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How to fulfill De Minimis Requirements for achieving 0% Corporate Tax in UAE Free Zones

Imagine building a thriving business in a tax-free jurisdiction. Sounds ideal, right? For Free Zone Persons in the UAE, this dream can be a reality. 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. To qualify for this tax advantage, certain criteria must be met, including the fulfilment of the De Minimis Requirements.

The De Minimis Requirements

Think of the de minimis rules as walking a tightrope. One wrong step, and you risk losing your tax-free advantage. It’s crucial to balance your income streams to avoid exceeding the de minimis threshold.

Let’s break down these rules and guide you through this challenging landscape.

If a Free Zone Person generates income outside the defined rules of the 0% Corporate Tax rate on Qualifying Income, it will cease to be considered a QFZP unless it meets the de minimis rule.

Revenue not included for De Minimis Requirements

This standard focuses on revenue that arises from transactions with a foreign permanent establishment. The income of a Domestic Permanent Establishment refers to the total income of the foreign company linked with a Domestic Permanent Establishment. It includes:

  • Income from immovable property situated in a free zone (excluding income from the use of land and buildings used for commercial purposes in a free zone for business operations through an agent in the zone when that income is derived from a transaction with a free zone person).
  • Income from intellectual property, excluding qualifying income.

De Minimis Requirements: Tax Implications of Excluded Revenue/Earnings

Income from these sources will be subject to a 9% Corporate Tax rate, unless it is classified as Exempt Income under the Corporate Tax Law. The de minimis rules permit a Free Zone Person to earn a minor percentage of income from Excluded Activities and ineligible sources while still retaining QFZP status, provided the de minimis rule criteria are satisfied.

Understanding the De Minimis Requirements

  1.  De Minimis Threshold

To qualify for the 0% corporate tax rate, a Free Zone Person (FZP) must meet the de minimis threshold. This is calculated as the lower of:

  • 5% of the FZP’s gross income for the tax period
  • AED 5,000,000
  • Revenue Classification

To determine de minimis compliance, an FZP must carefully classify its revenue.

  • Total Revenue: This encompasses all income received during the tax period, excluding contributions from permanent foreign establishments, permanent domestic establishments, and real estate income (except commercial property rentals within the free zone to other FZP’s).
  • Non-Qualifying Income: This includes revenue from:
    • Transactions with non-free zone entities or for non-qualifying activities
    • Transactions with non-beneficial free zone recipients

By accurately categorizing revenue, FZP’s can calculate their non-qualifying income and determine if they meet the de minimis criteria.

Profit Attribution and Exempt Income

Determining the profit attributable to a permanent establishment, whether domestic or foreign, is based on the Arm’s Length Principle. Notably, income generated by exempt persons, such as those in the extractive industry, is excluded from these calculations as they fall outside the scope of the Corporate Tax Law.

Consequences of Non-Compliance

If an FZP fails to meet the de minimis requirements, it will lose its qualifying status and become subject to the standard corporate tax rate of 9%. This change takes effect from the beginning of the tax period and lasts for four years.

To maintain their tax-advantaged position, FZP’s must diligently manage their income streams to ensure non-qualifying income remains below the de minimi

s threshold. By adhering to these guidelines, businesses can avoid the significant tax implications of non-compliance.

UAE Corporate Tax Made Easy with MS

Don’t let the new UAE Corporate Tax system hinder your business growth. MS offers expert tax solutions to streamline the process. Our team of professionals will handle everything from registration to filing, ensuring accuracy and compliance. By entrusting your corporate tax matters to us, you’ll gain valuable time and resources to focus on what truly matters – expanding your business.

Disclaimer: 

Content posted is for informational & knowledge sharing purposes only and is not intended to be a substitute for professional advice related to tax, finance, legal, compliance or accounting. No warranty whatsoever is made in this regard, and it is not intended to provide and should not be relied on for tax/finance/legal/compliance or accounting advice. The content posted is subject to future amendments / changes / clarifications in the regulation by the authorities. For any clarifications, you may contact our finance, tax, compliance, legal team.

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Shaping Economic Progress: A Glance at Dubai’s Tech Sector in H1 2024

120 km/h — that’s the highway road speed limit in Dubai. However, this speed is not confined to the roads; the word “speed” can be synonymous with Dubai itself. The city is more than just a haven of skyscrapers, luxury, and exotic desert landscapes. Its drive for speed and innovation extends well beyond its highways. Through strategic diversification plans, Dubai has emerged as a global tech hub, heavily investing in technology and innovation.

This rapid pace of advancement is reflected in the Emirate’s economic performance. In the first quarter of 2024, Dubai’s GDP grew by 3.2%, a result of substantial investments in emerging technologies. This growth underscores the effectiveness of Dubai’s diversification strategy, which is shifting the focus from oil-dependent revenue to a robust, knowledge-based economy.

The contributing tech factors

DIFC – for all your innovation needs

In a world where innovation is no longer an option but a necessity, the Dubai International Financial Centre (DIFC) has been calling up startups, entrepreneurs and technology firms to get their Tech Innovation License. With subsidized commercial license options, the businesses can have access to DIFC’s exclusive co-working space, and flexi desk.

The DIFC Innovation Licence has built the region’s largest innovation hub, with over 850 firms. By offering a 90% discount on licenses and a flexible platform, it has made the DIFC the go-to marketplace for cutting-edge businesses.

Other freezones

The Dubai Silicon Oasis Authority and other free zones are boosting tech companies, from startups to global giants, with top-notch infrastructure and support. These zones offer perks like 100% foreign ownership, tax breaks, and easy access to markets across the Middle East, Africa, and beyond.

Govt tech initiatives

Dubai Chamber of Digital Economy

The Dubai Chamber of Digital Economy is really boosting the tech scene in Dubai. In the first half of 2024, they helped 215 promising digital startups get started and grow, which is a huge 212% increase from last year. These startups now have a combined market value of about $7 billion. The chamber also trained 243 Emiratis through its ‘Create Apps in Dubai’ program, which shows their commitment to developing local talent. They organized 12 international roadshows to promote Expand North Star, the biggest global event for startups and investors. Plus, they took part in 15 other events, both locally and internationally, to keep pushing Dubai as a top tech hub.

DUB.AI

The Dubai’s Universal Blueprint for Artificial Intelligence was launched as a part of the D33 agenda to increase the emirates economic productivity by 50 per cent. DUB.AI is set to enhance Dubai’s quality of life and well-being through Artificial Intelligence. The plan kicks off with the appointment of Chief A.I. Officers in all government entities. Along with this, a new program will be introduced to attract and support data centres, and a special A.I. company license will be rolled out as a part of this initiative.

The plan is designed to create the best environment for A.I. companies and global talent by improving business operations, offering advanced tech infrastructure, and providing a flexible legal framework. This will help A.I. companies grow, spread the benefits of A.I., and drive progress for a better future.

With a range of proactive initiatives taken by the government, Dubai is poised to continue its pioneering role in the tech sector and remain an attractive destination for tech talent. The city’s rapid advancements in AI, e-commerce, and fintech are not only propelling its own technological growth but also catalyzing significant changes in related industries. This ripple effect creates numerous job opportunities and attracts top talent from around the world, further solidifying Dubai’s position as a leading force in shaping the future of technology on a global scale.

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DIFC Employment Law Update: Big Wins for UAE/GCC National Employees!

The Dubai International Financial Centre (DIFC) is a hive of ambition and opportunity. As a global financial hub, it attracts some of the brightest minds from around the world. Imagine sleek skyscrapers, vibrant networking events, and a dynamic work culture that pushes boundaries. But beyond the glamour, there’s a focus on providing a well-rounded experience for professionals.

That’s where the DIFC’s Employment Law comes in. This legal framework ensures fair treatment, competitive benefits, and a healthy work-life balance for all employees. Recently, in March 2024, the DIFC introduced some key amendments through DIFC Law No. 1 of 2024. Let’s delve deeper into these changes and explore how they further enhance the already impressive work life offered by the DIFC.

According to the recent amendment, DIFC employers must now make “top-up” payments to retirement schemes for their GCC national employees if the standard social security contributions are lower than what they would have received under the old law. This ensures GCC nationals get comparable benefits to non-GCC nationals. The law also covers situations where sanctions prevent contributions, requiring employers to accrue benefits until the sanctions are lifted. Finally, the update strengthens regulatory oversight within DIFC.

Good news for UAE/GCC national employees!

The new law requires DIFC employers to make top-up contributions into a Qualifying Scheme for eligible UAE/GCC national employees. This ensures they receive benefits comparable to non-UAE/GCC nationals, who are subject to mandatory Qualifying Scheme contributions.

How it works:

  • Employers will need to compare the Core Benefits that would be paid to a non-UAE/GCC national with the pension contributions currently being made to the GPSSA on behalf of the UAE/GCC national employee.
  • If there’s a gap (meaning the Core Benefits are higher than the GPSSA contributions), a top-up payment must be made to a Qualifying Scheme.
  • There’s a minimum top-up threshold of AED 1,000 per year for eligible employees.
  • Not complying with this can lead to penalties of up to USD 2,000 per employee.

End-of-service gratuity for sanctioned individuals

The law also clarifies how to handle end-of-service gratuity for employees classified as “Sanctioned Persons” (by the UN, UAE, or any entity managing the Qualifying Scheme). In such cases, employers must accrue these benefits until the sanction is lifted or the employment ends, whichever comes first. Once clear, the employer must transfer the accumulated amount to a Qualifying Scheme or directly to the employee.

What’s next?

  • DIFC employers should review their payroll practices to assess if top-up contributions are needed for their UAE/GCC national employees.
  • For employees impacted by sanctions, employers should start accruing their end-of-service gratuity separately. They are not liable for any investment gains or losses during this period.

Here’s a breakdown of how the DIFC law changes promote fairness, ensure compliance, and benefit businesses:

Fairness:

  • Equal End-of-Service Benefits: The “top-up” payments ensure GCC nationals receive retirement benefits comparable to non-GCC nationals, even though they contribute to a different social security system (GPSSA). This eliminates discrimination based on nationality.
  • Sanctions Protection: The law protects employees even during international sanctions. By requiring employers to accrue benefits during these periods, employees don’t lose out due to factors beyond their control.

Compliance:

  • Clearer Regulations: The amendments address specific scenarios like sanctions, providing clear guidelines for employers to follow. This reduces confusion and the risk of non-compliance.
  • Enhanced Oversight: Expanded powers for the RoC mean stricter enforcement of business regulations. This discourages non-compliance and promotes a fair and transparent business environment.

Benefits for Businesses:

  • Reduced Risk: Clearer regulations and stronger enforcement minimize the risk of legal issues for employers.
  • Talent Attraction & Retention: Offering competitive benefits like equal end-of-service helps DIFC businesses attract and retain skilled GCC nationals.
  • Reputation Boost: Following fair labor practices and complying with regulations enhances a company’s reputation, making it a more attractive employer.

Overall, these changes promote fairness and ensure compliance for DIFC businesses. By taking these steps, DIFC businesses can operate with greater confidence, attract top talent, and contribute to a more stable and fair business environment within the free zone.

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Global Green Leadership: UAE’s Financial Innovation in Sustainability

Who predominantly leads in environmental sustainability and climate actions across the Gulf region? Further out in the desert rises the UAE. Beyond the oil riches and iconic skyscrapers, the UAE is really diving into a journey towards a greener future.

Have you ever wondered how can human settlement make sense in such place? It all comes down to the UAE’s strong commitment to sustainability. The recent study shows that the major cities of the emirates have shifted their long-term focus to sustainability, elevating the nation as a global advocate for environmental stewardship. With the COP28 on the list, the Emirates is outshining the other GCC countries in key areas of environmental progress and sustainability.

UAE’s action towards sustainability

The government is already big on green investment, innovation, and technology, but they’re nudging businesses to get even more creative in these areas. The country excels in infrastructure and transport with substantial investments in mass transit, electric vehicle charging networks, and cleaner port facilities. It has strengthened climate financing regulations and implemented rigorous net-zero reporting and monitoring measures.

There is no pause; the country has also committed $54 billion to renewable energy sources by 2030, taking long steps in clean energy investments. Additionally, the UAE’s pledge of $30 billion to help developing nations transition to clean energy underscores its leadership in regional sustainability efforts.

IFC’s Driving Sustainable Finance Revolution in the UAE

DIFC

The Dubai International Financial Centre’s Sustainable Finance Framework is pivotal for raising capital dedicated to impactful and sustainable projects within its precincts, solidifying its leadership in sustainable finance across the region. By emphasizing transparency and disclosure, DIFC not only showcases proactive measures but also aligns closely with the United Nations Sustainable Development Goals. This framework is instrumental in promoting consistent finance flows essential for sustainable development, reinforcing DIFC’s role as a global financial center committed to driving positive environmental and social change.

ADGM

The Abu Dhabi Global Market’s Sustainable Finance Regulatory Framework enhances its standing as a leading hub for sustainable finance activities. This comprehensive framework includes regulations for sustainability-focused investment funds, bonds, and managed portfolios, alongside mandates requiring ADGM companies to disclose their environmental, social, and governance (ESG) practices. These initiatives are poised to accelerate the development of a robust sustainable finance ecosystem in the region. Furthermore, they play a crucial role in advancing the UAE’s ambitious goal of achieving net zero greenhouse gas emissions.

COP28 – The breakthrough deal in sustainability

COP28, held in Dubai, was a pivotal moment for global climate efforts, culminating in the UAE Consensus—an ambitious framework for sustainable development.

A year since its inception, COP28 continues to make waves. At the eighth Ministerial on Climate Action, Dr. Sultan Al Jaber, COP28 President, underscored the pressing need of putting the UAE Consensus into action for sustainable development. Highlighting significant strides, such as PetroChina’s commitment to emissions reductions, the event underscored increasing global participation in climate action. This is calling upon the nations to strengthen their climate plans, emphasizing the transformative potential of AI in advancing clean energy solutions. Also highlights the need for infrastructure upgrades to meet future challenges sustainably.

Discussions centered on financial reforms crucial for supporting these critical climate initiatives, reflecting COP28’s ongoing commitment to catalyzing global efforts towards a sustainable and resilient future. This ongoing dialogue not only reaffirms the importance of COP28’s outcomes but also underscores the collective responsibility to achieve meaningful progress in addressing climate change.

ALTÉRRA – Redefining corporate sustainability

During COP28, the UAE introduced ALTÉRRA, a US$30 billion initiative in partnership with BlackRock, Brookfield, and TPG. ALTÉRRA aims to mobilize $250 billion for global climate action by catalyzing private finance. It focuses on reducing barriers to investment in under-invested markets such as least developed countries and Small Island Developing States. ALTÉRRA prioritizes energy transition, industrial decarbonization, sustainable living, and climate technologies, aiming to significantly impact global efforts against climate change. It isn’t just shaping the future of green finance, but it’s reshaping our view on the investment itself.

Saudi Arabia’s Green Initiatives

Saudi Arabia’s green financing framework marks a big leap towards sustainability and their goal of achieving net-zero emissions through a circular carbon economy. This framework isn’t just paperwork—it’s a game changer. By laying out clear policies and investment strategies focused on sustainability and preserving the environment, it’s paving the way for investors and businesses across different sectors to get on board. This move shows that the Kingdom is serious about backing up its green ambitions with financial muscle, which not only helps Saudi Arabia but also contributes to the global fight against climate change. It’s a big step towards fulfilling Saudi Vision 2030, ensuring sustainable policies, smart investments, and building eco-friendly infrastructure.

In the UAE, sustainability is not just a trend but a transformative force shaping the future of the nation’s economy and society. By prioritizing energy efficiency and sustainability across sectors, UAE firms are not only differentiating themselves but also creating substantial operational value. They play a key role in innovating solutions for sustainability challenges, with the power to fuel the diversification agenda like no other. As we look ahead, it’s clear: the UAE’s sustainability will not only shape but redefine the future of its trade.

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M&A in Tech Industry: Key Trends and Strategic Moves in 2024

The tech industry is poised for a huge transformation in 2024. Just as the dot-com bubble burst paved the way for industry giants like Google and Amazon in the late 90s, the recent economic headwinds have created a ground for strategic acquisitions. The $69 billion acquisition of Activision Blizzard by Microsoft stands as a testament to this trend, marking a bold move into the gaming industry.

As we try to understand this landscape shaped by inflation, rising interest rates, and geopolitical tensions, the technology sector is experiencing a resurgence of M&A activity. Let’s delve into the key trends driving this dynamic environment.

  • Pent-up Demand: With a receding recession threat, stabilized inflation, and abundant capital, the stage is set for a surge in technology, media, and telecommunications M&A. Corporates are leading the charge, with a notable uptick in mega-deals. Private equity firms, under pressure to deploy capital, are expected to re-enter the fray in the latter part of the year.
  • IPO Resurgence: A buoyant equity market, coupled with improved IPO performance, is signaling a potential revival of the IPO market. While the first quarter of 2024 saw a slowdown, larger IPOs, particularly in the technology sector, indicate a promising trend.
  • AI as a Catalyst: The AI revolution is driving significant investments rather than outright acquisitions. Tech giants like Google, Meta, Microsoft, and Amazon are pouring billions into AI infrastructure, fueling innovation and competition.

M&A in Tech industry: Sector-specific trends

Technology:

  • Strategic Mega-Deals: Corporates are back in the game with a focus on executing growth strategies. The year has already witnessed a surge in mega-deals, setting the stage for a potentially active second half.
  • IT Services Consolidation: Economic headwinds and cost pressures have led to a slowdown in IT services M&A. However, the sector is expected to stabilize as market conditions improve.
  • Semiconductor Dealmaking: Regulatory scrutiny and supply chain resilience are taking precedence over M&A in the semiconductor industry. While deal activity is muted, strategic acquisitions like NVIDIA’s purchase of Run:ai highlight potential opportunities.

Entertainment and Media:

  • Distressed Assets and Restructuring: The industry is undergoing a transformation as companies shift focus from linear models to digital platforms. This is creating opportunities for strategic M&A.

Telecommunications:

  • Delayering and Consolidation: Telecommunication sector is optimizing portfolios and focusing on core competencies through asset sales and mergers. This trend is expected to continue, with infrastructure funds showing keen interest in network assets.
  • Cross-Border Deals: The sector is reassessing its global footprint and exploring opportunities to optimize their portfolios through cross-border transactions.

M&A in Tech industry: What’s next for 2024?

Embrace Complexity

  • Build a Strong Team: Assemble a cross-functional team with expertise in various areas, including legal, finance, operations, and technology.
  • Develop a Comprehensive Plan: Create a detailed roadmap outlining the deal’s objectives, timeline, and potential challenges.
  • Manage Stakeholder Expectations: Effectively communicate with employees, shareholders, customers, and regulators to build trust and support.

Focus on Outcomes

  • Define Clear Goals: Clearly articulate the desired outcomes of the deal, such as market expansion, cost reduction, or technological advancement.
  • Identify Synergies: Analyze how the target company can complement existing operations and create value.
  • Measure Success: Develop key performance indicators (KPIs) to track the deal’s performance and ensure it delivers the expected results.

Position for Long-Term Growth

  • Align with Corporate Strategy: Ensure the acquisition fits with the company’s overall strategic direction.
  • Build a Strong Integration Plan: Develop a comprehensive plan for integrating the target company’s operations, culture, and systems.
  • Foster Innovation: Encourage collaboration between the two companies to generate new ideas and products.

Recognize Transformational Opportunities

  • Identify Disruptive Technologies: Seek out targets that possess cutting-edge technologies or business models.
  • Adopt Cultural Transformation: Be prepared to adapt the company culture to accommodate the acquired business.
  • Leverage Talent Acquisition: Use M&A as an opportunity to acquire top talent and build a stronger workforce.

2024 is shaping up to be a pivotal year for the tech industry, marked by a resurgence of M&A activity and a renewed focus on growth. The confluence of pent-up demand, a stabilizing economy, and the allure of AI is driving strategic deal-making across sectors. While challenges persist, such as economic uncertainties and regulatory complexities, the overall outlook of M&A in tech industry is optimistic in 2024.

MS for M&A in tech industry

The tech industry is undergoing a transformative period, marked by strategic alliances and acquisitions. As the landscape evolves, understanding complex deals requires a strategic partner. MS offers a unique blend of industry expertise and strategic guidance to help tech companies unlock their full potential through M&A. Our services, including valuation and due diligence ensures seamless deal execution and maximum value creation. Let us make the deals work for you.

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CT for ADGM Free Zone: What’s new in Corporate Tax for Al Reem Island Businesses

The Abu Dhabi Global Market (ADGM) is making headlines again with a significant fee reduction for non-financial and retail licenses. Starting January 1st, 2025, businesses can expect cuts of 50% or more! This strategic move aims to streamline the transition of Al Reem Island businesses after its incorporation into the ADGM free zone last year. By revising costs, ADGM hopes to attract a wider range of companies to the region.

The transition of Al Reem island businesses from a mainland to a free zone like ADGM with world-class infrastructure and unparalleled global connectivity offers a lot of advantages. One among these is the corporate tax benefits. Previously under mainland regulations, Al Reem Island businesses couldn’t access the tax benefits of a free zone. Now, with their inclusion in ADGM, everything changes. As a free zone, ADGM boasts a 0% Corporate Tax rate for qualifying activities. This translates to significant tax savings for businesses operating within ADGM, known as Qualifying Free Zone Persons (QFZPs).

The tax advantages extend to:

  • Transactions between QFZPs and other Free Zone Persons (where the other party benefits).
  • Certain activities conducted within the designated free zone areas (including designated distribution zones).

Corporate Tax for Al Reem Island Businesses: Key Requirements

  • Physical Presence: To qualify for ADGM FZ benefits in Al Reem Island, companies must demonstrate a substantive operational footprint. This necessitates maintaining a physical office with dedicated employees, operational equipment, and sufficient expenditure to support your core business activities. While outsourcing is permitted, it must be confined within the Free Zone (Al Reem and Al Maryah Island combined) and conducted with proper oversight to ensure effective control over the outsourced tasks.
  • Qualifying Income Sources: To qualify for the 0% tax rate, the Al Reem Island business must generate income from approved sources:
    • Free Zone Transactions: The majority of your income should stem from transactions conducted entirely within the Free Zone (Al Reem and Al Maryah Island combined). However, these transactions must be out of a specific list of excluded activities, and the company must be the demonstrably true beneficiary of the transactions.
    • Approved Activities & Intellectual Property: Ensure the primary business activities align with the list of government-approved endeavors within the Free Zone (Al Reem and Al Maryah Island combined). Additionally, ownership or utilization of intellectual property that meets the designated criteria can contribute to your eligibility for the 0% tax benefit.
    • De Minimis Rule: The UAE acknowledges that establishing a new business may involve some non-qualifying activities initially. The de minimis rule allows Al Reem Island FZ companies to maintain a limited amount of non-qualifying income (the lower of AED 5 million or 5% of total revenue) without jeopardizing the 0% tax advantage.

Excluded Income Sources for Al Reem Island Businesses:

Certain income sources strictly disqualify an Al Reem Island business from the 0% tax rate. These include:

  • Income generated from outside the Free Zone geographical boundaries.
  • Revenue derived from unrelated property holdings.
  • Income from intellectual property that does not satisfy the qualifying criteria.

Corporate Tax for Al Reem Island Businesses: Compliance and Considerations

  • Standard Corporate Tax vs. Free Zone Benefits: Opting for the standard corporate tax regime automatically disqualifies the Al Reem Island business from the 0% Free Zone tax rate. Reverting back to the Free Zone benefits after this switch comes with a significant waiting period of four years.
  • Arm’s Length Principle: The UAE upholds fair market practices. Transactions between your Al Reem Island FZ company and affiliated businesses should be conducted at arm’s length, reflecting a fair market value for the goods or services exchanged. Documentation demonstrating adherence to this principle is crucial if you have significant transactions with related parties.
  • Financial Recordkeeping: Regardless of your income level, maintaining audited financial statements is a mandatory requirement for retaining your Al Reem Island FZ corporate tax benefits.

By adhering to these essential guidelines, Al Reem Island businesses can unlock the significant advantage of a 0% corporate tax rate and flourish within the ADGM’s dynamic and competitive Free Zone environment.

How can MS help you with Corporate Tax Registration?

MS helps businesses by simplifying the UAE Corporate Tax filing process, ensuring precision and effectiveness. Our team will expertly guide you through every step, from registration to submission. Starting with a comprehensive analysis of your company’s financial position, we’ll accurately assess your taxable income, considering relevant exemptions and deductions. With our support, you can save time and resources, confident that your corporate tax obligations are managed by knowledgeable professionals.

If your existing Al Reem Island business is confused regarding the free zone status after the transition to ADGM, await for our upcoming articles as we break down this for you.

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From DCF to EBITDA Multiples: Here’s how you can pick the Best Business Valuation Method

Have you ever looked at a company and wondered, “What is it truly worth?” Business valuation is the art of uncovering this hidden treasure, a crucial step for both buyers and sellers in the business world. But with so many methods out there, how do you choose the right one?

Let’s explore more about business valuation, equipping you with the knowledge to confidently select the most suitable method for any situation.

The Significance of Business Valuation

Understanding a company’s true value is key for several key reasons:

  • Mergers and Acquisitions (M&A): It ensures you pay a fair price for the target company, preventing overpayment or leaving money on the table.
  • Selling Your Business: It helps you command the maximum value for your years of hard work and investment.
  • Strategic Planning: It empowers you to make informed decisions about your company’s future growth trajectory.

Types of Business Valuations

There’s no magic formula for business valuation. The most effective method hinges on the specific company and its circumstances. Here’s a breakdown of some popular methods and the situations where they excel:

1. Discounted Cash Flow (DCF)

  • What it is: DCF is a popular method that estimates the present value of all the cash flow a company is expected to generate in the future. It considers the time value of money, meaning a dollar today is worth more than a dollar tomorrow.

    Strengths:
  • It focuses on a company’s future earning potential, which is a crucial indicator of value.
  • Relatively flexible, allowing adjustments for growth rates, discount rates, and capital expenditures.

    Weaknesses:
  • Relies heavily on accurate forecasts of future cash flows, which can be subjective and prone to error.
  • Requires a significant amount of financial data and complex calculations.

Best suited for: Companies with stable and predictable cash flows, such as established businesses in mature industries.

2. Capitalization of Earnings (Cap Rate Method)

  • What it is: This method builds on DCF by taking a company’s stabilized earnings (average earnings over a period) and dividing it by a capitalization rate (a rate of return expected by investors).

    Strengths:
  • Simpler to apply compared to DCF, requiring less data and complex calculations.
  • Useful for companies with consistent earnings growth patterns.

    Weaknesses:
  • Ignores the time value of money and future growth prospects beyond the stabilized earnings period.
  • Relies heavily on the chosen capitalization rate, which can be subjective.

Best suited for: Companies with a history of stable earnings and limited future growth expectations.

3. EBITDA Multiple: A Benchmarking Approach

  • What it is: This method multiplies a company’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) by an industry-specific multiple. The multiple reflects the average price-to-EBITDA ratio paid for similar companies in recent transactions.

    Strengths:
  • Quick and easy to apply, requiring readily available financial data.
  • Provides a benchmark for comparison with industry peers.

    Weaknesses:
  • Doesn’t account for a company’s specific financial structure (debt, capital expenses).
  • Relies on the accuracy and representativeness of the chosen industry multiple.

Best suited for: Companies operating in industries with readily available comparable transactions and similar financial structures.

4. Revenue Multiple: A Top-Line Perspective

  • What it is: This method multiplies a company’s revenue by a predetermined multiple based on industry benchmarks.

    Strengths:
  • Straightforward to apply, especially when EBITDA is unavailable.
  • Useful for companies in early stages where profitability may not yet be established.

    Weaknesses:
  • Doesn’t consider a company’s profitability or efficiency (revenue doesn’t translate directly to cash flow).
  • Industry multiples can vary significantly depending on growth potential and market conditions.

Best suited for: Early-stage companies, subscription-based businesses (SaaS), or industries where revenue growth is a primary valuation driver.

Selecting the Right Method for Your Business Valuation

Choosing the optimal valuation method requires careful consideration of several factors:

  • Available Information: Some methods, like DCF, require extensive financial data, while others rely on simpler metrics.
  • Company Type: An asset-light company shouldn’t be valued solely on its net assets. Similarly, a brand-centric company might not benefit as much from DCF compared to a method that considers brand value.
  • Company Size: Generally, larger companies have more valuation options at their disposal, while smaller companies with limited financial data may have fewer choices.
  • Economic Environment: During economic booms, it’s wise to adopt a conservative approach to valuation, acknowledging that economic cycles are cyclical.
  • End User Needs: Understanding their priorities is crucial for selecting the most relevant method like whether they primarily interested in acquiring a company’s tangible assets or its future cash flow generation potential

MS: Empowering Informed Decisions Through Expert Business Valuation in the UAE

At MS, we understand the critical role business valuation plays in securing the most favourable outcomes for your company. Our team of valuation specialists is equipped with the knowledge and experience to implement a range of valuation methods, ensuring we select the approach that best reflects your company’s unique characteristics and industry. Whether you’re considering a merger or acquisition, raising capital, or simply gauging your company’s current standing, we provide comprehensive valuations that go beyond just numbers. We translate complex financial data into actionable insights to make the deals work for you.


Still confused about how valuation works? Unsure which method to choose for your business? Getting the right valuation is crucial to maximizing your profit. Dive into our article to get more insights on what is valuation and why should you value your business. Click Here

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Things to know about Prescribed Company in the DIFC, Dubai

The Dubai International Financial Centre (DIFC) is a leading world-class business and lifestyle destination in the Middle East, Africa, and South Asia (MEASA) region. DIFC has a close to 20-year track record of facilitating trade and investment flows across MEASA. The region comprises 72 countries with a combined population of around three billion people and a nominal GDP of approximately USD 8 trillion. The centre offers a wide range of opportunities for setting up operating, holding, and tech companies for those who are focusing on business success. Among those, the revised regulation for Prescribed Companies is now attracting entities with its peculiarities.

DIFC introduced the Prescribed Company Regulations to supersede and broaden the scope of the previous regulations, the Special Purpose Company Regulations (SPC) and the Intermediary Special Purpose Vehicle Regime (ISPVR) in 2019. As a result of the enactment of the DIFC Prescribed Company Regulations, all Special Purpose Companies under the SPC Regulations were reclassified as Prescribed Companies. A key feature of this new regulation is its flexibility, fostering a business-friendly environment that promotes efficiency in time and cost savings for companies operating within the DIFC.

On July 15th, 2024, DIFC enacted a key amendment in the existing PC Regulations which significantly expand and simplify the current regime in the DIFC. The changes ensure that the companies are used as true holding company vehicles, rather than operational entities.

Now, what exactly is the Prescribed Company?

What is a Prescribed Company in the DIFC?

A Prescribed Company in the DIFC is a private company established under the DIFC Prescribed Company Regulations. It can be set up by a Qualifying Applicant or for a Qualifying Purpose. Qualifying Applicants include DIFC-registered entities, affiliates of such entities, shareholders, ultimate beneficial owners controlling a DIFC-registered entity, authorized firms, funds, UAE government entities, or family-operated businesses.

New PC Regulations Unveiled!

Effective from July 15, 2024, the DIFC has introduced significant updates to its PC Regulations. One among them is the expansion of the eligibility criteria for Prescribed Companies. Previously, eligibility was restricted to specific types of entities (qualifying applicants) and activities (qualifying purposes).

To incorporate or continue a Prescribed Company in the DIFC, applicants must now satisfy one of the following criteria:

1. The Prescribed Company is controlled by one or more:

 a) GCC Persons.

 b) Registered Persons.

 c) Authorized Firms.

2. The Prescribed Company is established or continued in the DIFC for the purpose of holding legal title to, or controlling, one or more GCC Registrable Assets.

3. The proposed Prescribed Company is established or continued in the DIFC for a Qualifying Purpose; or

4. The Prescribed Company established or continued in the DIFC has a director appointed from a DFSA-registered Corporate Service Provider

How Does a CSP Facilitate the Establishment of a Prescribed Company?

Any individual or corporate entity that does not qualify for a Prescribed Company under the qualifying requirements can still establish one, regardless of their country of residence. This is possible if the PC appoints a director who is an employee of a DFSA-regulated CSP. This CSP must also have an agreement with the DIFC Registrar of Companies to undertake specific compliance and AML functions on behalf of the PC.

Key Changes from the Old PC Regime

Previously, the PC regime restricted eligibility to entities with a strong DIFC nexus or those involved in specific qualifying activities, limiting the product’s appeal to the existing DIFC client base. The new regulations have significantly expanded the eligibility criteria, allowing for the formation of PCs under broader circumstances.

DIFC believes these changes will expand the appeal of this vehicle to a global investor base while maintaining necessary ties to the DIFC and GCC. To accommodate potential increased demand, DIFC is enhancing its AML procedures and risk management framework.

What Happens to Existing PCs That Fall Outside the New Regime?

Existing PCs will be restricted to their designated purpose as holding companies, prohibiting employment. This ensures their function as pure holding vehicles. PCs that no longer align with these criteria will benefit from transitional arrangements and a new commercial package offering continued licensing advantages similar to the previous regime. The package, named “Active Enterprise,” provides flexible options and reduced fees for qualifying applicants seeking alternative structures with the option to have employees.

Active Enterprise is a private company that can be established by a Qualifying Applicant. This structure is suitable for Holding Companies, Managing Offices, and Proprietary Investment activities across various sectors such as real estate, agricultural enterprises, management, and healthcare. The package has:

  • Option to have employees: In the case that Active Enterprise or its affiliate has an office in the DIFC.
  • Reduced licensing fees:  USD 100 Application Fee (one time) and an annual commercial license fee of USD 1000 (Data protection fees USD 750 – if applicable).
  • Flexible registered address: An Active Enterprise can have its own DIFC office space, co-working desk, share office space with its DIFC affiliate or, if the entity has no employees, use an appointed CSP’s registered address in DIFC.
  • Common law jurisdiction with independent DIFC Courts
  • Quick and easy, fully digital registration process: In-principal approval may be granted within three business days from the application submission.
  • No attestation is required for corporate documents.
  • Globally competitive and attractive tax regime.
  • Zero currency restrictions and 100% foreign ownership.
  • Zero restrictions on capital repatriation.

Why a Prescribed Company in DIFC?

There are several compelling reasons to opt for a Prescribed Company setup in DIFC:

  • Low-Cost Setup and Maintenance Costs: The cost of setting up and maintaining a DIFC Prescribed Company is considerably lower compared to a standard DIFC operational license.
  • Flexible Office Requirements: Prescribed Companies enjoy flexibility in office arrangements, allowing them to have their own DIFC office space, share space with individuals fulfilling qualifying requirements, or appoint a CSP for registered address services.
  • Favorable Tax Environment: The company benefits from 0% taxation on dividends and qualifying income, along with access to DIFC’s comprehensive network of double taxation treaties.
  • Legal Certainty and Efficiency: Operating within the DIFC’s English common law-based legal system, the company enjoys greater flexibility and innovation compared to other UAE free zones.
  • Fast-Track Application Process: Prescribed Companies benefit from an expedited application process, being exempt from auditing and filing accounts with the DIFC Registrar of Companies.

Exemptions for Crowdfunding and Structured Financing Activities

A Prescribed Company in DIFC with a crowdfunding structure enjoys several exemptions, further highlighting the benefits of a Prescribed Company in DIFC.

  • Crowdfunding Exemptions: A PC with a crowdfunding structure is exempt from the Companies Law requirement to have no more than 50 shareholders. Additionally, if its annual turnover is no more than USD 5 million, it is exempt from the need to prepare and file audited accounts, even if it has more than 20 shareholders.
  • Structured Financing Exemptions: PCs involved in structured financing are exempt from filing and auditing requirements. Furthermore, PCs issuing bonds or sukuk to the public can bypass the usual prohibition against private companies making public offers and the 50-shareholder limit.

Reduced Fees and Cost Efficiency

The PC regime in the DIFC offers a low-cost structure with significantly reduced fees. The application fee is a one-time payment of USD 100, and the annual license fee is USD 1,000. This cost efficiency, combined with the flexibility and exemptions provided by the PC structure, makes it a highly attractive option for businesses seeking a cost-effective entry into the DIFC.

Application Process for the set up of Prescribed Company in the DIFC

DIFC is Ready. Are You?

With the introduction of this new PC regime, DIFC aims to balance requiring substantive economic activity and providing access to flexible corporate structures for legitimate purposes. In the new UAE Corporate Tax era, which addresses substance concerns, the DIFC believes that expanding the PC regime is timely and beneficial.

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AI in M&A: Why AI Might Be the X-Factor in Your Next M&A

From self-driving cars navigating city streets to chatbots that answer your customer service questions, Artificial Intelligence (AI) is rapidly transforming our world. This wave of innovation isn’t stopping at the doorstep of the business world either. Mergers and Acquisitions (M&A), a sector traditionally known for its reliance on experience and intuition, is being reshaped by the power of AI.

The high-stakes world of M&A is about to get a major upgrade with AI. AI is poised to become the secret weapon of dealmakers, transforming the way deals are sourced, analysed, and executed. Forget lengthy due diligence process and gut-feeling decisions – AI promises to inject efficiency and insightful data analysis into every stage of the M&A process.

Let’s explore how AI will revolutionize M&A, from deal discovery to successful integration.

AI in M&A: Enhancing Efficiency and Driving Innovation

AI can significantly enhance efficiency by automating repetitive tasks, analyzing vast amounts of data, and providing valuable insights. Imagine AI-powered tools that can sift through piled documents during due diligence, identify potential risks and opportunities, and even generate draft reports. This frees up dealmakers to focus on strategic decision-making, creative problem-solving, and relationship building – aspects where human expertise remains irreplaceable.

AI can foster innovation in several ways. It can automate document review, data analysis, and risk assessment, allowing dealmakers to focus on decision-making and creative problem-solving. Additionally, AI-powered tools can analyze historical data to identify patterns and predict deal success rates, informing better deal selection and execution strategies.

M&A Deal Phases Poised to Benefit from AI

The potential benefits of AI extend across the entire M&A lifecycle:

  • Developing M&A Strategy: AI can analyze market trends, identify potential targets, and assess strategic fit.
  • Sourcing Targets: AI can search vast databases and identify companies that align with specific criteria.
  • Legal Review: AI can automate contract review, identify key terms, and suggest revisions.
  • Due Diligence: AI can analyze financial statements, identify potential risks, and extract relevant information from contracts.
  • Deep Data Review: AI can analyze vast amounts of unstructured data from various sources to uncover hidden insights.
  • Integration Planning: AI can model different integration scenarios and predict potential challenges.
  • Integration Execution: AI can automate tasks and track progress during the integration process.
  • Deal Postmortem: AI can analyze deal data to identify areas for improvement in future transactions.

AI in M&A: The Transformative Power of AI in Due Diligence

Due diligence, a critical yet time-consuming phase in M&A, stands to gain significant benefits from AI. AI can analyze vast amounts of data from contracts, financial statements, and other sources much faster than humans. This allows for a more comprehensive review, uncovering potential risks and opportunities that might otherwise be missed. AI can also identify patterns and trends in historical data, helping dealmakers predict potential post-merger challenges.

AI and Job Displacement: A Collaborative Future

Concerns about AI replacing human jobs in M&A are understandable. However, AI is more likely to complement and enhance the capabilities of dealmakers rather than eliminate them entirely. Repetitive and mundane tasks will be automated by AI, freeing up dealmakers to focus on higher-value activities that require human expertise, such as negotiation, relationship management, and strategic decision-making. AI will become a powerful ally, augmenting human capabilities and enabling dealmakers to deliver greater value.

Proceed with Caution: Responsible AI Adoption is Key

While the potential of AI in M&A is undeniable, responsible adoption is crucial. Here are some key considerations:

  • Compliance and Risk: Ensure AI tools comply with evolving regulations and mitigate potential risks associated with data security and bias.
  • Human Oversight: Maintain a healthy level of human oversight to ensure the validity and accuracy of AI-generated outputs.
  • Data Security and Privacy: Select AI tools that prioritize data security and user privacy.

Understanding the opportunities and risks associated with AI in M&A is paramount for informed decision-making and successful deal execution.

As AI continues to evolve, dealmakers who embrace this transformative technology will gain a significant competitive edge. By leveraging AI-powered tools and platforms, they can enhance efficiency, streamline processes, make more informed decisions, and ultimately, achieve greater deal success. The future of M&A is here, and AI is at the forefront of this transformation.

MS for Making the Deals Work for You

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ADGM Annual Accounts: Deadlines, Extensions, and Penalties

Operating within the Abu Dhabi Global Market (ADGM) offers a dynamic and internationally recognized platform for businesses. As a premiere international financial centre, companies and Limited Liability Partnerships (LLPs) are required to file annual accounts in the ADGM. These accounts serve a critical purpose: fostering transparency and ensuring compliance with financial regulations.

Let’s explore more about the ADGM Annual Accounts.

What is ADGM Annual Accounts?

ADGM annual accounts are comprehensive financial statements prepared by companies and Limited Liability Partnerships (LLPs) registered under the Abu Dhabi Global Market (ADGM) framework. These accounts adhere to International Accounting Standards (IAS) and provide a detailed picture of the entity’s financial performance and position for the preceding financial year.

Types of Accounts to File

The nature of the accounts you need to submit depends largely on the size and type of your business. Generally, ADGM requires the submission of audited annual accounts, which include:

  • An Auditor’s Report
  • A Director’s Report
  • A Board resolution approving the accounts

Small businesses that qualify under the small company’s regime can file a simplified version of their accounts, including an unaudited balance sheet. To qualify as a small company or LLP, your business must have:

  • A turnover not exceeding USD 13.5 million
  • No more than 35 employees

Public interest entities and financial service providers are excluded from this regime. The unaudited balance sheet must include a statement indicating it has been prepared according to the provisions applicable to small companies.

Filing Deadlines

Every ADGM business has an Accounting Reference Date (ARD) which sets the deadlines for filing. New companies must file their first annual accounts within nine months of their ARD, while existing businesses must adhere to a nine-month filing deadline following their ARD.

Also, the deadlines for filing annual accounts vary depending on the type of company:

  • First Annual Accounts: New companies must file within nine months of their ARD if the financial year is 12 months or less. If the financial year exceeds 12 months, accounts must be filed within nine months of the first anniversary of incorporation.
  • Subsequent Annual Accounts: Existing companies must file within nine months of their ARD for each subsequent year.

For instance, a company incorporated on 11 November 2022 with an ARD of 31 December 2023 must file by 11 August 2024 for its first financial year. For the following year, the deadline would be 30 September 2025. For public companies, the filing period is six months instead of nine.

Filing Procedure

All accounts must be submitted via the ADGM online registry solution. Log into your firm’s account, select “Maintain Company,” and then choose “Lodge Annual Accounts.” Follow the instructions to upload your accounts and any supporting documents. You will receive an automatic acknowledgment upon submission. The Registration Authority may review your accounts before accepting them.

Changing an ARD

Companies can request a change to their ARD, provided they meet the eligibility requirements. This change must be supported by a resolution from the directors and submitted to the Registration Authority. Businesses can change their ARD by notifying the Registration Authority and submitting a supporting directors’ resolution.

Extensions and Penalties for Filing Accounts

In exceptional circumstances, businesses can apply for an extension to the filing deadline, but these applications must be submitted before the original deadline and are evaluated on a case-by-case basis. If annual accounts are not submitted on time, businesses can face penalties of up to USD 15,000.

Detailed Requirements for Annual Accounts

When preparing annual accounts, the following requirements must be met:

  • All accounts must be denominated in USD
  • Balance sheets must be signed by a director, with the director’s name stated
  • For audited accounts, the director’s report must be signed by a director or company secretary, with the name of the signer stated
  • The auditor’s report must include the audit firm’s name and the senior auditor’s name

Filing ADGM annual accounts is not just a regulatory obligation, but a valuable tool for businesses. Timely and accurate accounts increase your credibility with stakeholders, provide insights to guide strategic decisions, and potentially ease access to funding. Moreover, staying compliant with filing deadlines reduces the risk of sanctions and demonstrates your commitment to good corporate governance. By prioritizing early preparation for ADGM annual accounts, you unlock a range of benefits that position your company for success within the thriving Abu Dhabi Global Market.

Disclaimer

*Registered in Abu Dhabi Global Market(RegisteredNo.000007218). We are not an ADGM Registered Corporate Service Provider.