefits.

One crucial aspect to consider is funding. At what point does the raising of strategic and operational funds to support a tax-exempt entity cross into commercial territory?

The Federal Tax Authority's corporate tax guide on Exempt Persons, specifically Public Benefit Entities, Pension Funds, and Social Security Funds, offers valuable insight and guidance on this matter.

Membership fees, fund-raising gala dinners, and potentially selling refreshments from a small shop or vending machines in office spaces are all common ways for organisations to generate revenue.

These practical and reasonable approaches are aimed at supporting the establishment and continued operation of entities that contribute positively to society.

As a final incentive, donations made to such entities are deductible against taxable profits. This not only benefits the organisations themselves but also allows donors to give back to their communities while receiving a financial benefit.

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