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How ADNOC Got It Right: Lessons in Discount Rate and Risk-Free Rate for Middle Eastern M&A in 2024

Discount Rates and Risk-Free Rate

In recent years, the Middle Eastern market has witnessed an increasing number of deals, driven by government reforms, economic diversification strategies, and a surge in foreign investments. Determining the right discount rate and Risk-Free Rate and accurately measuring industry risk are critical steps in ensuring successful M&A transactions in the region.

A prime example of this is Abu Dhabi National Oil Company (ADNOC), which entered into a strategic $5.8 billion partnership with Italy’s ENI and Austria’s OMV in its refining and trading businesses in 2019. Given the volatility of the oil and gas sector in the Middle East, ADNOC needed to carefully calculate the discount rate to determine the present value of its refining operations. The deal factored in multiple elements including the Risk-Free Rate, Industry Risk, and Country-Specific Risks.

ADNOC’s success in attracting foreign investment and optimizing its asset portfolio illustrates the importance of accurately determining the discount rate and industry risk, particularly in a complex and evolving market like the Middle East.

Let’s explore how concepts of Discount Rate and Risk-Free Rate can be applied effectively in the region.

Understanding the Relationship Between the Discount Rate and Risk-Free Rate:  

The Risk-Free Rate is a critical component in calculating the discount rate. In the Middle East, the risk-free rate often reflects the yield on local government bonds (such as UAE or Saudi Arabian government securities) and treasury bonds for transactions involving international investors. The discount rate, however, goes beyond this baseline rate, incorporating various risk factors pertinent to the Middle Eastern market.

When valuing a company in the Middle East, the discount rate typically includes:

  • Risk-Free Rate: The expected return from an investment with minimal risk of financial loss.
  • Market Risk Premium: Additional return required by investors to compensate for exposure to regional market risks.
  • Country-Specific Risks: Factors unique to the Middle East, such as political stability, currency volatility, and regulatory changes.
  • Industry-Specific Risks: Risks specific to the sector in which the target company operates, which may vary significantly across different countries in the region.

Discount Rate and Risk-Free Rate: Calculating the Discount Rate in the Middle East

Two primary methods are often employed to determine the discount rate and risk-free rate in the Middle East:

  • Capital Asset Pricing Model (CAPM): This model helps estimate the cost of equity, starting with the risk-free rate and adding premiums for market and country-specific risks. In a Middle Eastern context, the Risk-Free Rate may be based on local government bonds or adjusted to reflect geopolitical risks. The beta (β) will reflect the volatility of the company or industry relative to both local and international markets.
  • Weighted Average Cost of Capital (WACC): WACC calculates the overall discount rate by weighing the cost of equity and the cost of debt according to their proportions in the company’s capital structure. In the Middle East, the cost of debt might be influenced by factors like regional credit ratings, interest rate trends, and the overall economic stability of specific countries.

Measuring Industry Risk in the Middle East: Industry risk in the Middle East is shaped by several regional dynamics, from economic diversification policies (like Saudi Arabia’s Vision 2030, and We the UAE 2031) to rapid technological adoption in sectors such as fintech and healthcare.

Here’s how to assess it:

  • Qualitative Factors:
    • Regulatory Environment: Consider regional-specific regulations, such as the UAE’s progressive corporate tax policies or Saudi Arabia’s regulatory reforms to attract foreign investment.
    • Political and Economic Stability: Evaluate how geopolitical events, such as diplomatic relations and regional conflicts, might impact specific industries.
    • Sectoral Growth Trends: Assess government-led initiatives, such as infrastructure development, renewable energy projects, and digital transformation strategies, which may drive growth in specific sectors.
  • Quantitative Factors:
    • Beta Coefficient (β): Obtain beta values that reflect the Middle Eastern market dynamics, using a regional benchmark index like the Tadawul All Share Index (TASI) in Saudi Arabia or the Dubai Financial Market General Index (DFMGI).
    • Industry-Specific Data: Use historical data on default rates, credit spreads, and earnings volatility to understand industry-specific risks.
    • Foreign Exchange Risk: Account for currency risks, especially for industries that rely on imports or exports or have exposure to foreign currency transactions.
  • Start with the Local Risk-Free Rate: Use the yield on local government bonds as a baseline, adjusting for any geopolitical risks or currency considerations specific to the Middle Eastern market.
  • Incorporate Market and Industry Risks: Add the market risk premium, which accounts for the broader market’s volatility, adjusted by the industry beta (β). Factor in specific risks like political instability, regulatory changes, and sector-specific risks that might affect the target company.
  • Calculate the Final Discount Rate: Combine these elements using the CAPM or WACC formulas. The final discount rate should accurately reflect both the baseline risk (Rf) and additional risks unique to the Middle Eastern region.

Combining Risk Free Rate and Industry Risk to Find the Discount Rate: With both the Risk-Free Rate (Rf) and industry risk measures in place, here’s how to use them to calculate the appropriate discount rate for an M&A deal in the Middle East:

In the Middle East, while the Risk-Free Rate provides a baseline, comprehensive discount rate and Risk-Free Rate must account for the region’s unique characteristics. Factors such as geopolitical instability, sector-specific risks, and regulatory changes significantly influence investment returns along with discount rate and Risk-Free Rate. By meticulously integrating these elements, investors can navigate the region’s challenges, make informed decisions, and achieve optimal outcomes in M&A negotiations.

MS offers a unique blend of industry expertise and strategic guidance to help to unlock your full potential through M&A. Our services, including valuation and due diligence ensure seamless deal execution and maximum value creation. Let us make the deals work for you.

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First UAE Corporate Tax Return Filing: Countdown to September 30th, 2024, Begins!

The introduction of Corporate Tax in the UAE had sparked a wave of anxiety among businesses, largely due to confusion and misunderstandings surrounding the new rules.

One of the most prevalent myths is that taxes are only payable from January 1, 2024. However, this is not true for businesses whose first UAE corporate tax return filing period falls between June and December 2023. For these companies, the initial tax return deadline is September 30, 2024, setting a vital benchmark for future filings.

Let’s clear the air and focus on what your first tax period will actually look like and how to effectively prepare.

Understanding Your First Tax Period for First UAE Corporate Tax Return Filing

Since the announcement of the UAE corporate tax law on June 1, 2023, businesses have been through a sea of changes. One area where confusion persists is the ‘tax period,’ which is the financial year or part of the year for which a tax return must be submitted.

Under the law, businesses have some flexibility in defining their financial year. They can align with the Gregorian calendar year (January to December) or select a custom 12-month period that matches their reporting practices. The law applies to all entities incorporated under the UAE Commercial Companies Law, such as mainland companies, free zones, trusts, civil companies, and even foreign entities operating in the UAE through branches or headquarters.

A common sticking point is determining the commencement of the first tax period. For most businesses, this period begins with the first financial year starting on or after June 1, 2023, typically January 1, 2024. However, newly incorporated companies might face more complexity, with their first financial year ranging from six to 18 months.

First UAE Corporate Tax Return Filing: Examples to Illustrate the First Tax Period

To provide more clarity, let’s look at some scenarios:

  1. Company A: Established on February 1, 2023, and aligned with the Gregorian calendar, the initial financial period runs from February 1 to December 31, 2023. However, the first UAE corporate tax return filing period will start on January 1, 2024 – the first financial year beginning after June 1, 2023.
  2. Company B: Incorporated on June 2, 2023, with a financial year from January to December, will see its first tax period run from June 2 to December 31, 2023. The tax return for this period is due by September 30, 2024. This breaks the myth that the first UAE corporate tax return filing is due only by September 30, 2025.

Key Points on Tax Obligations and Financial Year Flexibility

While businesses can choose their financial year, this flexibility does not alter their corporate tax obligations. Whether a company’s first tax period is shorter or longer than 12 months, the AED 375,000 income threshold for the zero percent corporate tax rate remains unchanged. Likewise, the small business relief limit of AED 3 million in revenue still applies. Companies with revenues exceeding AED 50 million must provide audited financial statements, regardless of the length of their tax period.

Additionally, for tax periods shorter or longer than 12 months, certain rules, such as the general interest deduction limitation, adjust proportionately. This ensures fairness in deductions and maintains the integrity of tax calculations.

First UAE Corporate Tax Return Filing: Special Considerations for Non-Resident Entities

The corporate tax law also provides guidance for non-resident persons operating in the UAE through a permanent establishment or dependent agent:

  • Permanent Establishment: For non-residents with a fixed place of business, the first tax period begins six months after the entity has been operational. For instance, a company that began operations on February 1, 2022, and continues past June 1, 2023, would have its first tax period starting from January 1, 2024.
  • Dependent Agents: The tax period for non-residents operating through a dependent agent begins immediately after June 1, 2023. A non-resident agent effective from March 1, 2023, will have its first tax period begin on March 1, 2024.

Foreign juridical persons effectively managed and controlled in the UAE are considered resident persons under the law. A foreign company with a financial year from January 1 to December 31 will have its first tax period starting from January 1, 2024, if managed and controlled in the UAE during this time. Similarly, a foreign entity with a financial year from September 1 to August 31 would have its first tax period starting on September 1, 2023, if under UAE management and control.

Deregistration Requirements

Businesses must deregister for corporate tax if they cease operations due to dissolution, liquidation, or other reasons. However, the expiration of a business license alone does not suffice for deregistration. Even if a company winds down its operations during its first tax period, it is required to register for corporate tax according to the law.

Optimize Your First UAE Corporate Tax Return Filing with MS

Our team at MS provides solutions to your business with its unique tax obligations, from understanding your first tax period to aligning your financial year effectively. We assist with tax registration, compliance, and financial reporting, ensuring your documentation is accurate and submitted on time. With continuous updates and strategic insights on evolving tax regulations, we keep you ahead of the curve, allowing you to focus on growth while we manage your tax responsibilities.

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Dubai Bound? Discover the Fast Track to DIFC Residency

Whether you’re moving here for work, bringing your family along, or setting up a business, getting your visa sorted is a crucial step in making Dubai your home away from home.

As a leading financial centre in Dubai, the Dubai International Financial Centre (DIFC) offers comprehensive visa services tailored to meet the needs of professionals and their families. DIFC makes managing dependent visas straightforward and efficient, ensuring you have the right documentation and support throughout the process.

Let’s walk you through the essential steps and tips to understand the DIFC Residency services seamlessly to help you make the most of your time in this incredible city.

Client Portal for DIFC Residency

The DIFC Client Portal is designed to offer a wide range of online services to entities registered in the DIFC. Through the portal, users can easily access both company and employee services. For instance, the ‘Employee Services’ section allows DIFC entities to manage government service applications, including new employment visas, renewals, cancellations, and more. Additionally, the portal enables the submission of dependent visa packages and other optional services. The first user registered under the entity account is granted Super User privileges, providing them the ability to add or remove users and manage access permissions efficiently.

  • Facilitating the submission of dependent visa packages

For those with ‘Employee Services’ access, applying for dependent visas is a breeze through the portal. Just make sure your portal account has enough balance before hitting that submit button.

  • Avoiding Overstay Fines

To steer clear of overstay fines, submit your visa application at least 10 days before your current visit visa expires or the grace period for a canceled visa runs out. If there’s an overstay fine, your application will be on hold until it’s settled in the client portal.

  • Keeping Track of Your Application

Once you’ve submitted your application, you can keep an eye on its status through the portal. The DIFC Government Services Office will also send you emails and SMS updates when your documents are ready for pick-up or if they need more info.

  • Submitting Your Documents

When uploading documents, make sure they’re clear, colored, and in .jpg format. For passport photos, use a white background and make sure the applicant is facing the camera. If the dependent is under 15, the photo should follow EID guidelines: no teeth showing, no glasses or heavy jewelry, and a clear view of the face.

  • Accuracy is Key

Double-check your application details to avoid any hiccups. The Government Services Office isn’t responsible for errors if the information provided is inaccurate and the information is kept confidential.

  • Picking Up Your Documents

Original passports will only be handed over to the appointed consignee or company PROs, as per DIFC’s security policy. If someone else needs to collect the documents, make sure to send an authorization email from the registered portal user to gs.helpdesk@difc.ae.

  • Handling Service Requests

Be aware that any service requests with pending information or documents for over six months will be deleted, and unfortunately, there won’t be a refund for the service fee.

  • Fees and VAT

Some dependent visa applications might have VAT added. Don’t worry—a detailed tax invoice will be emailed to you once you’ve submitted your service request.

  • Office Hours

The DIFC Government Services Office is open Monday to Friday, from 8:00 AM to 3:00 PM. They take a break during Friday prayers from 1:00 to 2:00 PM, and they’re closed on public holidays.

In wrapping up, making Dubai your home is just a visa away! The DIFC offers an efficient gateway to living and working in this dynamic city, with straightforward processes to ensure a smooth transition. By following the tips and leveraging the services available, you can avoid unnecessary headaches and focus on what truly matters—embracing your new life in Dubai.

MS for DIFC Residency Services

MS is a registered corporate service provider in DIFC with a dedicated team ensuring that every aspect of the DIFC residency application is handled with precision and care. From guiding you through the documentation requirements to managing compliance with DIFC regulations, we provide comprehensive support throughout the entire process. Our goal is to simplify your journey, whether you’re seeking to establish a new business or relocate your workforce, ensuring a smooth and efficient experience in Dubai’s premier financial hub.

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From Record-Breaking 1.4 Trillion Non-Oil Trade to Ambitious 4 Trillion! Read the UAE’s H1 2024 results

Amidst global unrest and conflicts, including the ongoing Israel-Palestine crisis, the UAE stands out as a pillar of economic strength and stability.  The country is well-positioned to maintain its momentum in global trade, serving as a crucial link between East and West, as well as North and South. Its remarkable non-oil trade figures further highlight its growing influence and resilience in a time of significant change.

The UAE’s Exceptional Growth in Non-Oil Trade Figures

In the first half of 2024, the UAE achieved record-breaking non-oil trade figures, reaching AED 1.4 trillion ($381 billion). This remarkable performance not only surpasses the annual export figures from before the COVID-19 pandemic but also puts the country on track to achieve AED 3 trillion ($817 billion) in non-oil trade by the end of the year.

  • Non-Oil Exports: AED 345.1 billion ($94 billion), reflecting a significant 25% growth.
  • Non-Oil Imports: AED 800 billion ($218 billion), showcasing an 11.3% increase.
  • Re-Exports: AED 345.1 billion ($94 billion), with a 2.7% increase from the previous year.

The UAE Strengthening Global Trade Relations

As the global trade landscape evolves, it is increasingly shaped by structural changes in the world economy and society. Advances in technology, shifts in manufacturing centers, changing consumer preferences, demographic trends, and geopolitical developments are all driving significant transformations in how and where trade occurs.

The UAE has taken centre stage when it comes to the bilateral trade. One clear example of this is the UAE’s relationship with India. The UAE isn’t just a major trading partner for India; it’s also a vital gateway for Indian exports. This is reflected in the 10% increase in trade between the two countries.

But it doesn’t stop there. The UAE is also strengthening its trade ties with other important partners. Trade with Türkiye has grown by 15%, highlighting a solid economic partnership. Even more impressive is the 41% jump in trade with Iraq, which has now become the UAE’s top destination for exports. This showcases the transformative impact of the Comprehensive Economic Partnership Agreements (CEPA).

UAE’s non-oil trade and diversification

The UAE has long been a leading force in global trade largely due to its abundant natural oil reserves. With the sixth-largest oil reserves in the world, this strength has consistently positioned the UAE as one of the key players in international trade.

However, the UAE is now shifting gears and focusing more on non-oil trade. With the current H1 trade results, the country has set impressive new records and shown significant growth in this area. While it continues to benefit from its oil resources, the UAE is making a full-throttle push into non-oil sectors, demonstrating its ability to diversify and excel across a broader range of industries. It’s a clear sign that the UAE is not just resting on its oil-rich past but is actively shaping a broader, more dynamic future in global trade.

The emirates’ contributions to making the UAE a leading force in global trade are substantial. Abu Dhabi has broken a 10-year record for non-oil GDP in Q1 2024, driven by growth in sectors such as construction, finance, transport, manufacturing, and telecommunications with key contributions from Abu Dhabi Global Market (ADGM).

Meanwhile, Dubai continued its steady economic growth in Q1 2024, with positive performance across sectors including transportation, finance, real estate, and information and communication. The Dubai International Financial Centre (DIFC) delivered exceptional results in H1 2024, reinforcing Dubai’s role as a hub for innovation and business growth.

UAE’s trade vision: how the emirate’s aims for AED 4 trillion by 2031

As we look to the future, the UAE has set an exciting goal: reaching AED 4 trillion ($1.1 trillion) in annual foreign trade by 2031. Given the impressive progress we’ve already seen in 2024, it’s clear that this target is well within reach. The UAE is committed to expanding its trade network and building even stronger international relationships, which is driving its continued economic success. With these strategies in place, the UAE is well-positioned to achieve its ambitious goals and thrive in the years ahead.

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ADGM Annual Accounts Compliance Requirements You Should Know

As a world-class international financial centre, Abu Dhabi Global Market (ADGM) has set a high bar for corporate governance, transparency, and financial reporting. Companies operating within ADGM are required to meet stringent standards to maintain their good standing and ensure that their financial statements reflect accuracy, accountability, and integrity.

When it comes to preparing your company’s annual accounts, getting the numbers right is just the beginning. From currency denomination standards to ensuring the right signatures are in place, each compliance detail plays a crucial role in shaping the accuracy, credibility, and reliability of your financial reporting. Whether you’re a startup or an established enterprise, meeting these key requirements isn’t just compliance —it’s about building trust with investors, aligning with international standards, and setting the stage for future growth.

Explore the key aspects of ADGM annual account compliance requirements.

1. Currency Denomination: Accounts Must Be in USD

One of the fundamental requirements for preparing annual accounts is that all financial statements must be denominated in U.S. Dollars (USD). This standardization ensures consistency and comparability, particularly for companies that operate across borders or engage with international stakeholders. Presenting accounts in USD helps to avoid currency translation issues and provides a clearer picture of financial performance on a globally recognized scale.

Key Points to Consider:

  • Consistency: All transactions, assets, liabilities, income, and expenses should be recorded in USD.
  • Conversion Rates: For companies dealing in multiple currencies, it’s essential to use consistent exchange rates and disclose the rates used in the notes to the accounts.
  • Regulatory Compliance: Adhering to USD denomination aligns with international accounting standards, particularly for companies registered in jurisdictions that mandate USD for financial reporting.

2. Balance Sheet Signatures: Director’s Responsibility

The balance sheet is one of the most critical components of the annual accounts, providing a snapshot of the company’s financial position at a specific point in time. To ensure accountability and authenticity, the balance sheet must be signed by a director of the company, with the director’s name clearly stated. This requirement highlights the director’s role in overseeing financial accuracy and attests to the reliability of the information presented.

Key Points to Consider:

  • Legal Accountability: The director’s signature on the balance sheet signifies that the accounts have been reviewed and approved by the company’s management.
  • Transparency: Including the name of the signing director fosters transparency and reinforces stakeholder confidence in the company’s financial disclosures.
  • Documentation: The signed balance sheet should be properly archived as part of the company’s official records.

3. Audited Accounts: Director’s Report Signature

For audited accounts, the Director’s Report is a critical narrative that accompanies the financial statements, providing insights into the company’s performance, strategy, and outlook. This report must be signed by a director or the company secretary, with the name of the individual clearly stated. This requirement ensures that senior management takes ownership of the content, emphasizing the importance of the report in providing context to the figures presented.

Key Points to Consider:

  • Clarity and Accountability: The Director’s Report outlines the key activities, risks, and governance matters of the company, and its authenticity is validated through the signature.
  • Insightful Information: It provides shareholders and other stakeholders with a comprehensive view of the company’s operations beyond the numbers.
  • Compliance: The signature requirement ensures that the report complies with relevant corporate governance standards.

4. Auditor’s Report: Naming the Audit Firm and Senior Auditor

The Auditor’s Report is a crucial element of the annual accounts, offering an independent evaluation of the company’s financial statements. This report must include the name of the audit firm and the senior auditor responsible for the audit. Naming the audit firm and the senior auditor adds credibility to the financial statements and assures stakeholders of the rigor of the audit process.

Key Points to Consider:

  • Independence and Assurance: An external audit provides independent verification of the company’s financial statements, enhancing their credibility.
  • Transparency: Naming the audit firm and the senior auditor offers transparency and accountability, especially in case of any discrepancies or audit qualifications.
  • Professional Standards: The inclusion of the audit firm and auditor’s names aligns with international auditing standards and fosters trust among investors and regulators.

Ensuring ADGM Annual Accounts Compliance with Expert Guidance from MS

Understanding the complexities of ADGM annual accounts compliance requirements can be daunting, but MS is equipped to make the process seamless and stress-free. At MS, we offer specialized support to help your company meet all ADGM compliance standards for annual accounts preparation. With our comprehensive approach, you can avoid compliance pitfalls, streamline your annual reporting, and strengthen the credibility of your financial statements. Trust us to be your partner in compliance, ensuring that your ADGM annual accounts are prepared with precision and in full alignment with regulatory expectations.

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M&A in the UAE Healthcare Sector: Why is it so Appealing Sector in 2024?

M&A in the UAE healthcare sector is on an ever-best surge- Experts all over the world write and speak across the news and columns. But what happened behind the scenes in its run to 2024?

The United Arab Emirates (UAE) has emerged as a global healthcare hub, characterized by its rapid growth, advanced infrastructure, and increasing reliance on technology. This transformative landscape has ignited a surge in Mergers and Acquisitions (M&As) within the region. The Emirates of Dubai and Abu Dhabi have taken the lead, driving the sector’s expansion and solidifying healthcare as one of the UAE’s most rapidly growing industries. As healthcare providers seek to expand their reach, enhance capabilities, and capitalize on emerging trends, strategic partnerships, and acquisitions have become essential tools for growth.

The Rise of M&A in the UAE Healthcare Sector

M&A in the UAE’s healthcare sector has gained momentum, particularly in HealthTech and MedTech assets. Investment firms have recognized the potential in these areas, leading to a shift from provider consolidation to strategic asset acquisition. As corporations re-evaluate their business strategies, healthcare sector investments are being approached with caution but with a clear focus on long-term value.

In the short to medium term, several regions in the UAE are expected to become M&A magnets within the healthcare industry:

  • HealthTech Tools: To address critical challenges, improve employee performance, and optimize processes, healthcare providers are increasingly turning to HealthTech tools such as artificial intelligence (AI), analytics, and cloud technologies.
  • Telehealth: Telehealth is a way to receive healthcare services remotely through electronic devices like your computer, tablet, or smartphone. While still a modest component of most healthcare solutions, telehealth is gaining traction as providers explore specific areas where it can enhance existing capabilities.
  • MedTech Services: As MedTech services evolve from experimental to mainstream, providers are incorporating these services to improve patient care. Leading institutions are expected to build their value propositions around a combination of skilled physicians and comprehensive MedTech support.
  • Value-Based Care: Relevant partners are continuing efforts to standardize practices to support value-based care, aiming to improve patient outcomes while managing costs.

Looking ahead, M&A in the UAE Healthcare Sector is expected to see more decisive transactions, with sustained growth in the tech-enabled health sector. The future of healthcare M&A in 2024 is all with opportunities and challenges. Investment funds are likely to play an increasingly vital role by taking dominant positions in HealthTech assets. As the fundamental pillars of the industry remain strong, the forecast for M&A activity in the UAE remains favorable.

Understanding Regulatory Challenges of M&A in the UAE Healthcare Sector

Despite the continued activities around M&A in the UAE healthcare sector, several challenges persist, particularly on the regulatory front. These challenges can significantly impact the success and execution of M&A deals, requiring businesses to have a thorough understanding of the regulatory landscape.

Successful healthcare M&A deals necessitate proactive planning and effective communication with regulatory authorities. Legal and compliance teams play a crucial role in navigating these challenges. Key regulatory hurdles include:

  • Market Competition: Regulatory authorities closely scrutinize M&A transactions to protect market competition, preventing deals from giving any single entity excessive control. The UAE’s recent enactment of Federal Decree-Law 36/2023 on the Regulation of Competition took effect on January 31, 2024, and represents a comprehensive overhaul of the country’s competition regime.
  • Licensing Compliance: With more M&A deals involving the transfer of licenses or changes in ownership of healthcare facilities, compliance with licensing requirements is crucial.
  • Pharmaceutical Regulatory Approval: For pharmaceutical companies, gaining regulatory approval for drug pipelines and ensuring post-merger compliance with drug safety regulations are essential.

Embracing a Programmatic Approach to M&A

A broader trend in the healthcare and life sciences industry involves adopting a programmatic approach to M&A. This strategy entails executing a steady stream of relatively small, strategic transactions, such as acquisitions to fill gaps in portfolios or entering promising new market segments. This approach has also seen firms divest underperforming parts of their business to maximize profitability.

For instance, 3M, a significant player in the healthcare field globally, exemplifies this programmatic approach through continuous innovation and strategic investments. The company focuses on reducing the weight of power lines, automating healthcare data, and helping manufacturers achieve more with less. Life Sciences, a company providing automation and innovative solutions for various scientific fields, identifies complementary technologies or research capabilities to enhance its portfolio, remaining open to strategic partnerships and acquisitions.

A programmatic approach enables companies to proactively shape their business portfolios, creating the most value across industries. Companies in the UAE will continue tackling challenges while seeking growth opportunities in this dynamic economic landscape to support the expected continuation of M&A activity in the second half of 2024.

What Grabbed the Headlines in the Last Two Years of M&A in the UAE Healthcare Sector?

  • M42 Joint Venture: Formed by Mubadala’s healthcare division and G42, M42 focuses on using AI and technology to enhance healthcare delivery and precision medicine in the UAE and beyond.
  • Aster DM Healthcare Expansion: Aster announced expansion plans across the UAE and GCC, focusing on integrating digital health solutions to improve patient care and accessibility.
  • Pure Health and SEHA Merger: Pure Health merged with SEHA and Daman, creating one of the largest healthcare platforms in the region, aimed at streamlining healthcare delivery and improving patient outcomes.

The USD 232 million deal was closed with a significant EBITDA multiple of 10.5. Other key deals include ADQ’s merger of its healthcare entities Rafed and Union71 with Dubai-based Pure Health, Yas Holding’s acquisition of Geltec Healthcare FZE (part of a renowned pharma and nutraceutical group) and International Holding Company (IHC) acquiring a 40% stake in Response Plus Medical Services (RPM), a unit of VPS. 

The Growing Demand for Business Valuation and Due Diligence Services

With numerous healthcare enterprises establishing their foundations in Dubai and Abu Dhabi, the need for business valuation and due diligence services is becoming increasingly critical. The shift in focus and the rising activity within the sector globally have heightened the demand for accurate valuations and thorough due diligence processes. This trend underscores the importance of these services in facilitating successful M&A transactions.

MS can help you with this. Our expertise ensures that you have the insights and guidance needed to tackle the complexities of business valuation and due diligence, allowing you to focus on the bigger picture – your business’s success. Let’s make the deals work for you.

Connect with our M&A team through LinkedIn – Click Here

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Transfer Pricing Adjustments in the Age of Pillar Two: Is it a new challenge to tackle for MNEs?

In 2016, Apple Inc. found itself at the center of a high-stakes tax controversy that captured global attention. The tech giant faced scrutiny from the European Commission over its Transfer Pricing practices and tax arrangements with Ireland. The investigation revealed that Apple had been allocating a substantial portion of its profits to Irish subsidiaries, benefiting from a favorable tax rate that was considerably lower than those in other jurisdictions. This strategy, while legal at the time, raised questions about profit shifting and tax base erosion.

The case was a landmark moment, underscoring the relation between Multinational Enterprises (MNEs) and international tax regulations. It led Apple to overhaul its Transfer Pricing policies to align with the OECD’s BEPS guidelines, ensuring greater transparency and compliance with global standards.

Fast forward to today, and the global tax landscape is evolving once again with the OECD’s Pillar Two GloBE rules introducing a global minimum tax rate of 15%. For MNEs operating in the UAE, understanding how these new rules intersect with UAE Federal Corporate Tax is not just important—it’s essential.

As MNEs operating in the UAE confront the evolving global tax landscape, understanding the intersection of OECD Pillar Two GloBE (Global Anti-Base Erosion) rules and UAE Federal Corporate Tax is crucial. These rules, part of the Base Erosion and Profit Shifting (BEPS) project, set a global minimum tax rate of 15% to combat profit shifting and tax base erosion. For MNEs in the UAE, the close association between Transfer Pricing rules and UAE Federal Corporate Tax brings both opportunities and challenges.

The Interplay Between Transfer Pricing Adjustments and UAE Federal Corporate Tax

In the UAE, Transfer Pricing adjustments are vital for ensuring that transactions between related parties reflect arm’s length pricing, in line with both UAE Federal Corporate Tax and international standards. The introduction of Pillar Two further adds a layer to this landscape:

Timing of Transfer Pricing Adjustments

  • Post-Year-End Adjustments: MNEs in the UAE often make adjustments after the financial year-end to align their results with Transfer Pricing policies. Under Pillar Two, these adjustments must be booked in the fiscal year to which they pertain or the year in which they were made. This requirement aligns with the UAE’s Federal Corporate Tax regulations, which also demand accurate reflection of financial results in tax returns.
  • Low-Tax Jurisdictions: Historically, the UAE’s favorable tax environment has been seen as a low-tax jurisdiction. Under Pillar Two, there is increased scrutiny on Transfer Pricing adjustments in such jurisdictions. The UAE’s Federal Corporate Tax framework, which adheres to the arm’s length principle, must be carefully integrated with the GloBE rules to avoid potential disallowance of adjustments and double taxation risks.
  • Double Taxation Risks: Adjustments made after filing the GloBE Information Return (“GIR”) can complicate dispute resolution. For UAE-based MNEs, this means navigating potential double taxation if income is reallocated from the UAE to higher-tax jurisdictions. The UAE’s corporate tax regime and its alignment with global standards play a critical role in managing these risks.

Strategies for Managing Transfer Pricing Adjustments in the UAE

To address the challenges posed by Pillar Two and ensure compliance with UAE Federal Corporate Tax regulations, MNEs should adopt the following strategies:

1. Creating a Robust Transfer Pricing Policy

  • Alignment with UAE Federal Corporate Tax: Ensure Transfer Pricing policies are consistent with UAE regulations and international standards. The UAE Federal Corporate Tax rules emphasize the arm’s length principle, which should be reflected in the global Transfer Pricing policy to avoid discrepancies with tax authorities.
  • Regular Monitoring: Regularly update Transfer Pricing policies and documentation to align with both UAE Federal Corporate Tax requirements and Pillar Two rules. This practice supports compliance and mitigates risks associated with post-year-end adjustments.

2. Timing of Adjustments

  • Proactive Adjustments: Make Transfer Pricing adjustments contemporaneously with transactions to reduce discrepancies between financial accounts and tax returns. For UAE-based MNEs, timely adjustments are crucial for aligning with both local tax regulations and Pillar Two requirements.

3. Alignment with Financial Reporting

  • Collaboration with Financial Reporting Teams: Ensure that Transfer Pricing adjustments are accurately reflected in consolidated financial statements. Accurate reporting in line with UAE Federal Corporate Tax and GloBE rules is essential for determining the correct GloBE ETR.

4. Seeking Advance Certainty

  • Advance Pricing Agreements (APAs): Utilize APAs to gain certainty on the arm’s length nature of transactions. In the UAE, bilateral or multilateral APAs can help mitigate disputes and ensure that Transfer Pricing adjustments are recognized by UAE tax authorities and other jurisdictions.

The close association between Transfer Pricing rules and UAE Federal Corporate Tax underscores the importance of a well-coordinated approach for MNEs. By aligning Transfer Pricing policies with UAE regulations, managing the timing of adjustments, ensuring accurate financial reporting, and seeking advance certainty through APAs, MNEs can navigate the complexities introduced by OECD Pillar Two effectively. Embracing these strategies will help MNEs comply with both local and global tax requirements, ensuring a smooth alignment with the new international tax standards and minimizing potential risks.

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What is the UAE Corporate Tax Exempted Incomes? Find Here!

The UAE’s corporate tax landscape has undergone significant changes, making it essential for businesses to understand the nuances of the new regulations. With the stakes high, non-compliance can lead to substantial penalties.

One of the most crucial aspects of corporate tax regulations is identifying and leveraging available exemptions. The UAE government has outlined specific exemptions for certain types of income and entities, which can significantly reduce tax burdens.

Upcoming CT Deadline: Don’t Miss It!

Before diving into the specifics of corporate tax exempted incomes, it’s crucial to remind you about an important upcoming deadline. If your Resident Juridical Person’s license was issued in June—regardless of the year—you have until 31 August 2024 to submit your Tax Registration application. Missing this deadline could result in late registration penalties, which can have a financial impact on your business. This deadline is just one example of why staying on top of your tax obligations is so important.

Corporate Tax Exempted Incomes: What You Need to Know

While CT registration is mandatory for all businesses, not all income is subject to taxation. The UAE government has outlined specific exemptions that certain businesses and individuals may qualify for. Understanding these exemptions can save you time, effort, and money.

Here’s a concise overview of the Corporate Tax Exempted Incomes:

1. Individuals Earning Employment Income

One of the most common sources of income, salaries, and other employment-related income from both public and private sectors are not subject to corporate tax. This exemption means that individuals working as employees will not see any changes to their tax obligations, as their employment income is not taxable under the corporate tax regime.

2. Passive Income Earners

If you’re earning passive income from sources such as interest, dividends, capital gains, or other investment returns from personal savings or investments, you are exempt from corporate tax. This exemption is particularly beneficial for individuals who rely on investments for income rather than traditional employment, allowing them to continue growing their wealth without the burden of additional taxes.

3. Foreign Investors

The UAE has always been an attractive destination for foreign investors, and this continues under the corporate tax framework. Income generated by foreign investors from dividends, capital gains, interest, and royalties remains non-taxable under UAE corporate tax. This exemption helps maintain the UAE’s competitive edge as a global investment hub, encouraging further foreign investment in the country.

4. Extractive Industries

Businesses involved in the extraction of natural resources, such as oil and gas companies, are governed by Emirate-level taxation. These entities are exempt from federal corporate tax, ensuring that their taxation remains within the jurisdiction of the individual Emirates. This exemption recognizes the unique nature of the extractive industries and the significant role they play in the UAE’s economy.

5. Qualifying Public Benefit Entities

Public benefit entities that meet specific criteria are also exempt from corporate tax. These entities typically include organizations that serve the public good, such as charities and non-profits. By exempting these entities, the UAE government supports the continuation of their vital work without the added financial burden of corporate tax.

6. Government and Government-Controlled Entities

Entities that are wholly owned by the government or are controlled by it are not subject to corporate tax. This exemption ensures that government-related activities can continue uninterrupted, supporting the broader economic and social objectives of the UAE.

7. Free Zone Businesses

The UAE’s Free Zones have long been a major draw for businesses due to their favorable tax regimes. Under the new corporate tax laws, certain businesses operating in Free Zones may continue to enjoy tax exemptions, provided they qualify as “Qualifying Free Zone Persons” and do not engage in business activities within mainland UAE. This exemption maintains the Free Zones’ attractiveness to businesses looking for a tax-efficient environment.

Next Steps: Ensure Compliance and Avoid Penalties with MS

Corporate Tax Exempted Incomes are one key aspect of UAE Corporate Tax Regulations. Also, understanding various aspects of corporate tax can be challenging, especially when it comes to determining whether your business qualifies for an exemption. If you’re unsure about your eligibility or need assistance with the registration process, our team of experts at MS is here to help. We can guide you through the necessary steps to safeguard your business and ensure you remain compliant with all applicable tax regulations.

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What Should Companies Focus on for a Successful ADGM Annual Audit?

ADGM Annual accounts

Today, compliance is far more than a box to tick. Companies that master the art of regulatory adherence don’t just avoid penalties; they thrive, gaining the trust of stakeholders and reinforcing their reputation in a competitive landscape. Compliance, especially in financial reporting, demands a sharp eye for detail and a forward-thinking strategy, turning what may seem like an obligation into a powerful tool for growth.

At the forefront of regulatory adherence is the Abu Dhabi Global Market (ADGM), a visionary force in the UAE known for its rigorous standards and commitment to transparency. For companies and LLPs registered under ADGM, the preparation of annual accounts is not just a routine task. These financial statements, thoroughly prepared in line with International Accounting Standards (IAS), provide a clear lens into a company’s fiscal health, offering critical insights for both internal decision-makers and external stakeholders.

With the September 30th deadline for submitting these accounts fast approaching, businesses must understand the audit process with care and precision, ensuring that their financial records not only meet ADGM’s regulatory requirements but also stand as a testament to their financial integrity.

In light of the RA’s 2023 assessments, it is crucial for company directors, especially those serving on audit and risk committees, along with audit partners, to carefully scrutinize and approve the ongoing audit work on company accounts.

Accurate, timely, and insightful corporate reporting is fundamental to the proper functioning of capital markets, investor confidence, and the protection of public interests. The RA places a strong emphasis on high audit quality as a regulatory priority and may hold audit firms, audit principals, and company directors responsible for any deficiencies in the preparation or auditing of financial statements.

Key Findings by ADGM Annual Audit 2023 on How Audits Can Go Wrong

ADGM’s commitment to maintaining a strong regulatory environment extends to its audit requirements. Companies must align their audit practices with ADGM’s stringent standards, which prioritize several key areas:

  1. Tailored Audit Approaches: One of the most critical aspects of an ADGM audit is the use of methodologies tailored to incorporate ADGM’s specific requirements. Limited or improper application of these methodologies can lead to significant gaps in the audit process, particularly concerning financial statement disclosures. Utilizing a financial statement disclosure checklist that factors in ADGM requirements is essential for ensuring accuracy and completeness.
  2. Strategic Audit Planning: A well-structured audit begins with strategic planning. However, common issues such as inadequate understanding of the entity, its environment, and risk factors can hinder the audit process. Effective planning procedures, including a comprehensive risk assessment, are crucial for identifying potential challenges early in the audit process and ensuring all relevant areas are covered.
  3. Revenue Verification: Revenue is often a focal point in financial audits, and ADGM audits are no exception. Insufficient audit evidence on key audit assertions can arise from weak audit tests and inadequate planning. Ensuring robust audit tests and well-documented procedures can mitigate these risks, providing a clearer and more accurate representation of the company’s financial performance.
  4. Comprehensive Group Audits: For companies operating as part of a group, group audits present additional complexities. Common challenges include inadequate work by the group auditor, especially in areas such as scoping, materiality, and communication with component auditors. To address these issues, group auditors must establish clear communication channels and ensure a thorough understanding of the component auditors’ work.
  5. Thorough Journals Testing: Journals testing is a critical component of any audit, particularly when there is a significant risk of management override of controls. However, some audit teams fail to conduct adequate work in this area, leading to potential oversight of key risks. Implementing rigorous journals testing procedures can help auditors detect and address these risks effectively.
  6. Assessing Going Concern and Subsequent Events: Auditors must also evaluate the entity’s ability to continue as a going concern and identify any post-period events that require disclosure or adjustment in the financial statements. Inadequate work in this area can lead to significant misstatements. Auditors should conduct thorough reviews and analyses to support the going concern assumption and ensure all relevant events are accounted for.
  7. Ensuring Quality Control: Lastly, maintaining high standards of quality control throughout the audit process is paramount. This includes the active involvement of the ADGM Registered Audit Principal from the planning stage through to completion. Additionally, the engagement partner responsible for issuing and signing the audit report should be consistently involved to ensure continuity and oversight.

Preparing for Your 2024 ADGM Annual Accounts

As the September 30th deadline approaches, it’s vital for companies in ADGM to review their accounting and audit processes and ensure they meet all regulatory requirements. By focusing on the key areas highlighted above, companies can not only comply with ADGM standards but also enhance the accuracy and reliability of their financial statements.

Streamline Your ADGM Annual Accounts Filing with Expert Support from MS

At MS, we specialize in ensuring seamless compliance with the annual filing requirements of the ADGM. Our team of experts guides you through every step of preparing and submitting your annual accounts, aligning with ADGM’s stringent regulatory standards. From accurate financial reporting to timely submissions, we handle the entire process, reducing your administrative burden and ensuring that your business remains in good standing with the regulatory authorities. With our tailored approach, we make sure your financial statements are precise, compliant, and reflective of your company’s financial health.

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How to Optimize Your UAE Corporate Tax Position: Key Insights and Best Practices

Recent updates from the UAE Federal Tax Authority (FTA) underscore the urgency for businesses to stay informed about Corporate Tax (CT) regulations. For instance, companies with licenses issued in June 2024 must complete their CT registration by August 31, 2024, to avoid penalties. The introduction of the UAE Corporate Tax CT regime not only brings new compliance requirements but also opens up opportunities for optimizing tax positions. Companies can benefit from incentives for Qualifying Business Activities and must understand detailed rules on expense management and financial reporting. Adopting a proactive approach to these changes is essential for maximizing benefits and ensuring compliance in this complex tax environment to optimize your UAE Corporate Tax position.

Here’s a quick rundown of key points that help you ensure compliance and enhance your tax positioning:

  1. Strategic Tax Optimization and Adjustments

The UAE’s CT framework offers potential incentives for Qualifying Business Activities, providing opportunities to reduce tax liabilities. While specific details are still emerging, businesses should stay updated on these developments. Additionally, understanding the deductibility of local taxes, such as municipal and property taxes, is essential. However, taxes under certain Emirate laws, like those on foreign bank branches, are not deductible.

Key considerations:

  • Qualifying Business Activities: Research potential incentives and explore how your business can align with qualifying criteria.
  • Local Tax Deductibility: Understand the deductibility of various local taxes and plan accordingly.
  • Expense Management and Allocation

Proper management and allocation of expenses are critical under the new CT regime. Employee costs, including benefits like medical insurance and travel allowances, are generally deductible subject to the arm’s length standard. However, excessive contributions to private pension funds are not deductible.

For expenses serving both business operations and exempt income, businesses must allocate them on a fair and reasonable basis using a consistent method. Non-deductible expenses capitalized cannot be depreciated for CT purposes, requiring careful consideration when determining capitalizable costs.

Key considerations:

  • Arm’s Length Standard: Ensure that expense allocations comply with the arm’s length principle.
  • Expense Allocation Methods: Adopt a consistent and justifiable method for allocating expenses.
  • Capitalization and Depreciation: Carefully evaluate the capitalization of expenses and their potential impact on tax deductions.
  • Financial Reporting and Compliance

As businesses approach the financial year-end, accurate and compliant tax-related reporting is essential. Companies with a revenue threshold of AED 50 million must prepare audited financial statements in accordance with the arm’s length standard.

Decisions regarding the election to apply the realization basis for unrealized gains or losses should be made early, as this choice is irreversible. Pre-incorporation and pre-trading expenses, deductible even before revenue generation, need careful recording.

Key considerations:

  • Audited Financial Statements: Ensure compliance with audit requirements for businesses exceeding the revenue threshold.
  • Realization Basis Election: Make informed decisions about the realization basis to optimize tax positions.
  • Pre-Incorporation and Pre-Trading Expenses: Accurately record and document these expenses for potential deductions.
  • Preparing for Tax Adjustments

The UAE’s CT regime requires a structured approach to calculating taxable income and CT payable. Multiple tax adjustments may be necessary, involving data from various business functions.

Key considerations:

  • Tax Policy and Procedures: Implement documented policies and procedures to streamline tax calculations and ensure compliance.
  • Year-End Reporting: Prepare for year-end reporting to accurately calculate CT and related deferred taxes.

Optimize Your UAE Corporate Tax Position with MS

It’s vital for all businesses to begin their UAE Corporate Tax impact assessment to understand where they stand according to the regulations of the CT. Partner with MS to properly assess your Corporate Tax and our expertise will help you understand the UAE taxation, keeping your business compliant and protected. Act now—secure your business’s future with MS today.

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