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M&A in 2024: Why Financial Due Diligence is more important than ever

M&A in 2024: Why Financial Due Diligence is more important than ever
M&A in 2024: Why Financial Due Diligence is more important than ever

The global Mergers and Acquisitions (M&A) landscape underwent a significant contraction in 2023, experiencing its lowest annual deal value in a decade. This decline, mirroring a broader economic slowdown, brought total M&A activity down to levels last observed in 2013. Rising interest rates are considered to be a primary factor contributing to this cautious approach by companies, as they grapple with increased financing costs and a less favourable economic outlook.

When it comes to the M&A surge in 2024, financial due diligence is not just a procedural step—it’s a crucial component that can determine the success or failure of the entire transaction. A thorough investigation of a target company’s financial health can uncover potential risks and present numerous benefits, enabling investors, acquirers, and lenders to make well-informed decisions.

What is Financial Due Diligence in M&A?

Financial due diligence involves a deep dive into the financial records and health of a target company. This process is essential for evaluating whether the company is a viable investment. It typically includes a detailed examination of:

  • Financial Statements: These include balance sheets, income statements, and cash flow statements, which provide a snapshot of the company’s financial performance over time.
  • Assets and Liabilities: Understanding what the company owns and owes is critical to assessing its financial stability.
  • Cash Flows: Analyzing cash inflows and outflows helps determine the company’s liquidity and operational efficiency.
  • Projections: Evaluating future financial projections to assess the company’s growth potential and sustainability.

Why is Financial Due Diligence Important?

  1. Risk Identification and Mitigation: Financial due diligence can uncover hidden liabilities, questionable accounting practices, or financial irregularities. By identifying these risks `early, investors can negotiate better terms or decide to walk away from a potentially bad deal.
  2. Valuation Accuracy: A thorough financial analysis ensures that the buyer pays a fair price for the target company. Overpaying for an acquisition can lead to significant financial losses, while undervaluing can result in missed opportunities for growth.
  3. Informed Decision-Making: With a clear understanding of the target company’s financial health, stakeholders can make more informed decisions regarding the acquisition. This includes assessing whether the acquisition aligns with their strategic goals and financial capabilities.
  4. Negotiation Leverage: Detailed financial insights provide acquirers with the leverage needed to negotiate terms that are favorable to them. Knowledge of potential financial weaknesses can be used to adjust the purchase price or secure better warranties and indemnities.
  5. Integration Planning: Understanding the financial landscape of the target company aids in planning for post-merger integration. It helps in aligning financial systems, budgets, and performance metrics, ensuring a smoother transition and integration process.

Steps in the Financial Due Diligence Process

  1. Initial Assessment: Begin with a preliminary review of the target company’s financial documents. This helps in identifying any red flags or areas that require deeper investigation.
  2. Detailed Financial Analysis: Conduct a comprehensive analysis of financial statements, tax returns, and other relevant financial records. This includes evaluating revenue streams, profit margins, expense trends, and capital structure.
  3. Verification of Assets and Liabilities: Confirm the existence and value of assets and liabilities listed on the balance sheet. This step ensures that there are no discrepancies or overstatements that could affect the company’s valuation.
  4. Cash Flow Examination: Analyze the company’s cash flow to understand its liquidity position and how it manages its cash. This is crucial for assessing the company’s ability to sustain operations and service debt.
  5. Review of Financial Projections: Assess the assumptions and methodologies used in the company’s financial projections. This helps in determining the realism and achievability of the forecasted growth and profitability.
  6. Compilation of Findings: Summarize the findings in a detailed report, highlighting any potential risks, inconsistencies, and opportunities. This report serves as a basis for decision-making and negotiation.

Benefits of Financial Due Diligence in M&A

  • Informed Decision-Making: Provides insights for negotiation, setting fair deal terms, and planning smooth integration.
  • Risk Mitigation: Uncovers financial, legal, operational, market, and tax risks that could jeopardize the deal.
  • Opportunity Identification: Reveals hidden assets, growth potential, and areas for post-acquisition improvement.
Financial Due Diligence in M&A: Core Focus Areas
  • Financial Sustainability: Goes beyond headline figures to assess the long-term viability of earnings.
  • Sales Strategy Insight: Look deeper than revenue numbers to understand future sales potential.
  • Working Capital Considerations: Analyzes factors affecting working capital needs beyond historical data.
  • Future Planning Assessment: Evaluate management’s forecasts and assumptions about the company’s direction.
  • Human Capital Value: Assesses investments in employee training and development to understand their impact on productivity.
  • IT Investment Returns: Analyzes if technology investments are generating a positive return on investment.

Choose MS for conducting thorough due diligence

Unlocking the true potential of your M&A strategy requires a partner with deep regional expertise and a commitment to success. At MS, our team of seasoned professionals leverages their extensive experience to deliver comprehensive due diligence services. This empowers you with the critical insights necessary to navigate the complexities of M&A with confidence. We go beyond risk mitigation; our keen understanding of the unique UAE business landscape allows us to identify and capitalize on hidden opportunities, ensuring your M&A transactions pave the way for long-term success. Choose MS – your trusted advisor for maximizing the value of your M&A endeavours.

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Insights into the Future: Fintech Marketing Trends Transforming the UAE

The United Arab Emirates is rapidly becoming a focal point for fintech innovation, fueled by its robust infrastructure and tech-savvy community. With the flourishing e-commerce industry, consumers in the UAE are increasingly seeking seamless online payment options, while businesses are recognizing the importance of establishing a digital presence.

This surge in online activity has created a demand for secure and convenient payment solutions, driving fintech firms to develop innovative products like mobile wallets and touchless payment systems. As a result, the fintech sector in the UAE is experiencing unprecedented growth, catering to the evolving needs of both consumers and businesses alike.


Tech-driven revolution

Blockchain and open banking innovations are poised to revolutionize the future of financial services. Even though neobanks are in their early stages in the UAE, they’re positioned to lead the charge by offering streamlined digital services that bypass the high fees and complex pricing structures of traditional banks, thereby building trust with their customers.

In the United Arab Emirates, both neobanks and traditional banks are expanding their digital offerings. Neobanks aim to entice customers away from traditional banks by providing similar products and services at more affordable rates. The fintech regulatory framework in the UAE has also contributed to the rise of neobanks, facilitating their growth and fostering a competitive environment in the financial sector.

Growth of online and digital payments

The FinTech app developers are on a roll, bringing in increasing reliance on mobile devices in the UAE. These apps enable customers to effortlessly handle their finances on the go, providing smooth mobile banking and payment services. Digital wallets are gaining immense traction, as fintech developers focus on crafting secure payment solutions tailored for smartphones. With high investments on advanced technology, speedy internet, and quality mobile networks, the chances of seamless online shopping experience have increased.

Emerging trends in cross-border payments
FinTechs have harnessed technology to introduce affordable solutions for international payments catering to individuals, small businesses, and corporations. They’ve revolutionized the cross-border payments landscape by offering improved customer service, global accessibility, flexible payment choices, reduced fees, and faster transaction processing times.

How UPI Sparks Fintech Advancements in the UAE

The Unified Payments Interface (UPI), developed by the National Payments Corporation of India (NPCI), serves as an instantaneous payment system facilitating fund transfers between bank accounts via smartphones. Offering seamless transactions across multiple banks, UPI ensures both security and convenience in payments. Its features encompass peer-to-peer transfers, bill settlements, merchant transactions, and more, thus modernizing India’s payment ecosystem and enhancing financial accessibility for millions.

The widespread availability, swift transaction processing, simplified procedures, and various added benefits of UPI have propelled its global adoption rate. This trend could mark the initial phase of establishing a multinational payment infrastructure, linking numerous countries through faster payment and remittance systems built upon UPI’s framework and standards. Integration of these systems would be notably streamlined owing to the utilization of UPI’s established framework.

In line with this progression, earlier in the year, an MoU were signed between India and UAE for an agreement to interconnect the instant payment platforms – UPI (India) and AANI (UAE). This landmark agreement is poised to facilitate seamless cross-border transactions between India and the UAE, underscoring a significant advancement in financial cooperation and connectivity between the two nations.

Case study

Beyond Border’s – PhonePe’s UAE Entry

PhonePe’s recent expansion into the UAE market through its partnership with Neopay, the payment subsidiary of Mashreq, highlights the significant boost digital payment solutions are providing to the financial landscape. Leveraging the Unified Payments Interface (UPI) and QR code technology, PhonePe enables Indian travelers in the UAE to conduct seamless cross-border transactions at various establishments. The integration of banking services, allowing NRIs to link their accounts, further enhances transactional ease.

This has enhanced the cross-border transactions, innovative payment solutions, and integration of banking services further cementing the already strong financial relationships between the two countries.

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Complying with ESR in the UAE: What you need to know

Complying with ESR in the UAE: What you need to know

The UAE implemented the Economic Substance Regulation (ESR) to prevent harmful tax practices and enhance tax transparency, reflecting its commitment as a member of the OECD Inclusive Framework on BEPS (Base Erosion and Profit Shifting). Consequently, mainland, offshore, and free zone companies registered in the UAE must demonstrate adequate economic presence in the country. Businesses engaged in Relevant Activities are required to submit the ES notification and report annually to the authority.

ESR in the UAE explained

ESR requires companies earning income in the UAE to demonstrate they have a substantial base of operations in the country. This translates to having a proportionate level of:

  • Infrastructure: Physical office space, equipment, and technology necessary to support the revenue-generating activities.
  • Employees: A qualified workforce in the UAE with the expertise to handle the relevant activities.
  • Expenditures: Operating expenses commensurate with the level of activity and income generated in the UAE.

The emphasis is on demonstrating a genuine economic connection to the UAE, not just mailbox operation.

Who must comply with ESR in the UAE?

ESR applies to a broad range of entities if they conduct any ‘Relevant Activities’, including:

  • Banking Business
  • Insurance Business
  • Investment Fund Management Business
  • Lease-Finance Business
  • Headquarters Business
  • Shipping Business
  • Holding Company Business
  • Intellectual Property Business
  • Distribution and Service Centre Business

Determining your Branch’s ESR Applicability

A meticulous approach is required to determine if your branch falls under ESR. Here’s a more detailed breakdown of the process:

  1. Scrutinize Relevant Activities: Carefully examine the list of relevant activities and assess if your branch engages in any of them, even partially.
  2. Evaluate Activity Level in the UAE: Conduct a thorough evaluation of your branch’s operations within the UAE. This includes:
    • The number of employees dedicated to the relevant activity in the UAE.
    • The value and location of physical assets used for the activity in the UAE.
    • The overall scale and nature of the relevant activity conducted within the UAE compared to global operations.
  3. Verify “Licensee” Status: ESR applies to businesses holding a valid license to operate in the UAE. If your branch has a license, it’s highly likely to be subject to ESR.
  4. Explore Exemption Criteria: There are exemptions for certain entities, such as:
    • Branches of foreign businesses that are tax-resident and pay taxes on all relevant income in another jurisdiction.
    • Wholly UAE-owned businesses that operate solely within the UAE and are not part of a multinational group.

It’s crucial to carefully examine the exemption criteria and ensure you meet all the requirements before claiming exemption.

Complying with ESR in the UAE: Reporting requirements

If your branch needs to comply with ESR, you’ll be required to submit reports to the Federal Tax Authority (FTA), the designated authority for collecting ESR information. These reports will detail:

  • Branch Information: Legal name, trade name, trade license details, etc.
  • Activities: A clear description of the relevant activities undertaken by the branch.
  • Financial Information: Financial statements and relevant financial data specific to the branch’s activities in the UAE.
  • Employee Details: The number of employees engaged in the relevant activities within the branch.
  • Physical Assets: The value and location of any physical assets used by the branch for the relevant activities.
  • Core Income-Generating Activities (CIGAs): A clear identification and explanation of the specific activities that generate the relevant income for the branch in the UAE.
  • Economic Substance Test Compliance: A confirmation that the branch has met the ESR requirements and any supporting documentation to substantiate this claim.

Penalties for non-compliance with ESR in the UAE

Failure to submit the ES notification: AED 20,000

Failure to submit the ES report: AED 50,000

Failure to submit the ES report for the consecutive year: AED 400,000

Providing inaccurate information: AED 50,000

Remember these Key Points on ESR Filings in the UAE

  • ESR applies to all UAE entities conducting relevant activities, not just foreign-owned companies.
  • There’s no general exemption for offshore companies; they are subject to ESR if involved in relevant activities.
  • Legal documents don’t solely define ESR applicability. A “substance over form” approach prevails, focusing on actual activities.
  • Regularly assess your branch’s activities to ensure continuous compliance with ESR.
  • Proper documentation is essential when claiming exemptions under ESR.
  • ESR filing is mandatory regardless of whether the relevant activity generates income for the branch.
  • Penalties exist for non-compliance, including failing to submit notifications and reports or providing inaccurate information.

How MS can help you file ESR in the UAE

Remaining mindful of ESR deadlines is essential to avoid incurring penalties and facing other negative consequences. At MS, we are dedicated to supporting you throughout the entire process. Our efficient and comprehensive services are designed to help you determine if your business engages in Relevant Activities, making ESR filings straightforward and stress-free. By ensuring compliance with all ESR requirements, we can help you prevent any potential penalties.

Don’t let uncertainty hold back your compliance efforts. By partnering with us, you can safeguard your business’s future and maintain its financial health. Our team of experts is ready to provide you with the guidance and support you need to navigate the complexities of ESR regulations the UAE.

Disclaimer

Please be advised that the conditions specified in the register are subject to revisions based on any modifications made to the schedule of contraventions by the UAE authorities. These revisions may arise due to updates in regulatory requirements, policy amendments, or other factors deemed necessary by the UAE Government.

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Corporate Tax in the UAE: How Free Zones can optimize your UAE business

Corporate Tax in the UAE: How Free Zones can optimize your UAE business

The United Arab Emirates (UAE) has emerged as a global hub for business and innovation, and a significant contributor to this success story is the strategic role played by Free Zones (FZs). These designated areas offer a multitude of advantages for businesses, making them particularly attractive for startups and established companies looking to expand their reach. One of those advantages is the 0% Corporate Tax structure for businesses with certain criteria operating in the Free Zones including Corporate Tax for Abu Dhabi Global Market (ADGM) including Al Reem Island and Dubai International Financial Centre (DIFC).

Before that, let’s glance at the other benefits of UAE Free Zones.

Why Choose a Free Zone in the UAE?

Compared to the UAE mainland, FZs provide a compelling environment for businesses to thrive. Here are some key benefits:

  • Full Foreign Ownership: Unlike the mainland, FZs allow complete foreign ownership, eliminating the need for a local partner. This simplifies the set-up process and offers greater control for international investors.
  • Streamlined Business Setup: Setting up a business in a Free Zone is a breeze. The process is fast, and efficient, and removes unnecessary bureaucratic hurdles.
  • Premium Infrastructure: Free Zones boast state-of-the-art infrastructure, including advanced communication networks, business centers, and logistics facilities. This ensures a smooth operation and a competitive edge.
  • Wider Legal and Commercial Options: FZs offer a wider range of legal and commercial structures for businesses to choose from, allowing for greater flexibility and customization based on specific needs.

The Corporate Tax in the UAE and Free Zone Advantages

The UAE’s recent implementation of a Corporate Tax regime acknowledges the critical role played by FZs in the nation’s economic growth. Recognizing this, the government offers a highly attractive benefit – a 0% Corporate Tax rate for qualifying Free Zone companies and branches (QFZPs) engaged in designated Qualifying Activities and transactions.

These Qualifying Activities typically involve:

  • Business is conducted solely between QFZPs and Free Zone Persons (where the Free Zone Person is the ultimate beneficiary of the transactions).
  • Specific activities performed within the designated geographical areas of a Free Zone or a specific zone for distribution activities.

Free Zone Perks: Unlocking the 0% Corporate Tax Rate in the UAE

So, you’ve set your sights on the UAE’s Free Zones (FZs) and their tempting offer of a 0% Corporate Tax rate. But hold on, there are a few hurdles to clear before you claim this. Here’s a breakdown of the key conditions you’ll need to meet to qualify as a Qualifying Free Zone Person (QFZP).

Who qualifies as a Free Zone Person?

First things first, you need to be a resident of the Free Zone. This means being a company whether it is holding, operational, or other types incorporated, established, or registered within a Free Zone. It can also be a branch of a non-resident company or even a UAE company that’s registered in a Free Zone. The important part is that only the qualifying income earned by your Free Zone business gets 0% tax treatment.

The substance is key: Proving your presence

The UAE wants to see a real commitment from you, not just a mailbox address in a Free Zone. You’ll need to demonstrate that you have a substantial presence within the zone. This means having enough employees, assets, and operational expenses to carry out your core business activities. Outsourcing is allowed, but only within the Free Zone and with proper supervision to ensure you’re still in control.

Where your income comes from matters

Not all income is created equal in the eyes of the UAE taxman. To qualify for the 0% rate, your income needs to come from approved sources:

Transactions within the Free Zone: But there’s a catch – they can’t be involved in excluded activities, and they must be the true beneficiaries of the transactions.

Qualifying Activities: Make sure your core business falls under the list of approved activities.

Qualifying Intellectual Property: Owning or exploiting intellectual property that meets specific criteria can also bring you a 0% tax advantage.

Other Income: If your non-qualifying income stays below the de minimis threshold (explained later), you’re still good to go.

Beware the Excluded List

Some income sources are strictly off-limits for the 0% tax rate. These include income from locations outside the Free Zone, unrelated property holdings, and intellectual property that doesn’t meet the qualifying criteria.

Choosing your tax path wisely

Don’t opt for the standard corporate tax regime if you want the 0% rate. This is a one-way street, and switching back to QFZP benefits comes with a four-year waiting period.

Playing by the Arm’s Length Principle

The UAE wants to ensure fair play – your Free Zone company’s profits should reflect its actual contribution, not some artificial arrangement with affiliated businesses. This is where the arm’s length principle comes in. If you have significant transactions with related parties according to the transfer pricing regulations, be prepared to maintain documentation that proves they were conducted at arm’s length.

Keeping the books in order

Regardless of your income level, audited financial statements are a must for QFZP status.

Corporate Tax De Minimis Rule: A little Non-Qualifying Income is okay

The UAE understands that starting a business might involve some non-qualifying activities. The de minimis rule allows QFZPs to have a small amount of non-qualifying income (the lower of AED 5 million or 5% of total revenue) without losing the 0% tax benefit.

The Free Zone Person’s non-qualifying income in a tax period is revenue derived from:

  • Excluded Activities: Activities that do not meet the qualifying criteria.
  • Activities with Non-Free Zone Persons: Transactions where the other party is not a Free Zone Person.
  • Non-Beneficial Transactions: Transactions with a Free Zone Person where the Free Zone Person is not the beneficial recipient of the relevant services or goods.

By meeting these requirements, you can unlock the door to the UAE’s Free Zone tax haven and enjoy the benefits of a competitive business environment. Remember, staying informed and compliant is key to keeping your QFZP status and maximizing your tax advantages.

How can MS help you with Corporate Tax in the UAE?

MS can streamline your UAE Corporate Tax filing process, ensuring accuracy and efficiency. We have a team of experts well-versed in UAE tax regulations who can guide you through the entire procedure, from registration to filing. We’ll begin by thoroughly analyzing your company’s financial standing to accurately determine your taxable income, taking into account any applicable exemptions and deductions. By leveraging our expertise, you can save valuable time and resources by knowing your corporate tax filing is handled by professionals.

Disclaimer

Please be advised that the conditions specified in the register are subject to revisions based on any modifications made to the schedule of contraventions by the UAE authorities. These revisions may arise due to updates in regulatory requirements, policy amendments, or other factors deemed necessary by the UAE Government.

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Rise of the Activist Investors in M&A 2024: Focus, Strategy, and Impacts

Rise of the Activist Investors in M&A 2024: Focus, Strategy, and Impacts

The landscape of Mergers & Acquisitions (M&A) is undergoing a significant transformation each year. Activist investors, once viewed as peripheral players, have emerged as influential forces capable of reshaping deal dynamics and influencing corporate strategy. M&A activity is no longer solely about maximizing short-term shareholder returns through quick fixes. Today’s investors are increasingly looking for deals that create sustainable value over the long term. This focus on long-term value encompasses factors like a company’s innovation potential, brand reputation, and ability to adapt to changing market conditions. Companies that prioritize these aspects are not only more attractive to investors but are also better positioned to navigate the complexities of the modern business environment.

Who are Activist Investors in M&A?

Activist investors are strategic stakeholders who acquire significant shareholdings in companies with the express purpose of influencing management and direction, particularly regarding M&A activity. Their primary objective is to unlock shareholder value through a variety of means, including advocating for mergers, acquisitions, divestitures, or even opposing deals deemed unfavorable. They leverage their ownership stake to exert pressure on leadership, often resorting to public campaigns to champion their preferred strategies.

Let’s explore a case study on the influence of activist investors and how they created a lasting impact.

Engine No. 1: Investor Activists with an ESG edge

Engine No. 1, a relatively small activist investor group, disrupted the M&A landscape in 2021 by securing board seats at ExxonMobil, a global energy giant. Their audacious campaign transcended the typical focus on maximizing shareholder returns. Engine No. 1 specifically advocated for ExxonMobil to prioritize climate change mitigation strategies, demonstrating the growing influence of activist investors with environmental, social, and governance (ESG) agendas.

This successful campaign underscores a significant shift within the activist investor landscape. Engine No. 1’s win highlights the ability of such groups to exert pressure on companies to adopt sustainable practices, potentially impacting future M&A strategies. Companies engaged in M&A activity may now need to consider not only traditional financial metrics, but also environmental and social responsibility factors when evaluating potential deals. The long-term ramifications of Engine No. 1’s involvement with ExxonMobil remain to be fully understood. However, their success serves as a clear indicator that ESG considerations are becoming a critical component of the activist investor era, potentially shaping the future of M&A transactions.

Activist Investors: Identifying targets and advocating for change

Activist investors are potential targets within the M&A landscape through various approaches. These approaches involve a blend of financial analysis, industry benchmarking, and corporate governance scrutiny:

  • Financial analysis: Activist investors analyze valuation metrics like Price-to-Earnings (P/E) ratios and free cash flow to pinpoint companies trading below their intrinsic value. They seek undervalued companies with the potential for significant performance improvement through strategic changes.
  • Industry benchmarking: They compare a company’s performance to industry leaders, seeking out potential acquirers or restructuring opportunities that could unlock hidden value. This benchmarking exercise allows them to identify companies that may be underperforming relative to their peers.
  • Corporate governance scrutiny: Activist investors assess the effectiveness of the board of directors and management team, identifying areas where leadership may be hindering shareholder value creation. They may scrutinize aspects such as board composition, executive compensation, and strategic decision-making processes.

Once a target is identified, activist investors have a range of tools at their disposal to advocate for change and influence M&A strategy:

  • Shareholder engagement: They engage in constructive dialogue with the company’s board and management, proposing strategic changes and restructuring plans that aim to unlock shareholder value. This collaborative approach can lead to mutually beneficial outcomes for both the activist investor and the company.
  • Proxy contests: They may challenge the existing board composition by nominating their own candidates, aiming to gain greater influence over company decisions, including those related to M&A activity. This tactic can be a powerful tool for forcing companies to consider alternative strategies.
  • Public campaigns: Activist investors leverage media relations to raise awareness of their concerns and garner support from other shareholders, potentially pressuring management to consider their proposals regarding M&A strategy. By bringing public attention to their cause, they can create a groundswell of support for their agenda.

How do Activist Investors impact M&A valuations?

Activist investors are leaving their mark on the world of M&A. Here’s how their involvement can change the game:

  • Bidding wars: Activist campaigns can spark bidding wars between acquirers, driving up the target company’s price. The activist spotlight exposes the target’s potential, attracting new suitors. Pressure on the target’s board to maximize shareholder value makes them more receptive to offers. Strategic bidders may pay a premium to win the deal.
  • Strategic focus: Activist pressure can push companies towards M&A that creates long-term value. This could involve strategic acquisitions for synergies and growth, divestitures of underperforming assets, or improved corporate governance for better value creation. Activist involvement ensures M&A decisions are driven by long-term strategy, not short-term gains.
  • Data-driven approach: Activist investors bring strong financial analysis skills to the table. They scrutinize financials, benchmark against peers, and consider future growth potential. This ensures a more rigorous valuation of the target company, benefiting both the target and the acquirer. Fairer deals are reached based on a clear understanding of the target’s true value.

The future of activist investors in M&A is bright. Expect specialization and collaboration to lead to laser-focused campaigns. ESG will become a core focus, pushing companies towards sustainable M&A strategies. Technological advancements will empower them with sharper insights, while regulatory adaptations will be met with strategic adjustments. Finally, a shared focus on long-term value creation could lead to more collaboration with companies, benefiting all stakeholders.

If you need any assistance with M&A valuation, due diligence and more, choose MS as we can help you to make the whole process seamless and hassle-free.

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Futuristic Finance: The Emergence of Neobanks and Digital Banking in the UAE

Futuristic Finance: The Emergence of Neo banks and Digital Banking in the UAE

Technology has totally changed our lives- everything’s just a tap away now. From entertainment, and healthcare to banking, the digital age has reshaped the landscape. As society increasingly embraces digital solutions, traditional banking models have undergone a seismic shift, more open to digital tools and technologies. Now it’s all about convenience, as banks are jumping into digital options, our phones are becoming our wallets. Thus, the stage is set for the digitalization of finance, where mobile-first approaches and innovative startups are leading the charge, transforming how we save, spend, and invest.

Role of Neo banking in the UAE Economy

Neo-banking is still in its infancy stage in the Middle East, yet its potential in the region is significant, evident from the increasing investment in the sector. COVID-19 accelerated the digital readiness mindset of UAE residents. Regulators are keen to align the UAE’s digital agenda with the country’s banking industry to progress towards a completely digital world. These newly developed digital banks are focusing on streamlining operations to conduct high-volume digital transactions to cater to the rising demand for digitization. Banks are also molding their business strategies to act as a platform to connect various forms of digital transactions.

Digital banking v/s Neo banking

Digital banking and neo-banking are not quite the same. Even though both these mention digital operations, digital banking typically refers to the online services offered by traditional banks, allowing customers to manage their finances digitally.

Neo-banking, however, goes a step further. Neo-banks operate exclusively online, without any physical branches. They often emerge independently or in collaboration with traditional banks.

 Case study – Wio

In the competitive landscape of digital banking within the world, UAE’s Wio Bank has emerged as a notable success story. Established in September 2022, it swiftly garnered attention with its sophisticated app and innovative services. Wio Bank distinguishes itself through a range of customer-centric features, including fee-free international money transfers, zero accounting maintenance fees, early salary access, and an enticing loyalty program. Its inaugural year of full operation in 2023 yielded impressive financial results, boasting a profit of Dh 2 million and revenues totaling Dh266.4 million and in 2024, it Became One of the Fastest ‘Neo-Banks’ Globally to Hit a Profit.

With a strategic focus on digital-first solutions and a commitment to transparency, Wio Bank has attracted discerning consumers and cultivated significant growth. As it continues to expand, Wio Bank is poised to become a premier digital-only banking institution not only in the UAE but globally.

The Future Role of Digital and Neo Banks

The neo-banking revolution has just begun, the emergence of neo-banks and digital banking in the UAE represents a significant shift in the way people access financial services. These changes offer exciting opportunities for individuals and businesses alike. By collaborating with traditional banks, utilizing advanced technology such as AI, and focusing on personalized services, neo-banks are transforming the banking experience. This shift isn’t just about money; it’s about connecting people to a more accessible and convenient financial future. It’s an exciting time, promising a brighter, more inclusive banking landscape for all.

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UAE enters a new era of Tax administration with CIT Return Form

UAE enters new era of Tax administration with CIT Return Form

The United Arab Emirates (UAE) has long been a top choice for businesses seeking a tax-friendly environment. Unlike many countries, the UAE historically boasted minimal taxes, attracting a significant amount of foreign investment. This tax landscape played a major role in establishing the UAE as a global hub for trade and commerce.

In this scenario, the UAE has taken a major step forward in its tax administration with the release of the Corporate Tax (CIT) return form. This mandatory document signifies a new era for businesses operating within the UAE, requiring them to report their taxable income for a specific tax period.

What is the CIT Return Form?

The CIT return form is essentially a report card for businesses in the UAE. It captures a company’s financial health and tax situation for a designated tax period. Businesses are legally obligated to submit this form electronically, no later than nine months from the end of the relevant tax period.

What information does the Form capture?

The CIT return form is designed to be comprehensive, ensuring accurate tax calculations and adherence to UAE tax laws. Here’s a breakdown of the key sections:

  • Taxpayer Information: This section gathers basic details about the entity, including its name, tax registration number (TRN), the tax period being reported, and the accounting basis used.
  • Elections: This section empowers businesses to make strategic choices that can impact their tax liability. Options include opting for Small Business Relief, which offers benefits for smaller companies, or excluding income generated by foreign permanent establishments (PEs) from their taxable income.
  • Financial Summary: This section dives into the company’s financial performance. It captures details like revenue, expenses, Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), and most importantly, the net profit or loss before tax. This data forms the foundation for calculating the CIT liability.
  • Tax Computation: This crucial section takes the financial information from the previous section and factors in exemptions, reliefs, and non-deductible expenses. By applying the relevant tax rates, this section determines the final amount of Corporate Income Tax payable by the company.
  • Additional Information: This section serves as a catch-all for any additional information or supporting documents the tax authorities may require. Businesses should use this space to ensure complete transparency and compliance with UAE tax regulations.

Importance of timely and accurate submission

Filing the CIT return form accurately and on time is not just a formality; it’s a legal requirement. Failure to comply can lead to penalties. The UAE enforces a tiered penalty system, with fines starting at AED 500 per month for late filings during the first year, escalating to AED 1,000 per month thereafter.

The road ahead in the UAE tax landscape

The introduction of the CIT return form represents a significant step in the UAE’s ongoing efforts to build a robust tax infrastructure. This system facilitates businesses in meeting their tax obligations while contributing to the country’s economic development. As a business operating in the UAE, it’s crucial to familiarize yourself with the CIT return form and its requirements. By ensuring timely and accurate submissions, you can guarantee compliance with UAE tax regulations and avoid any potential penalties.

MS for your timely and accurate tax compliance

Our tax team at MS provides a hassle-free solution for all your tax needs. We expertly manage your Corporate Tax, VAT, and ESR to ensure seamless compliance and optimize your bottom line. By staying current with the latest UAE tax regulations, we guarantee accurate filings and minimize your risk of penalties. Our team identifies all available deductions and credits to help reduce your overall tax burden. Furthermore, we offer strategic tax planning advice tailored to your business goals, enabling you to make informed decisions that maximize long-term profits.

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Reduce Risk & Ensure Compliance: How local accounting expertise helps your global business

Reduce Risk & Ensure Compliance: How local accounting expertise helps your global business

The allure of international expansion is undeniable. New markets, increased revenue, and global recognition – these are just some of the enticing possibilities. However, the path to international success is often riddled with hidden complexities, particularly when it comes to accounting and compliance.

This is where the importance of local accounting expertise shines. While venturing into new territories might seem like simply replicating your domestic approach, accounting practices and regulations vary significantly across borders. What works seamlessly in your home country can quickly become a compliance nightmare abroad.

The case study below, using the hypothetical scenario, illustrates the potential pitfalls companies can face due to a lack of local accounting expertise,

Let’s consider the cautionary tale of Company XYZ, a prominent US-based widget manufacturer. Excited about international expansion, they initially attempted to manage their Brazilian venture using their established US accounting practices. This seemingly logical decision proved disastrous. The intricacies of Brazil’s complex tax regulations completely unraveled XYZ’s US-centric accounting system. The result? Miscalculations, missed deadlines, hefty penalties, and even legal issues due to non-compliance.

XYZ’s experience serves as a cautionary tale for companies venturing into international markets. Underestimating the complexities of international accounting can lead to significant financial losses, wasted resources, and missed opportunities. Partnering with local accounting professionals is crucial for ensuring compliance, streamlining operations, and gaining valuable market insights – ultimately paving the way for successful global expansion.

The hidden costs of ignoring local accounting expertise

  • Errors and late submissions: Unfamiliarity with foreign tax laws and reporting requirements can lead to costly errors and missed deadlines. These can result in hefty penalties and damage your company’s reputation for financial responsibility.
  • Inefficient use of resources: Trying to squeeze your international operations into your existing accounting system is a recipe for wasted time and resources. The process becomes cumbersome, requiring significant adjustments and potentially leading to delays.
  • Missed growth opportunities: Without local financial insights, you’re essentially flying blind. You might miss crucial market trends impacting your bottom line or overlook lucrative growth opportunities due to a lack of understanding of the financial landscape.

Achieving clarity with local accounting expertise

Partnering with a local accounting firm is the key to unlocking the true potential of your global expansion. Local accounting professionals possess the deep knowledge and experience necessary to navigate the complexities of international accounting. Here’s how they can empower your business:

  • Assured compliance: Local accounting professionals ensure your financial records adhere to all local standards. This meticulous adherence minimizes the risk of errors and penalties, allowing you to operate with peace of mind.
  • Efficient integration: Seamlessly integrating local accounting requirements with your global ERP system is crucial for smooth and efficient operations. Local experts can bridge this gap, ensuring a streamlined flow of financial data.
  • Valuable insights: Local expertise extends far beyond accounting. Your partners can offer critical insights into local market trends, cultural nuances impacting financial practices, and upcoming regulatory changes. This comprehensive understanding allows you to make well-informed business decisions that are tailored to the specific market.

Investing in local accounting expertise: A tool for global success

By partnering with local accounting professionals, you gain a strategic advantage in the global marketplace. They become your trusted advisors, guiding you through the intricacies of international accounting and empowering you to navigate the complexities of foreign regulations. This investment in local expertise goes beyond just ensuring compliance. It unlocks a treasure trove of valuable market insights, allowing you to make informed decisions, streamline operations, and ultimately achieve sustainable growth in your international endeavors.

Taking the next step of local accounting expertise with MS

Ready to embark on your global journey with confidence?  Seek out MS if you are looking for an accounting firm with a proven track record of serving international businesses.  We align with your company culture and understand your specific industry needs. Investing in our accounting expertise is not just an expense; it’s an investment in the long-term success of your global expansion. With the right partner by your side, you can overcome the complexities of international accounting and unlock the full potential of your global ambitions.

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How ESG in M&A is reshaping the deals around the globe

How ESG in M&A is reshaping the deals around the globe

The world of finance is undergoing a seismic shift. No longer is the bottom line the sole driver of corporate decisions. Today, a new set of factors – environmental, social, and governance (ESG) considerations – are fundamentally reshaping how businesses operate and, crucially, how they approach mergers and acquisitions (M&A). While ESG has been gaining traction for some time, its influence on M&A strategy is becoming undeniable.

Imagine a world where acquiring a competitor isn’t just about market share or immediate profit margins. Imagine a world where factors like a company’s carbon footprint, its commitment to diversity and inclusion, and its ethical sourcing practices play a significant role in determining the value of a potential deal. This is the reality we are hurtling towards, and M&A strategy is at the forefront of this transformation. M&A can be a powerful tool for driving positive change. By prioritizing ESG factors in M&A deals, organizations can contribute to addressing pressing environmental and social issues while reaping the financial benefits of strong ESG performance.

Let’s explore how ESG is reshaping M&A and the implications for businesses considering acquisitions or mergers.

ESG in M&A: Beyond just avoiding risk

Traditionally, M&A has focused on identifying and mitigating risks. While ESG does present some new risks, it also unlocks significant opportunities. Companies with strong ESG performance are attracting premium valuations. For instance, renewable energy providers boasted valuation multiples significantly higher than traditional oil and gas companies in recent M&A deals.

Looking at a target company through an ESG lens can reveal hidden risks beyond the typical financial considerations. These may include physical risks associated with climate change, potential regulatory changes driven by sustainability concerns, or disruptions caused by new climate technologies.

Quantifying the impact of ESG in M&A

It’s been challenging to translate ESG factors into financial terms, making it difficult to account for them in valuations. However, progress is being made. Private equity firms are pioneering new tools and techniques to quantify ESG impacts, allowing for a more holistic understanding of a target’s value.

Long-Term Planning is Key

ESG risks and opportunities often play out over extended timeframes, exceeding the typical time horizons used in M&A models. This necessitates longer-term planning and incorporating ESG factors into valuation models. Analyzing scenarios at potential exit points and factoring in evolving regulations and technologies is crucial.

ESG Due Diligence: A Must-have

The growing importance of ESG necessitates robust ESG due diligence during M&A transactions. This involves assessing a target’s ESG risk exposure, its approach to managing these risks, and potential ESG-related opportunities. Due diligence should encompass traditional areas like labor practices and compliance but also delve into areas like biodiversity and human rights. Standardized metrics for ESG reporting are still under development. However, resources from organizations like the World Economic Forum and the Sustainability Accounting Standards Board (SASB) can provide guidance for due diligence efforts. Additionally, some companies’ CSR and sustainability reports can be helpful resources.

Building ESG in M&A expertise for both buyers and sellers

Given the complexity of ESG issues, businesses may consider establishing dedicated ESG due diligence teams or ensuring all team members have a strong understanding of ESG considerations. A comprehensive due diligence process should analyze the target company, its industry, and competitors.

Sellers can maximize their deal value by proactively evaluating their ESG practices before going to market. Tools like the SASB Materiality Map can help identify key ESG priorities for their industry. Buyers, on the other hand, should establish a framework for prioritizing ESG factors when evaluating potential targets.

Preparing for a Successful M&A Deal with ESG considerations

Several areas require focus during M&A preparation to ensure a smooth and successful transaction for both parties:

  • Governance & Integration: A target’s ESG policies and commitment to sustainability reflect its culture and long-term viability.
  • Past ESG Issues: Addressing past non-compliance or ESG risks helps ensure a successful transaction.
  • ESG Ratings & Standards: Understanding the target’s ESG ratings and frameworks used helps assess its performance.
  • Stakeholder Engagement: Effective engagement with stakeholders on both sides is crucial for a smooth transition.
  • Legal Review: A thorough legal review covering environmental compliance, human rights, labor standards, and other ESG-related areas is essential.

ESG and Valuation: A Clear Connection

Studies indicate that companies with strong ESG records command premium valuations during acquisitions. This is because ESG factors can impact a company’s cash flow through factors like customer attraction, cost reduction, regulatory compliance, talent acquisition, and capital allocation.

The Future of ESG in M&A

ESG’s influence in M&A is steadily increasing. As ESG metrics and valuation tools continue to improve, neglecting ESG considerations will become increasingly untenable. Businesses that proactively integrate ESG into their M&A strategies will be well-positioned to navigate the evolving landscape and unlock the opportunities presented by a more sustainable future.

MS as your partner in M&A deals

MS recognizes the complexities of M&A deals and is here to help you navigate the journey that could jeopardize your deal. Through thorough due diligence, we identify potential risks such as outdated IP or unforeseen liabilities. Our valuation experts ensure you don’t overpay, while our financing specialists take all costs into account to provide a clear financial picture. We assist with integration to minimize disruptions and manage expectations. By meticulously addressing these areas, we empower you to make informed decisions throughout the process, maximizing the value of your M&A strategy.

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Exploring the new possibilities of Corporate Tax in the UAE: Challenges and strategies for success

Exploring the new possibilities of Corporate Tax in the UAE: Challenges and strategies for success

The final call to register with the UAE Federal Tax Authority (FTA) Corporate Tax if your business license was issued in January or February, regardless of the year, is fast approaching. The deadline is May 31st, 2024, and failing to register by this date could result in significant fines up to 10,000 AED. This itself shows the stringent measures UAE is taking to implement a strong tax regime in the country.

The UAE has long been a magnet for businesses thanks to its tax-friendly policies. However, the recent introduction of corporate tax (CT) signifies a shift in the nation’s fiscal landscape. While this new system brings challenges, it also unlocks exciting opportunities for businesses to flourish in a more structured and transparent economic environment. Let’s delve into the implications of UAE corporate tax, exploring both the hurdles and the potential for growth it presents.

Understanding Corporate Tax in the UAE

The UAE’s federal CT system aims to diversify revenue streams and align with global tax transparency standards. Effective June 1, 2023, businesses pay a 9% CT rate on taqxable income exceeding AED 375,000, with income below this threshold remaining tax-free. This move aligns with the UAE’s vision of solidifying its position as a global business hub.

Opportunities for business growth with updated Corporate Tax in the UAE

Strengthened regulatory framework: The Corporate Tax (CT) system fosters a stronger regulatory environment. By adopting internationally recognized tax practices, the UAE enhances its commitment to economic stability and transparency. This attracts global investors seeking well-regulated markets, thereby enhancing business opportunities and growth.

Boosted public spending: Revenue from CT enables the UAE government to invest more in public infrastructure and services. Improved infrastructure, healthcare, and education create a more conducive environment for businesses to operate and expand. These investments likely lead to enhanced economic development and higher living standards, indirectly benefiting businesses across various sectors.

 Incentives in Free Zones: While CT applies to all businesses, Free Zone entities can enjoy tax breaks if they meet specific criteria. These incentives make Free Zones even more attractive for new and existing businesses, providing a competitive edge and stimulating economic activity within these designated areas.

Sustained competitive edge: Despite the introduction of CT, the UAE still boasts one of the world’s lowest tax rates. This positions the UAE as an attractive destination for multinationals and entrepreneurs seeking a favorable tax regime. Businesses can leverage this advantage to attract international talent and investment.

Updated Corporate Tax in the UAE: Challenges for business growth

Compliance and administrative burden: The introduction of CT brings new compliance requirements. Companies must maintain accurate financial records, meet tax filing deadlines, and adhere to the new tax laws. This increased administrative burden can be challenging, especially for small and medium-sized enterprises (SMEs) lacking robust accounting systems.

Impact on profit margins: The 9% CT will reduce net profits for businesses operating in the UAE. Companies will need to re-evaluate pricing strategies and cost structures to maintain profitability. This adjustment period may necessitate strategic planning and financial restructuring.

Navigating complex Tax regulations: The new tax regime includes specific provisions and exemptions that businesses must navigate. Understanding and applying these regulations can be complex, requiring professional guidance. Engaging with corporate tax advisory services can help businesses effectively manage their tax obligations and optimize their tax strategies.

Transitional challenges: Shifting to the new tax regime may present short-term challenges, such as updating financial systems, training staff, and modifying business operations to comply with the new laws. Businesses will need to invest time and resources to ensure a smooth transition.

Strategies for success in the new Tax environment

Here are some key strategies for navigating the new CT landscape:

Comprehensive Tax planning: Businesses should explore tax planning strategies, such as identifying and maximizing tax-deductible expenses, capitalizing on benefits within qualified free zones, and understanding the taxability of their income.

Maintaining accurate Financial Records: Detailed and accurate financial records are essential for error-free tax filing and verifiable compliance. Implementing robust accounting software can streamline tax management processes, saving time and resources.

Leveraging Tax benefits: The CT law offers various tax benefits, such as exemptions, small business relief, and the concept of Qualified Free Zones. Businesses can explore these benefits and align their strategies to claim the maximum advantages available.

Adopting technology solutions: Utilizing cloud-based technology for tax filing, record management, and financial analysis can automate tasks, improve accuracy, and significantly reduce the compliance workload.

Focusing on value creation: Businesses focusing on activities that generate genuine economic value for the UAE, such as innovation, employment generation, and knowledge transfer, will be well-positioned to thrive in this new era.

MS leveraging advisory services for Corporate Tax in the UAE

Given the opportunities and challenges of the new CT regime, businesses in the UAE can significantly benefit from professional tax consultants. The tax experts at MS offer comprehensive advisory services to help businesses navigate the complexities of the new tax environment. By providing expert guidance on compliance, tax planning, and strategic financial management, tax consultants can help businesses optimize their tax position and achieve sustainable growth with new corporate tax regime in the UAE.

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