Category: Blogs

Categories
Blogs

Qualifying for a 0% Corporate Tax Rate in the DIFC: What Operational Companies Need to Know

Qualifying for a 0% Corporate Tax Rate in the DIFC: What Operational Companies Need to Know
Qualifying for a 0% Corporate Tax Rate in the DIFC: What Operational Companies Need to Know

Choosing the right business structure and location is a crucial yet initial step when starting a business in the United Arab Emirates (UAE). Out of the seven Emirates, Dubai stands out with its excellence in areas like tourism, real estate and trade etc. attracting the crowd including High Net Worth Individuals around the globe.  For the last 20 years, the Dubai International Financial Centre (DIFC) in Dubai has offered numerous incorporation benefits, making it the best choice for many, and with the option to establish an operational company. Setting up a business in the DIFC provides several advantages over other parts of Dubai.

The DIFC offers benefits such as proximity to major markets, flexible company structures, strong intellectual property protection, a streamlined visa process, access to funding, and a supportive environment for business growth. These advantages can significantly help companies succeed in today’s competitive business landscape.

Corporate Tax Rate in the DIFC for Operational Companies

The UAE’s new federal corporate tax system offers significant advantages to businesses operating within its Free Zones including DIFC. These entities can enjoy a 0% corporate tax rate, but specific criteria need to be met. In contrast, companies located outside Free Zones face a standard 9% tax on their taxable income exceeding AED 375,000. However, Free Zone businesses including operational companies can maintain this attractive 0% tax rate on their qualifying income by achieving Qualifying Free Zone Person (QFZP) status. It’s important to note that any income earned by a QFZP that doesn’t meet the qualifying criteria will be taxed at the standard 9% rate. This system provides a clear incentive for Free Zone companies to comply with QFZP requirements and continue benefiting from a competitive tax environment.

To understand the Corporate Tax implications for Free Zone operational companies, let’s first explore the core features of the new UAE Federal Corporate Tax system.

Which of the DIFC entities Qualifies for a 0% Corporate Tax Rate?

The good news is that possibly most of the operational companies in the DIFC can benefit from a 0% corporate tax rate on their qualifying income. To qualify as a Qualifying Free Zone Person (QFZP) and enjoy this tax advantage, your company must meet specific criteria:

  • Substantial Presence in the UAE: Demonstrate a strong physical presence in the UAE with a local office and employees.
  • Qualifying Income Generation: Your primary source of income must stem from compliant business activities conducted within the DIFC or with international clients.
  • Opting Out of Standard CT Rates: You cannot choose to be taxed under the standard corporate tax rates that apply outside Free Zones.
  • De Minimis Threshold: Any non-qualifying income must be below 5% of your total revenue or AED 5 million, whichever is lower.
  • IFRS-Compliant Audits: Maintain accurate financial records and have them audited according to International Financial Reporting Standards (IFRS).
  • DIFC Authority Requirements: Ensure compliance with any additional stipulations set forth by the DIFC.

What Activities of operational companies in the DIFC qualify for the 0% Tax Rate?

The UAE Ministry of Finance categorizes business activities for corporate tax purposes. Here’s a focus on qualifying activities that benefit from the 0% tax rate in the DIFC or any other Free Zone.

  • Manufacturing and Processing
  • Trading of Qualifying Commodities
  • Investment Holding
  • Ship Ownership and Management
  • Reinsurance and Fund Management Services
  • Wealth and Investment Management
  • Headquarters and Treasury Services to Related Parties
  • Financing and Leasing of Aircraft
  • Distribution and Logistics Services
  • Ancillary Activities Supporting the Above

It’s important to note that there are also excluded activities listed in the official documentation that may not qualify for the 0% tax rate benefit.

Understanding Qualifying Income for Operational Companies in the DIFC

Qualifying income refers to the portion of your company’s earnings that is eligible for the 0% corporate tax rate in the DIFC. Here’s a breakdown to help you determine what qualifies:

  • Transaction with another Free Zone person: If your business transactions are with another business entity within the same Free Zone, the income generated from these transactions can be considered as qualifying income.
  • Transaction with a non-Free Zone person: If your business transactions are with an entity outside the Free Zone, the income from these transactions may not be considered as qualifying income.
  • Income from all other transactions: All other income, provided they satisfy the de minimis requirements, can be considered as qualifying income.

However, qualifying income does not include income generated from domestic (mainland) or foreign permanent establishments, immovable property outside the Free Zone, and certain other activities like income from non-commercial properties.

Corporate Tax: Filing and Payment Procedures for DIFC Companies

  • Registration: Applications for corporate tax registration are submitted through the DIFC’s Corporate Registry. They will assess your eligibility for a Corporate Tax Registration Certificate (OCRT).
  • Required Documents: The registration process involves submitting an application, paying fees, and providing detailed financial information, including income, expenses, assets, liabilities, and capital.
  • Ongoing Obligations: Once registered, you must comply with the relevant tax rules and regulations set by the Federal Tax Authority (FTA). This includes filing yearly tax returns reporting your taxable income and profits. You may also need to submit annual financial statements and audited financials upon request from the FTA.
  • Simplified Filing: The FTA offers various e-services for DIFC taxpayers, including online registration, tax return submission, and online tax payments. They also have a Voluntary Disclosure Program for rectifying past non-compliance.

MS for corporate tax compliance Operational companies in the DIFC

Uncertain about the impact of the UAE’s new Corporate Tax Law on your operational company in the DIFC? MS can be your trusted advisor. We provide comprehensive support, from maximizing the 0% tax benefit offered by Free Zones to ensuring compliance with transfer pricing regulations.  Our experts simplify tax record keeping and reporting, keeping you informed of any future changes in the tax environment.  Let MS guide your operational company towards success in the DIFC.

Categories
Blogs

Payroll Best Practices in the UAE Financial Freezones: ADGM and DIFC

Payroll Best Practices in the UAE Financial Freezones: ADGM and DIFC
Payroll Best Practices in the UAE Financial Freezones: ADGM and DIFC

The UAE Constitution and societal values are foundational in upholding and protecting workers’ rights. As a member of the International Labor Organization (ILO), the Arab Labor Organization, and other international bodies dedicated to employment rights, the UAE remains committed to transparency and fairness in its obligations toward all workers. The UAE continuously reviews various work-related aspects, including recruitment, hiring processes, and the living conditions of expatriate workers. Significant strides have been made to ensure that workers are treated with respect and equality and have accessible, confidential avenues for reporting labor disputes and abuse.

Employment Benefits and Sector Differences in the UAE

Employees in the UAE, whether local or expatriate, are generally entitled to a range of benefits. However, some benefits are exclusive to local employees, and there are notable differences between public and private sector employment. Furthermore, specific regulations apply to employees working in areas such as the Dubai International Financial Centre (DIFC), the Abu Dhabi Global Market (ADGM), and the other UAE Free Zones.

While the UAE constitution and its membership in international labour organizations establish strong employee rights, these rights translate into concrete obligations for employers. One key area of obligation is ensuring fair and transparent compensation and benefits. This is where payroll services come into play. Understanding UAE labour laws related to payroll, such as minimum wage, overtime, and end-of-service benefits, is crucial for employers to fulfill their obligations and maintain a compliant and positive work environment.

Wage Protection System in the UAE

In the UAE, the Wage Protection System (WPS) is a government initiative designed to ensure timely and full payment of employee wages. Implemented by the Ministry of Human Resources and Emiratisation, WPS mandates that all private sector employers pay their employees’ salaries through an approved electronic system, typically through banks or financial institutions. This system aims to enhance transparency, protect workers’ rights, and streamline payroll processes by providing a reliable and secure mechanism for wage disbursement. Compliance with WPS is crucial for businesses to avoid penalties and ensure adherence to labor regulations.

Grasping Legal Essentials for Payroll Services in the UAE

Know the UAE Labor Laws: Understanding the UAE’s labor laws and regulations related to payroll, such as minimum wage standards, overtime rules, and end-of-service benefits, is crucial. Ensuring compliance helps avoid penalties and legal issues.

Keep Informed: Stay updated on any amendments or new regulations from relevant UAE authorities, such as the Ministry of Human Resources and Emiratization (MOHRE).

Maintain Detailed Records: Accurately document employee information, including personal details, contracts, salary structures, and attendance. Errors in this data can lead to payroll mistakes and legal issues.

Regular Updates: Update employee records regularly to reflect changes in salary, benefits, allowances, and tax status, ensuring payroll calculations are accurate and compliant.

Follow Payroll Schedules: Ensure salaries are paid on time according to employment contracts and UAE labor laws. Delayed payments can hurt employee morale and lead to legal disputes.

Automate Payments: Implement automated payment systems to ensure prompt salary disbursements, considering banking holidays and other relevant factors.

Secure Payroll Data: Ensure the confidentiality of payroll information in compliance with UAE data protection laws, such as Federal Law No. 2 of 2019 on Information and Communication Technology.

Implement Security Measures: Use robust security measures to protect payroll data from unauthorized access, breaches, and cyber threats, including encryption, access controls, and regular backups.

Flawless Payroll: Ensuring Smooth Operations in ADGM

The significance of payroll services in ADGM is multifaceted, addressing both legal compliance and operational efficiency in this prominent international financial center. ADGM operates under a regulatory and legal framework, which includes its employment laws and standards distinct from other parts of the UAE. The ADGM Employment Regulations 2019 ensure a fair balance between employer and employee obligations including the payroll. Other key aspects include timely payment of wages, and payslips, along with a mandated end-of-service gratuity calculated based on an employee’s tenure. This uniqueness necessitates precise and comprehensive payroll management and employee rights to ensure full compliance with local regulations, including specific requirements for salary disbursements, end-of-service gratuities, and tax obligations.

Efficient DIFC Payroll Solutions with DEWS

In the DIFC, the importance of payroll services extends beyond mere compliance to encompass critical aspects of regulatory adherence and operational efficiency. The DIFC maintains a distinct legal and regulatory environment, encompassing specific employee compensation mandates such as the DIFC Employee Workplace Savings (DEWS) scheme. DEWS is a mandatory savings plan designed to provide financial security to employees upon the termination of their employment.

Under DEWS, DIFC employers are mandated to contribute a percentage of their employees’ salaries, including allowances and benefits, into a designated savings account. Accurate management of these contributions is essential for regulatory compliance, as failure to adhere to DEWS requirements can lead to substantial fines and legal issues. Professional payroll services play a pivotal role in this process by ensuring that DEWS contributions are correctly calculated, processed, and reported in line with DIFC regulations. These services also facilitate clear communication with employees about their DEWS entitlements and streamline the integration of DEWS management with overall payroll operations. By ensuring precise DEWS administration, businesses in DIFC can enhance employee satisfaction and retention while maintaining a competitive edge in the global financial market.

Payroll Precision with MS

Professional payroll services of MS in ADGM and DIFC are equipped to handle all the complexities, ensuring that all statutory requirements are met accurately and on time. This mitigates the risk of non-compliance, which can result in substantial fines, legal disputes, and damage to a company’s reputation. Given ADGM and DIFC’s global stature and most reputed regulatory environment, maintaining compliance is not just about avoiding penalties but also about fostering trust and credibility among international stakeholders and clients.

Categories
Blogs

Why DIFC Holding Company: A Game-Changer for Global Investors

Why DIFC Holding Company: A Game-Changer for Global Investors
Why DIFC Holding Company: A Game-Changer for Global Investors

The Dubai International Financial Centre (DIFC) in Dubai has rapidly become a leading global business hub, drawing international investors with its prime location, progressive regulations, and top-tier infrastructure. Central to this success is the DIFC holding company—a flexible corporate structure offering substantial benefits for investors aiming to manage and expand their asset portfolios.

What is a Holding Company?

A holding company is a legal entity created primarily to own shares in other companies, referred to as subsidiaries. Unlike the passive holding structures that produce goods or provide services, pure holding companies focus on managing investments and exerting control over their subsidiaries without engaging in direct commercial activities.

Why Choose a DIFC Holding Company?

The DIFC provides a unique value proposition for establishing a holding company, featuring several key advantages:

  1. Tax Efficiency: The DIFC offers a highly attractive tax regime. Holding companies enjoy a 0% corporate tax rate on certain conditions, resulting in significant tax savings.
  2. Strategic Location: Positioned at the intersection of East and West, the DIFC is ideal for managing global investments. Its location offers easy access to a wide network of financial institutions and supports seamless cross-border transactions.
  3. Operational Flexibility: DIFC holding companies can hold a diverse range of assets, such as shares in other companies, intellectual property (IP), and real estate. This flexibility allows investors to efficiently manage varied portfolios from a single, centralized location.
  4. Streamlined Management: By centralizing control over multiple subsidiaries, holding companies simplify financial reporting, governance structures, and decision-making processes, leading to enhanced operational efficiency.
  5. Access to Capital: The DIFC’s strong regulatory framework and its reputation as a financial hub boost investor confidence and facilitate access to capital.
  6. Visa Benefits: Unlike traditional offshore companies, DIFC holding companies are recognized as operational entities, enabling them to obtain visas for employees and their families, thereby fostering a robust and dynamic workforce.

Why the UAE is a Premier Destination for Your Holding Company

The DIFC is located in the UAE, one of the strategic hubs for setting up a holding company. The UAE offers a highly competitive tax environment for holding companies, with no corporate or personal income taxes for most businesses and a zero percent tax rate in free zones. This minimizes the tax burden and simplifies compliance compared to jurisdictions like London, New York, Singapore, and Hong Kong. Additionally, the UAE’s extensive network of double taxation agreements prevents double taxation on the same income.

Beyond taxes, the UAE’s free zones provide 100% foreign ownership, repatriation of profits, and exemptions from import and export duties. Strategically located, the UAE offers access to emerging markets in the Middle East, Africa, and South Asia, creating significant growth opportunities.

The UAE’s political and economic stability, commitment to international standards like BEPS, and transparent regulatory environment make it a secure and advantageous location for establishing a holding company.

Ideal Activities for DIFC Holding Companies

DIFC holding companies are suitable for a broad range of activities, including:

  • Investment Management: Efficiently manage investments in a diversified portfolio of companies across various sectors.
  • Mergers & Acquisitions: Serve as the central entity for structuring and managing mergers and acquisitions.
  • IP Management: Hold and manage intellectual property rights such as patents, trademarks, and copyrights for subsidiaries.
  • Real Estate Investment: Own and manage real estate assets both domestically and internationally.
  • Family Offices: Establish structures for managing family wealth across generations.

Steps to Establish a DIFC Holding Company

Setting up a DIFC holding company involves a straightforward process:

  1. Business Name Selection: Choose a unique name that complies with DIFC regulations.
  2. Director & Shareholder Appointment: Appoint at least one director and one shareholder, who can be either individuals or companies.
  3. Share Capital Definition: Determine the authorized share capital, defining the maximum amount the company can raise through share issuance.
  4. Document Preparation & Submission: Prepare and submit the necessary legal documents, including the Memorandum of Association (MOA) and Articles of Association (AOA), to the DIFC Registrar.
  5. Corporate Bank Account Opening: Open a corporate bank account in the UAE to manage the company’s financial transactions.

Key Considerations and Regulations

While the benefits of establishing a DIFC holding company are numerous, there are important considerations to keep in mind:

  • Qualifying Activities: To benefit from tax advantages, the holding company’s activities must be classified as “qualifying activities” under DIFC regulations, typically involving investment management or financial services.
  • Substance Requirements: DIFC holding companies must demonstrate a physical presence and adequate economic substance within the DIFC, which may include maintaining office space, employing staff, and conducting genuine business activities for availing 0% corporate tax rate.
  • Qualifying Income: To qualify for the 0% rate, your income must come from approved sources such as Free Zone transactions (excluding certain activities) and qualifying business activities. Additionally, owning or exploiting qualifying intellectual property can grant the 0% tax advantage. If your non-qualifying income stays below the de minimis threshold, you can still benefit from the favourable tax rate.

A DIFC holding company can be an effective tool for global investors looking to optimize their investment strategies, streamline operations, and tap into a dynamic financial hub. By leveraging the DIFC’s unique advantages and adhering to its regulatory framework, investors can unlock significant growth opportunities and achieve lasting success.

Categories
Blogs

Reviving M&A in 2024: How to Conduct Smart Due Diligence

Reviving M&A in 2024: How to Conduct Smart Due Diligence
Reviving M&A in 2024: How to Conduct Smart Due Diligence

Heading into the second half of 2024, there are encouraging signs of recovery in Mergers and Acquisitions (M&A) activity. This comes after M&A activity fell to its lowest level in ten years in 2023 and due to high interest rates and macroeconomic volatility.

The recent surge in deal activity underscores a renewed optimism in the market. This presents a strategic opportunity to revisit best practices for conducting due diligence. By ensuring a robust due diligence process, investors can approach opportunities with increased agility and conviction.

Given the inherent volatility and shifting market dynamics, thorough research and validation of potential investments are important. Comprehensive due diligence minimizes information gaps, identifies potential risks and red flags, and ultimately fosters a competitive advantage in capital deployment.

Let’s explore some of the most pertinent qualitative and quantitative criteria to incorporate into your due diligence checklist.

1. Cracking the Financial Code:

  • Evaluate the audited financial statements (3-5 years’ worth) for a clear understanding. Analyze cash flow, assets, liabilities, and profitability trends to understand the target company’s financial health.
  • Identify outstanding debt, unrecorded liabilities, and financing details. Knowing the company’s financial commitments is crucial for informed decision-making.

2. Unveiling the Operational Engine:

  • Examine agreements with subsidiaries, joint ventures, and partnerships. Uncover any potential hidden costs or complexities.
  • Review contracts with key personnel and affiliates.
  • Understand the company’s supply chain and any potential restrictions. Identify vulnerabilities or bottlenecks that could impact operations.

3. Shedding Light on Sales & Marketing:

  • Analyze competitor strengths, weaknesses, and market position. A clear understanding of the competitive landscape is essential.
  • Evaluate current marketing programs, budgets, and distribution channels. Assess the effectiveness of the company’s sales engine.
  • Gauge customer satisfaction and retention strategies. A loyal customer base is a valuable asset.

4. Examining the Workforce:

  • Review employee headcount, salaries, and compensation trends. Analyze turnover data and employee morale surveys to understand the company’s human capital.
  • Identify any union affiliations and understand the company’s approach to employee benefits programs.

5. Safeguarding Intellectual Property:

  • Unearth all patents, trademarks, copyrights, and trade secrets. Intellectual property is a cornerstone of many businesses.
  • Review licensing agreements and potential IP infringement claims. Ensure the company has measures in place to protect its intellectual property.

6. Legal Loopholes:

  • Scrutinize pending litigation, judgments, and regulatory inquiries. Uncover any potential legal headaches.
  • Review insurance policies, licenses, permits, and compliance documentation. Ensure the company is operating within legal boundaries.
  • Analyze board and shareholder meeting minutes for any red flags that might indicate past issues.

7. Property & Real Estate: Brick by Brick:

  • Understand the company’s ownership of physical assets.
  • Map out the company’s real estate holdings and ownership structure. Identify any potential liabilities or limitations.

8. Illuminating the Cyber Health:

  • Assess the company’s IT infrastructure, security protocols, and disaster recovery plans. Evaluate its preparedness for potential IT disruptions.
  • Review data security measures and the company’s history of cyber breaches. Ensure the company has robust defenses in place.
  • Examine software licensing agreements and compliance standards. Identify any potential software-related risks.

Thorough due diligence is critical for successfully navigating the exciting, yet potentially challenging, landscape of M&A transactions. These resources can uncover essential business information, provide valuable industry and company insights, and equip you with the knowledge needed to make informed investment decisions.

Make smarter M&A decisions with MS

Our team of experts provides in-depth due diligence services, giving you the information you need to confidently navigate the UAE’s unique business environment. We minimize risks and identify opportunities to help you achieve successful Mergers and Acquisitions, propelling your business growth. Partner with MS and unlock the potential of profitable M&A deals.

Making deals work for you!

Categories
Blogs

UAE: A Half Year of Growth – A Look Ahead after H1 2024

UAE: A Half Year of Growth
UAE: A Half Year of Growth

As we hit the halfway mark of 2024, the UAE is powering ahead as an economic frontrunner, driven by relentless innovation, strategic investment, proactive policies and expansive growth across key sectors. In 2023, the country’s GDP soared to Dh1.68 trillion, showing a growth rate of 3.6 percent. This strong momentum has continued into 2024, with favourable trends seen across all key economic indicators. The UAE economy has shown remarkable resilience and growth potential amidst global uncertainties. The national economy is expected to grow by 4 percent in 2024 lead by strong activities in sectors like tourism, construction, manufacturing and finance. Clearly, the UAE isn’t just keeping up—it’s leading the charge in the global economic landscape.

The Current Economic Landscape

GDP Growth: Achieved 3.6% growth in 2023, with forecasts indicating further growth in 2024. The Central Bank of the UAE (CBUAE) initially projected a 4.2% economic growth for 2024 but revised it down to 3.9%, indicating a slight slowdown expected. Looking to 2025, they foresee a substantial acceleration in growth to 6.2%, driven by increased oil production and ongoing expansion in non-oil sectors.

Key Sector Contributions to the UAE Economy

1) Oil Sector: the UAE’s oil and gas sector, constituting 40% of the GDP, will continue to serve as a critical economic pillar. The country aims to ramp up oil production to 5 million barrels per day by 2027 to meet global energy needs, with a projected growth in oil output of 5.8% expected in 2024.

2) Non-Oil Sector– The UAE’s non-oil GDP, adjusted for inflation, reached Dh1.25 trillion, marking a 6.2% growth rate by the end of first half. This places the country fifth globally in terms of real GDP growth (according to the 2023 ranking).

-Tourism

Leading tourists’ destination: The UAE is a top tourist destination in the Middle East, contributing Dhs220 billion to its GDP in 2023, representing 11.7% of its economy. Ranked 18th globally in the World Economic Forum’s Travel & Tourism Development Index (TTDI), the UAE stands first in the MENA region.

The UAE expects tourism to contribute Dh236 billion to its economy in 2024, with plans to reach Dh450 billion by 2031 under the National Tourism Strategy 2031. This initiative aims to elevate the UAE as a premier global tourism destination in the coming decade.

-Financial Sector

The financial sector significantly boosted the UAE’s GDP last year, with total assets exceeding AED 4 trillion, marking an 11.1 percent growth. Banking, amid ongoing digital transformation, remained a pillar of strength, demonstrating robust fundamentals through strong capitalisation, profitability, and ample liquidity.

Diversification from Oil Dependence: The finance sector actively encourages diversification away from oil-dependent revenues, thus promoting a more resilient and sustainable economy.

Regulatory stability: The UAE’s Central Bank and regulatory bodies maintain a stable financial environment with effective regulations, fostering investor confidence, attracting foreign investment, and ensuring financial stability.

-Aviation

The aviation sector plays a crucial role in boosting the UAE’s economy by enhancing tourism, trade, and investment flows, both domestic and international. The UAE civil aviation sector soared in the first quarter of 2024, boasting a remarkable 14.7% increase compared to the corresponding period last year.

As a global hub, it facilitates seamless connectivity, supporting the nation’s economic ambitions. Additionally, the sector’s capabilities in areas such as engine maintenance, financing, leasing, air traffic management, and airport security contribute significantly to overall economic growth.

Dubai and Abu Dhabi, as two of the most powerful emirates in the UAE, equally contribute to the country’s economy. Dubai leads the UAE in greenfield FDI projects, hosting a substantial 81% of the country’s new investments in this category. Meanwhile, Abu Dhabi has risen as the MENA region’s fastest-growing startup hub, enhancing its ecosystem value by 28%. These achievements not only attract global investments but also stimulate local innovation, significantly bolstering the UAE’s economic influence on a global scale.

The UAE has risen to the top 10 globally in several GDP-related competitiveness indicators, achieving sixth place in the GNI Index of the UNDP’s 2024 Human Development Index Report. Economic diversification remains pivotal for reducing reliance on oil revenue, leveraging significant contributions from non-oil GDP and successful Foreign Direct Investment.

As we enter the next phase, the UAE is set to take the lead with its strong non-oil sector, strategic investments, and smart initiatives driving stability and innovation. Positioned for regional and global prominence, the nation sets a compelling example of economic resilience and forward-thinking leadership.

Categories
Blogs

UAE Input VAT: The Hidden Benefit Businesses Missing Out in the VAT Landscape

UAE VAT Registration
UAE VAT Registration: 5 Pitfalls to Avoid for Your Successful Compliance

The recent introduction of corporate tax in the United Arab Emirates (UAE) has sharpened the focus on the existing Value Added Tax (VAT) system. It’s crucial to understand the distinction between these two taxes. VAT, implemented in 2018, applies to most goods and services in the UAE at a standard rate of 5%. There’s a twist, businesses registered for VAT can claim input tax credits, significantly reducing their overall VAT burden.

As many are already familiar with this aspect, let’s brush up on the key insights of the Input VAT.

What is Input VAT?

Input VAT refers to the VAT a business pays on its purchases of goods and services used for taxable supplies. This mechanism ensures that businesses only pay VAT on the value they add at each stage of the supply chain.

How Input VAT Recovery Works

In the UAE, input tax recovery allows VAT-registered businesses to reclaim credit for the VAT paid on eligible business-related purchases and expenses.

  • Registration Thresholds: Businesses are required to register for VAT within 30 days if their annual taxable income exceeds AED 375,000. Voluntary registration is an option for businesses with turnovers between AED 187,500 and AED 375,000 to take advantage of input tax recovery.
  • Claiming the Credit: Registered businesses can claim credit for the VAT paid on all taxable purchases, reducing their overall VAT burden and ensuring a transparent system where the final consumer pays the VAT.

Steps to Recover Input VAT in the UAE

Recovering input VAT in the UAE involves a few key steps:

  1. Eligibility Check:
  • Only businesses registered as taxable persons under UAE VAT regulations can claim input tax recovery (mandatory registration for exceeding AED 375,000 annual taxable sales or voluntary for turnovers between AED 187,500 and AED 375,000).
  • The purchased goods and services must be exclusively used for making taxable supplies (not personal use or exempt supplies).

2. Maintain Proper Records:

  • Retain valid tax invoices for every business purchase, clearly showing
  1. Supplier’s VAT registration details
  2. Description of purchased goods or services
  3. Taxable value of the purchase
  4. Applicable VAT
  • A system to organize these documents (digital or physical) is crucial for a smoother claim process and reduces audit stress.

3. Calculate Input Tax:

  • Businesses managing accounts manually need to carefully review each invoice to identify the VAT amount and calculate the total input tax claimable for that tax period.
  • Consider using a spend management solution to streamline this process by tracking expenses, storing invoices securely, and automating VAT calculations.

4. Submit VAT Return and Claim Recovery:

  • The UAE FTA mandates that registered businesses file a VAT Return within 28 days after the tax period’s end.
  • This return should detail your taxable supplies, output VAT collected from customers, and input tax paid on purchases. Ensure accurate mention of the total input VAT to avoid discrepancies.
  • The claimed input tax is typically refunded directly to your registered bank account by the FTA within a few weeks of filing the return.

Timeframe for Recovery

You can claim input tax in your first VAT return as soon as you have:

  • A valid tax invoice.
  • The intention is to make payment against the invoice within six months of the agreed payment date.

Correcting Past Returns

The FTA’s ‘Voluntary Disclosure’ provision allows businesses to correct errors or omissions in submitted VAT returns without penalties. This can be done by completing an online form on the FTA website, detailing the errors, and providing the correct information.

Maximizing Input VAT Recovery

For a smooth input tax recovery process, follow this checklist:

  • Ensure purchased goods and services are used for taxable sales as per the UAE VAT Law.
  • Always request a Tax Invoice for purchases where you plan to claim input tax.
  • The tax invoice should have all the details for input tax recovery consideration.
  • You must pay or intend to pay the full amount due for the supplies, aiming to settle the invoice within 6 months.

Be VAT Compliant in the UAE with MS

MS takes the complexity out of VAT regulations and ensures your business is fully compliant in the UAE, so you can focus on what matters most – growing your business. Our team will streamline your processes, making everything smooth and collaborative. With MS, you get more than just a service. You get a partner who understands your specific business in the ever-changing UAE market. We’ll support your growth and success every step of the way.

Categories
Blogs

UAE Tax Registration Number: Eligibility, Application Process, and Benefits for Businesses

UAE Tax Registration Number: Eligibility, Application Process, and Benefits
UAE Tax Registration Number: Eligibility, Application Process, and Benefits

When it comes to managing a business in the United Arab Emirates (UAE), understanding the ins and outs of Corporate Tax registration is essential. While the UAE has traditionally been known for its tax-friendly policies, recent changes have implemented specific regulations for corporate tax compliance in the Emirates. The recent arrival of corporate tax in the UAE has generated a lot of confusion for businesses throughout the country. Regardless of whether your company is located on the mainland or operates within a free zone with special tax benefits, such as Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), it’s vital to understand and comply with the registration requirements.

Among the various requirements, getting a Tax Registration Number (TRN) is crucial. For both the registration of Value Added Tax (VAT) and Corporate Tax, having a TRN is mandatory. Let’s explore more about TRN.

What is a Tax Registration Number in the UAE?

A Tax Registration Number in the UAE (TRN) is a unique identification number assigned by the Federal Tax Authority (FTA) to businesses and individuals in the UAE. It’s like a social security number for your business, used to track your tax obligations and ensure compliance with UAE laws.

Who Needs a Tax Registration Number in the UAE?

Every business operating in the UAE needs to comply with VAT regulations. There are two registration thresholds:

  • Voluntary Registration (AED 187,500): Businesses with a turnover exceeding AED 187,500 but below AED 375,000 can choose to register for VAT.
  • Mandatory Registration (AED 375,000): Businesses with a turnover exceeding AED 375,000 in the last 12 months or expected to exceed it in the next 30 days must register for VAT.

Benefits of Having a Tax Registration Number in the UAE

  • Charge VAT on your services: Only businesses with a TRN can legally charge VAT to their customers.
  • Comply with tax laws: A TRN helps ensure you’re following UAE tax regulations and avoiding penalties.
  • Accurate financial tracking: The TRN helps the government track your transactions for accurate record-keeping.

How to Apply for a Tax Registration Number in the UAE

  1. Register on the EmaraTax portal: You’ll need a UAE ID pass to create an account.
  2. Log in and choose the registration option: Select “VAT, Excise, or Corporate Tax Registration” based on your needs.
  3. Verify eligibility and gather documents: Ensure you meet the eligibility criteria and have all the necessary documents like trade license, bank details, etc.
  4. Complete the application form: Fill out the online application form carefully. Consider using a tax agent for assistance.
  5. Submit the application: Once you’ve completed the form and uploaded the required documents, submit your application.

Processing Time and Approval

The FTA typically processes applications within 20 business days. They may request additional information if needed, which can extend the processing time.

Where to Find Your Tax Registration Number in the UAE

After approval, you’ll receive a VAT (Tax) Certificate containing your TRN, a Generated International Bank Account Number (GIBAN), and a downloadable registration certificate from your EmaraTax account.

MS for Corporate Tax Compliance in the UAE

UAE Corporate Tax registration can be a daunting task for both Free Zones and mainland businesses. Don’t wait! Early registration streamlines the process and keeps you compliant. This protects your company and contributes to the UAE’s economic growth. For a stress-free and compliant registration, consider partnering with MS. We’ll tailor our services to your specific needs, ensuring you meet all legal requirements with ease.

Categories
Blogs

Hold Tight: Strategies for Holding Companies to Prosper in the UAE’s New Corporate Tax Framework

Hold Tight: Strategies for Holding Companies to Prosper in the UAE's New Corporate Tax Framework
Hold Tight: Strategies for Holding Companies to Prosper in the UAE's New Corporate Tax Framework

The United Arab Emirates (UAE) has long been recognized for its business-friendly environment, characterized by the absence of corporate and personal tax. However, a significant shift has occurred with the introduction of the UAE Corporate Tax (CT) law through Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (CT Law). This new legislation has far-reaching implications for taxpayers, particularly for Holding Companies.

Let’s explore how this new legislation affects the Holding Companies.

Understanding Holding Companies

Holding Companies primarily hold controlling interests in other companies. Their income typically comes from dividends, capital gains, and interest. The UAE law defines a Holding Company as a company that establishes or controls subsidiaries through shares or membership interests, allowing it to influence their decisions.

Definition under Company Law (Federal Decree-Law No. 32 of 2021)

Article 268 – Definition of the Holding Company

A Holding Company is a Joint Stock Company or a Limited Liability Company that establishes subsidiaries inside the State or abroad or controls existing companies by holding shares or membership interests, enabling such a Company to control the management of the subsidiary and influence its decisions.

The name of the Company followed by the expression ‘Holding Company’ shall appear on all papers, advertisements, and other documents issued by the Holding Company.

Definition as per UAE Economic Substance Regulations (ESR)

A company that:

  • Has acquisition and holding of shares or equity interests in other companies as its sole activity.
  • Derives its income solely from dividends and capital gains on its equity interests.

Taxation for Holding Companies

The tax treatment of a Holding Company depends on its location:

  • Free Zone: Companies in Free Zones like Abu Dhabi Global Market (ADGM) or Dubai International Financial Centre (DIFC) may be eligible for a 0% tax rate if they qualify as Qualifying Free Zone Persons (QFZPs). To achieve this, they must demonstrate sufficient substance in the Free Zone, comply with transfer pricing rules, and have audited financial accounts. Income from holding shares for at least 12 months is considered a Qualifying Activity, making such Holding Companies likely to benefit from the 0% CT rate.
  • Mainland: Holding Companies outside Free Zones (mainland) are generally subject to the 9% CT unless their income falls under exemptions listed in Article 22 of the CT Law. This includes dividends and capital gains from domestic companies and, under certain conditions, dividends and profits from foreign subsidiaries.

Exempt Income for Holding Companies on Corporate Tax

Holding Companies can significantly reduce their tax burden through various exemptions:

  1. Dividends from Resident Companies: Dividends received from UAE-incorporated companies are generally exempt from CT. This promotes domestic investment and simplifies the tax structure.
  2. Dividends from Foreign Shareholdings: Dividends from foreign subsidiaries can also be exempt if the Holding Company meets the Participation Exemption requirements (refer to a separate post for details).
  3. Capital Gains from Shareholdings: Capital gains from selling domestic or foreign shares may be exempt under the Participation Exemption, encouraging long-term investment.
  4. Headquarter Services in Free Zones: Headquarter services provided to related parties in the same Free Zone or across jurisdictions qualify as a Qualifying Activity for QFZPs. This includes management, administrative, or strategic services.

Taxable Income for Holding Companies

Not all income streams are exempt from the tax, let’s look at the income categories which falls under the purview of taxation:

  1. Interest Income: Interest earned from loans, exceeding a specific limit, is generally taxable. Additionally, interest expenses on loans from related parties used for dividend distributions or capital activities may not be deductible unless a legitimate business purpose is demonstrated.
  2. Rental Income: Rental income is generally taxable, with exemptions under specific conditions (e.g., commercial property income within a Free Zone earned from another Free Zone person is taxed at 0%).
  3. Service Fees: Fees for management, consultancy, strategic advisory, or administrative support provided to subsidiaries are subject to Corporate Tax.
  4. Royalties: Royalties received for intellectual property (patents, trademarks, copyrights) are taxable.
  5. Foreign Exchange Gains: Gains arising from foreign exchange transactions, realized or unrealized, are taxable.

The UAE’s new corporate tax law has some changes that Holding Companies need to grasp. However, by staying informed and meeting the requirements for exemption, you can keep your Holding Company business thriving in the UAE’s pro-business climate. Think of it as a chance to showcase your company’s legitimacy to unlock tax benefits.

MS for corporate tax compliance of Holding companies in the UAE

MS can be a valuable partner for Holding Companies for understanding the nuances of the new UAE Corporate Tax law. We offer thorough support, assisting with Free Zone and substance requirements for the 0% tax rate, ensuring compliance with transfer pricing regulations, managing tax record keeping and reporting, and keeping you updated on the evolving tax landscape. Let us help your Holding Company thrive in the new UAE corporate tax environment.

Categories
Blogs

Smart Regulations, Smart Investments: UAE’s transformation into A Digital Asset Hub

Digital Asset Hub in the UAE
Digital Asset Hub

In 2009, an anonymous programmer foresaw a revolutionary shift hidden in the dark web that would rewrite the rules of finance and technology worldwide – marking the birth of cryptocurrency. Led by Bitcoin and a flurry of alternative coins, these digital assets surged in popularity, captivating global investors. However, the market faced a cold snap in November 2022 when FTX, a leading exchange once valued at over $30 billion, collapsed. This event caused disruption across the industry, leading Bitcoin prices to drop to levels last seen in 2020.

Following the turbulent events of 2022, the cryptocurrency market has staged an impressive recovery, defied earlier doubts, and demonstrated its resilience. Bitcoin, the poster child of digital currencies, has soared close to record highs, marking a remarkable 160% increase in its price by March 2024.

How is the UAE adopting digital assets?

The UAE has become a trailblazer in digital asset regulation, showcasing its commitment to innovation and technology. With a unified approach across its Emirates, the UAE has established a robust yet flexible regulatory framework. This framework aims to attract global businesses while safeguarding consumer interests and financial stability. By adapting swiftly to the evolving digital landscape, the UAE has emerged as a pivotal player in shaping the future of digital economies worldwide.

Emirates – contributions

Abu Dhabi

Abu Dhabi Global Market (ADGM), through its Financial Services Regulatory Authority (FSRA), has been at the forefront of digital asset regulation since 2018. They set a global benchmark by introducing guidelines for cryptocurrencies and digital assets, which have been constantly updated to adapt to the evolving landscape.

Recently, ADGM introduced the world’s first DLT (Digital ledger technology) Foundations Regime, a groundbreaking move that provides a legal framework for blockchain foundations and decentralized autonomous organizations (DAOs). The world’s first-of-its-kind, this regime supports innovative governance methods such as token voting and smart contracts, reinforcing ADGM’s role as a leader in fostering digital asset native activities.

ADGM is home to some of the top blockchain-based companies, including Binance, SEBA Bank, Securrency, M2, Burjx, FNS, Himalaya, BitOasis, Matrix, and Midchains.

MEAACBA

The Middle East Africa and Asia Crypto and Blockchain Association (MEAACBA), backed by ADGM, is a non-profit organization uniting industry leaders in the Middle East, Africa, and Asia to tackle industry challenges and integrate digital assets into vital economic sectors. It aims to accelerate the blockchain and cryptocurrency developments in the region.

ADGM X HACKEN

Abu Dhabi Global Market (ADGM) and Hacken, a global leader in blockchain security auditing, have signed an MoU to work together on setting new standards for blockchain security and compliance. This collaboration focuses on developing security benchmarks and monitoring tools under ADGM’s DLT Foundations framework. This collaboration will highlight ADGM’s innovation in regulatory frameworks and Hacken’s dedication to enhancing global blockchain security.

Dubai

The Dubai International Financial Centre, with its tax-free status and 100% foreign ownership, has become a hub for financial services, including digital assets. The Dubai Financial Services Authority (DFSA) is proactive in developing a balanced regulatory framework that promotes innovation alongside risk management in the digital asset industry.

Recently, DIFC proposed a new Digital Assets Law and Security regime to define how digital assets like Bitcoin, Ether, Litecoin, Toncoin, and Ripple are managed within its jurisdiction. Dubai also launched the Virtual Asset Regulatory Authority in 2022 to oversee virtual asset provision and exchange across the emirate. The DFSA’s consultation paper on Security Tokens in the DIFC is a key step towards establishing a comprehensive Digital Assets Regime, paving the way for innovative fintech applications using DLT. These steps show Dubai’s dedication to becoming a global leader in digital asset innovation and regulation.

VARA – Dubai’s Virtual Assets Regulatory Authority

Virtual Assets Regulatory Authority (VARA) is the world’s first regulator dedicated exclusively to virtual assets. VARA aims to play a crucial role in Dubai’s D33 Economic Agenda. The VARA rulebook sets clear guidelines for virtual asset operators in Dubai, ensuring they follow specific rules when engaging in virtual asset activities.

DIFC License

The Dubai AI and Web 3.0 Campus in the Dubai International Financial Centre will provide subsidized licenses for AI and Web3 activities, including Distributed Ledger Technology (DLT) services.

Ras Al Khaima

Ras Al Khaimah is emerging as a prime destination for blockchain businesses with its pioneering RAK DAO, the UAE’s first Web3-focused free zone.

Crypto Majlis

Through proactive regulatory initiatives and collaboration with industry leaders, Ras Al Khaimah is showcasing a progressive approach to fostering innovation in the crypto sector by establishing crypto majlis. RAK Digital Assets Oasis further solidifies its commitment to advancing digital assets and blockchain technology through collaborative efforts.

Why are global Investors and top talents heading to the UAE

  • Blockchain ventures are gaining attention as sectors like real estate in Dubai adopt digital currencies such as Bitcoin for buying and selling properties.
  • Bitcoin’s role as digital gold and a hedge against inflation is also becoming more popular amidst global economic uncertainties.
  • Gaming ventures are another hot spot for crypto investments due to their strong appeal to consumers in the digital currency space.

Future of Crypto in the UAE

The UAE has strategically positioned itself as a rising star in the global crypto industry by implementing smart regulations, fostering financial innovation, and investing in top-notch infrastructure. The UAE’s clear policies, entrepreneur-friendly environment, and robust digital backbone are attracting wealth and talent. While it’s early to declare it the crypto capital, the UAE’s adoption of Web3 and blockchain promises efficiency, transparency, and security advantages for businesses, paving the way for continued growth and innovation in finance.

Categories
Blogs

The Rebound of M&A in the Services & Industrial Sector – What to Expect in H2 2024

The Rebound of M&A in the Services & Industrial Sector – What to Expect in H2 2024
M&A in the Services & Industrial Sector

Expect busy M&A times ahead for the Services & Industrial sector in the upcoming months of 2024! Despite the persistent challenges posed by high interest rates and stringent regulatory environments, companies within this sector are increasingly turning to M&A for a rebound to drive growth and creating value. This trend highlights the sector’s resilience and adaptability in the face of economic uncertainties.

In recent years, the Services & Industrial sector has been going through a complex and evolving market environment. Factors such as technological advancements, shifting consumer preferences, and global economic pressures have compelled companies to rethink their strategies and optimize their operations. M&A activity has emerged as a vital tool in this context, enabling companies to realign their portfolios, enhance their technological capabilities, and expand their market presence. To stay competitive, businesses are strategically selling off non-essential parts of their business (strategic divestitures) and buying up new assets (acquisitions) to make the most of their resources.

Strategic Divestitures for Enhanced Capital Allocation

In today’s market, companies are thoroughly assessing their portfolios. These evaluations often lead to the divestiture of non-core assets, which can fund strategic investments and corporate initiatives. By shedding these non-essential parts of their businesses, companies can better allocate capital to higher-growth and more profitable areas. This strategy not only strengthens financial health but also enables reinvestment in promising new segments.

Addressing Capability Gaps with Strategic Acquisitions

As companies work to optimize their portfolios, internal reviews frequently uncover gaps in technology and capabilities. To fill these gaps and maintain competitiveness, I&S companies are increasingly focusing on acquiring new technologies and digital capabilities. The demand for artificial intelligence (AI), automation, and digital transformation solutions is particularly high, as these technologies are crucial for countering market disruptions and expanding market presence.

Industry Consolidation and Strategic Expansion

The Services & Industrial sector is also seeing significant industry consolidation, driven by the need for strategic growth and diversification. This trend is particularly notable among small to medium-sized companies that have been negatively impacted by various economic conditions. Consolidation helps companies achieve economies of scale, streamline operations, and enhance their competitive positions.

Key M&A Themes for the Second Half of 2024

Several key themes are expected to influence M&A activity in the Services & Industrial sector during the second half of 2024:

  1. Embracing Market Uncertainty: Buyers and sellers are expected to embrace ongoing market uncertainties and challenges, using M&A to drive growth and unlock value.
  2. Strategic Portfolio Reviews: Companies will continue conducting strategic portfolio reviews, leading to acquisitions that address capability gaps and divestitures that improve capital allocation.
  3. Focus on Technological Advancements: AI, automation, and digital transformation will remain strategic focal points for M&A, helping companies stay competitive and respond to market disruptions.
  4. Sector-Specific M&A: The M&A outlook will vary by sector. Industrial Manufacturing, Aerospace & Defense, and Engineering & Construction are expected to rebound with increasing economic optimism. The Automotive sector will continue adapting to the electric vehicle shift, while business services like tax and accounting will experience further consolidation.

Driving Business Transformation and Growth

Business transformation and profitable growth are top priorities for companies aiming to stay competitive. These objectives are expected to be achieved through strategic M&A focused on digital innovation and consolidation, as well as through divestitures of non-core assets. Sustainability and emission-reduction initiatives will also drive acquisitions, as companies strive to comply with regulations and meet consumer demands.

The Services & Industrial sector is up for a dynamic second half of 2024, driven by strategic M&A activities aimed at growth, innovation, and portfolio optimization. Companies that effectively navigate these trends will be well-positioned to thrive in a competitive and evolving market.

MS: Your Partner in Successful M&A Deals

Despite headwinds in the industry, the M&A market perked up in the first half of 2024. Big deals in technology and energy, along with continued strength in the Middle East, helped drive this modest recovery. If you are planning to reap rewards through M&A, MS can be your ideal partner. We have the industry knowledge and market research to ensure you find the ideal fit, while our deal structuring and negotiation skills guarantee you secure the best possible terms. Don’t journey the complexities of M&A alone – partner with us to maximize value creation and propel your company’s growth through strategic M&A deals.