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Staying compliant with Value Added Tax in the UAE: Key aspects for UAE businesses

Staying compliant with Value Added Tax in the UAE: Key aspects for UAE businesses
Staying compliant with Value Added Tax in the UAE: Key aspects for UAE businesses

Understanding the Value Added Tax (VAT) landscape in the UAE is essential for business success in this dynamic economic environment. VAT has become a significant factor for businesses operating in the UAE since its introduction in 2018. As the UAE continues to attract global enterprises, effectively managing VAT compliance is crucial for maintaining financial integrity and competitive advantage.

What is Value Added Tax in the UAE?

VAT is an indirect tax levied on the value added to goods and services at each stage of the supply chain. Consumers ultimately bear the burden as sellers collect VAT on their sales and remit it to the government. However, businesses can reclaim the VAT they pay on their purchases, reducing their overall tax burden.

VAT Rates in the UAE

The UAE applies a standard VAT rate of 5% to most goods and services. However, there are exceptions:

  • Zero-rated Supplies (0% VAT): These include exports outside the GCC, international transportation, crude oil/natural gas, the first supply of residential real estate, and specific healthcare and education services.
  • Exempt Supplies: Certain financial services, subsequent supplies of residential real estate, bare land transactions, and domestic passenger transport are exempt from VAT.

Value Added Tax in the UAE: Registration procedures

Mandatory Registration

Businesses exceeding AED 375,000 in taxable supplies and imports within the last 12 months or anticipating exceeding this threshold amount in the next 30 days must register for VAT (mandatory registration). Businesses below this threshold can voluntarily register to recover VAT credits.

Voluntary Registration

Businesses that do not meet the mandatory registration criteria can still opt for voluntary registration. This option is available if the total value of taxable supplies and imports, or taxable expenses, exceeded AED 187,500 in the previous 12 months. Likewise, if a business anticipates surpassing this threshold in the next 30 days, voluntary registration is an option.

VAT Compliance

VAT compliance involves several key aspects:

  • VAT Return Filing: Businesses must file VAT returns quarterly or monthly, depending on their turnover. These returns summarize all their taxable transactions for the period, including the total value of sales and purchases, the amount of VAT charged and paid, and the amount of VAT recoverable. Filing accurate and timely VAT returns is crucial to avoid penalties from the Federal Tax Authority (FTA).
  • Record Keeping: Businesses must maintain detailed records for at least five years. This includes source documents (like purchase invoices), sales invoices, receipts, and any other documents that support the VAT calculations in their returns. Proper record keeping is essential for audits and to ensure they have the documentation to support any VAT claims they make.

Value Added Tax in the UAE: Impact on different business sectors

VAT implementation has affected various sectors differently:

  • Retail: Businesses have adjusted pricing strategies, cash flow management, and VAT calculations.
  • Manufacturing: Manufacturers manage input VAT on raw materials and output VAT on finished goods.
  • Real Estate: VAT implications differ based on the property type (residential or commercial).
  • Hospitality: Businesses must incorporate VAT into room rates, food sales, and other services.
  • Healthcare: While most services are exempt, some related products and services are taxable, creating compliance challenges.

VAT in the UAE: What’s there for Free Zones?

While UAE free zones offer tax benefits, VAT can be complex. The key lies in designated zones, treated as outside the UAE for VAT. Goods and services within these zones are generally VAT-free. However, supplying to the mainland or non-designated zones incurs 5% VAT. Businesses in free zones need to understand their zone’s designation and how it affects their VAT obligations.

Value Added Tax in the UAE: Turn your confusion to confidence with MS

Complying with VAT in the UAE doesn’t have to be a solitary struggle. At MS, we stand by your side as your dedicated financial partner for VAT services. We simplify the complexities of VAT, ensuring full compliance with regulations, so your business can thrive. Our team of experts is committed to streamlining your VAT processes, providing a seamless and collaborative experience. With MS, you gain more than just a service provider; you gain a partner who understands your unique business story in the dynamic UAE market, supporting your growth and success every step of the way. Choose MS and experience the difference beyond mere numbers.

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How does the Local Currency Settlement system enhance the cross-border transactions between the UAE and India?

How does the Local Currency Settlement system enhance the cross-border transactions between UAE and India?
How does the Local Currency Settlement system enhance the cross-border transactions between UAE and India?

India and the UAE have forged ahead with a Local Currency Settlement System (LCSS), marking a pivotal shift in their economic collaboration. This pioneering initiative enables bilateral trade transactions to occur directly in Indian Rupees and UAE Dirhams, reducing dependence on the US Dollar. By cutting transaction costs and accelerating settlement times, LCSS sets the stage for a more agile and cost-effective trade ecosystem between these dynamic economies.

Breaking Down Local Currency Settlement System

The Local Currency Settlement System (LCSS) is a bilateral agreement between nations aimed at boosting cross-border transactions and economic ties.

Domestic Currency Transactions: LCSS allows exporters and importers from both countries to conduct business using their own currencies—Indian Rupees and UAE Dirhams. This eliminates the need for conversions into a third currency like the US Dollar.

Cost and Time Efficiency: By bypassing intermediary currencies, the Local Currency Settlement System(LCSS) reduces transaction costs significantly. It also speeds up processing times, making transactions more efficient for businesses.

Flexibility in Payment Currency: Traders under LCSS have the flexibility to choose whether to pay or receive payments in Indian Rupees or UAE Dirhams, depending on what suits them best for each transaction.

UPI and IPP Integration

India and the UAE are improving financial connectivity with the integration of India’s Unified Payments Interface (UPI) and the UAE’s Instant Payment Platform (IPP). This partnership allows fast secure, and cost-effective cross-border transfers between the two countries. By linking card switches, they also ensure that domestic cards are accepted mutually, simplifying transactions for users. Supported by agreements signed by the RBI and the Central Bank of UAE, this collaboration aims to further streamline payments by exploring integration between India’s Structured Financial Messaging System (SFMS) and UAE’s messaging system.

Economic benefits

  • Reduced Transaction Costs: Direct transactions in Indian Rupees and UAE Dirhams minimize the average two percent transaction cost currently incurred by Indian exporters to the UAE.
  • Elimination of Foreign Exchange Requirements: LCSS removes the need for foreign currency exchanges, reducing additional costs and complexities for small and medium exporters.
  • Improved Transparency and Efficiency: LCSS promotes greater price transparency and quicker settlement times, streamlining trade processes and enhancing economic cooperation.
  • Support for Small Businesses: The system supports inclusivity by allowing smaller players to participate more effectively in international trade.

Local Currency Settlement System impact and Market boost

The Local Currency Settlement System (LCSS) holds the potential to significantly boost the UAE’s food security goals and position it as a regional manufacturing hub. Indian companies could establish operations to target the GCC market under this system. The initiative particularly benefits small and medium enterprises (SMEs), aligning with the UAE’s focus on developing the MSME sector. Initially, LCSS will prioritize larger corporations to ensure stability before expanding to smaller businesses, recognizing the need for gradual adoption due to initial complexities. This strategic approach aims to enhance economic collaboration and competitiveness between India and the UAE.

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New business in the UAE? Don’t miss the 3-month Corporate Tax deadline

New business in the UAE? Don’t miss the 3-month Corporate Tax deadline
Corporate Tax deadline

The business landscape in the UAE is undergoing a significant shift with the introduction of corporate tax. This new tax regime comes with important deadlines for businesses to register, and these deadlines can vary depending on your company’s specific situation. The new corporate tax system is designed to be both effective and competitive, aligning with international standards. This will make the UAE an even more attractive location for businesses and investors. The tax system will also support the UAE’s development goals and strategic plans. Additionally, it fulfils the country’s commitment to tax transparency, which helps to prevent unfair tax competition and fosters good relations with developed nations.

While free zones are amping up their offerings to attract new businesses, all companies in the UAE, including those in free zones like Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), need to be aware of the corporate tax registration requirements.

Key Points for Existing Businesses:

  • Registration Corporate Tax Deadlines Based on License Issuance Date: The deadline for existing companies to register for corporate tax depends on when their licenses were issued. You can find the specific timelines outlined in the Federal Tax Authority (FTA) Decision.
  • Multiple Licenses: If your company holds multiple licenses, the earliest issuance date dictates your registration deadline. Ensure you submit your application within the allotted timeframe to avoid penalties.

Deadlines for New Businesses (including Free Zones):

  • Three Months After Incorporation: New companies incorporated on or after March 1st, 2024, including those in free zones, have three months from their incorporation date to register for corporate tax. Be aware that your registration might fall before June 30th as the deadline for these cases is strictly three months from the date your license was issued.

For example: If your business is incorporated on March 3rd, 2024, your Corporate Tax deadline is on June 3rd, 2024.

  • Foreign Companies: Foreign companies effectively managed and controlled within the UAE after March 1st, 2024, need to register within three months of their financial year-end.

Upcoming Corporate Tax Deadline – June 30th, 2024:

  • Don’t Miss Out: This deadline applies to all businesses with licenses issued in March or April of any year prior to 2024. Failing to register by June 30th can result in a penalty of AED 10,000.

The takeaway

The introduction of corporate tax in the UAE necessitates action from businesses. Familiarize yourself with the deadlines based on your company’s specific situation and ensure timely registration to avoid penalties. While free zones are offering attractive incentives to draw in new businesses, remember that corporate tax registration applies to all companies in the UAE.

MS for ensuring hassle-free Corporate Tax registration

We know that the deadline assessment will be a daunting task, but MS is here to help you through the process. Our team of experts will assess your specific situation to ensure you meet the correct deadline. We’ll guide you through every step of the process, ensuring all documentation is accurate and filed on time. MS is here to make your Corporate Tax registration smooth and ensure compliance, sparing you from additional penalties for late registration. Take action now to ensure your business stays compliant and penalty-free.

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Is Your Business Compliant with UAE Economic Substance Regulation? A Deep Dive into Relevant Activities and CIGAs

Is Your Business Compliant with UAE Economic Substance Regulation? A Deep Dive into Relevant Activities and CIGAs
Is Your Business Compliant with UAE Economic Substance Regulation? A Deep Dive into Relevant Activities and CIGAs

The UAE’s business environment is booming, and simply registering a company isn’t enough anymore. The Economic Substance Regulations (ESR) are here to make sure companies are truly operating and contributing to the UAE’s economy. These regulations apply to both free zones and onshore businesses. By following the ESR, you’ll not only be compliant, but you’ll also demonstrate your commitment to the UAE’s growth and showcase that your business is here for the long haul.

What are Economic Substance Regulations (ESR)?

ESR is a set of rules that require businesses to actively perform their services and validate their economic presence in the UAE. These regulations are specified under the Cabinet of Ministers Resolution No. 57 of 2020. Only businesses engaged in certain “Relevant Activities” are subject to ESR compliance.

Relevant Activities Under ESR

According to Article No. 3 of Resolution No. 57, the following activities are classified as relevant and thus fall under the scope of ESR:

  1. Intellectual Property Business
  2. Shipping Business
  3. Headquarters Business
  4. Investment Fund Management Business
  5. Banking Business
  6. Service Centre Business
  7. Holding Company Business
  8. Lease/Finance Business
  9. Insurance Business

Businesses engaged in any of these activities must comply with ESR requirements, which include annual ESR filing and reporting.

Core Income Generating Activities (CIGAs)

CIGAs are the primary activities carried out by a licensee to generate income from their relevant activities. Here’s a breakdown of CIGAs for each relevant activity:

  1. Banking Business

The banking sector under the ESR must demonstrate active engagement in various core activities. These include raising funds, managing risks related to credit, currency, and interest rates, and taking hedging positions to mitigate financial uncertainties. Banks are also required to provide financial services such as loans and credit facilities to customers, manage their capital effectively, and prepare comprehensive regulatory reports. The UAE Central Bank, along with competent authorities in Financial Free Zones, oversees the regulatory compliance of banking businesses.

  • Insurance Business

Insurance companies operating in the UAE must adhere to ESR by engaging in activities like predicting and calculating risks, providing insurance and reinsurance services, and underwriting insurance policies. These core functions ensure that the insurance businesses generate substantial economic activity within the country. The regulatory framework for insurance businesses is maintained by the Insurance Authority and the competent authorities in Free Zones and Financial Free Zones.

  1. Investment Fund Management Business

Investment fund management companies need to perform several critical activities to comply with ESR. These activities include making informed decisions on holding and selling investments, calculating risks and reserves, managing currency and interest rate risks, and preparing detailed reports for investors and regulatory bodies. These businesses fall under the supervision of the Securities and Commodities Authority, as well as competent authorities in Free Zones and Financial Free Zones.

  1. Lease-Finance Business

Lease-finance businesses must engage in a range of core activities, such as agreeing on funding terms, acquiring and leasing assets, setting terms and durations for financing or leasing agreements, monitoring and revising these agreements, and managing associated risks. These activities ensure that lease-finance businesses generate sufficient economic substance. The UAE Central Bank and the competent authorities in Free Zones and Financial Free Zones oversee these businesses.

  1. Headquarters Business

Headquarters businesses are required to perform essential management functions to comply with ESR. These include making significant management decisions, incurring operating expenditures on behalf of group entities, and coordinating group activities. These core functions ensure that the headquarters provides substantial economic contribution. The Ministry of Economy, along with competent authorities in Free Zones and Financial Free Zones, regulates headquarters businesses.

  1. Shipping Business

Shipping businesses must undertake various core activities to demonstrate economic substance, such as managing crew (hiring, paying, overseeing), overhauling and maintaining ships, overseeing shipping operations, and managing orders, and deliveries, and organizing voyages. These activities ensure that shipping businesses contribute significantly to the UAE economy. The Ministry of Economy and competent authorities in Free Zones and Financial Free Zones oversee the regulatory compliance of shipping businesses.

  1. Holding Company Business

Holding companies must manage activities related to their core functions, which include overseeing and managing their subsidiaries and investments. These companies must ensure they perform these activities to demonstrate a substantial economic presence in the UAE. If your holding company is in any Free Zones such as the Abu Dhabi Global Market (ADGM) or Dubai International Financial Centre (DIFC), you should also comply with the ESR. The Ministry of Economy and competent authorities in Free Zones and Financial Free Zones regulate holding company businesses.

  1. Intellectual Property Business

Intellectual Property (IP) businesses must engage in specific core activities depending on the type of IP assets they hold. For patents or similar assets, activities include research and development, while for marketing intangibles, the focus is on branding, marketing, and distribution. In exceptional cases, strategic decision-making and risk management related to the development and exploitation of IP assets are required. The Ministry of Economy and competent authorities in Free Zones and Financial Free Zones oversee these businesses.

  1. Distribution and Service Centre Business

Businesses in the distribution and service center sector must perform key activities such as transporting and storing goods for sale, managing inventories, taking orders, and providing consulting or administrative services. The Ministry of Economy and competent authorities in Free Zones and Financial Free Zones regulate these businesses.

By understanding and adhering to these core activities, businesses can ensure they meet the ESR requirements and maintain compliance with UAE regulations, thereby contributing to the country’s economic growth and stability.

Streamline your Economic Substance Regulation compliance with MS’s expert guidance

Uncertain about the UAE’s Economic Substance Regulations (ESR)? MS can be your single-source solution for smooth compliance. Fretting over deadlines and penalties can hold your business back. MS simplifies ESR for you. Our services cover everything: from identifying if your business even needs to file, to handling the entire filing process efficiently. With MS as your partner, a team of ESR experts ensures your filings meet all requirements. This not only minimizes the risk of penalties but also gives you the peace of mind to focus on growing your business. Don’t let ESR become a hurdle – let MS guide you through the process with confidence.

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

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

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

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

What is Financial Due Diligence in M&A?

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

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

Why is Financial Due Diligence Important?

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

Steps in the Financial Due Diligence Process

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

Benefits of Financial Due Diligence in M&A

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

Choose MS for conducting thorough due diligence

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

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Insights into the Future: Fintech Marketing Trends Transforming the UAE

Insights into the Future: Fintech Marketing Trends Transforming the UAE

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

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


Tech-driven revolution

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

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

Growth of online and digital payments

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

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

How UPI Sparks Fintech Advancements in the UAE

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

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

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

Case study

Beyond Border’s – PhonePe’s UAE Entry

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

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

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

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

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

ESR in the UAE explained

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

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

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

Who must comply with ESR in the UAE?

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

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

Determining your Branch’s ESR Applicability

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

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

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

Complying with ESR in the UAE: Reporting requirements

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

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

Penalties for non-compliance with ESR in the UAE

Failure to submit the ES notification: AED 20,000

Failure to submit the ES report: AED 50,000

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

Providing inaccurate information: AED 50,000

Remember these Key Points on ESR Filings in the UAE

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

How MS can help you file ESR in the UAE

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

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

Disclaimer

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

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

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

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

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

Why Choose a Free Zone in the UAE?

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

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

The Corporate Tax in the UAE and Free Zone Advantages

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

These Qualifying Activities typically involve:

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

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

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

Who qualifies as a Free Zone Person?

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

The substance is key: Proving your presence

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

Where your income comes from matters

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

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

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

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

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

Beware the Excluded List

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

Choosing your tax path wisely

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

Playing by the Arm’s Length Principle

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

Keeping the books in order

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

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

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

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

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

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

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

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

Disclaimer

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

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

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

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

Who are Activist Investors in M&A?

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

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

Engine No. 1: Investor Activists with an ESG edge

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

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

Activist Investors: Identifying targets and advocating for change

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

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

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

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

How do Activist Investors impact M&A valuations?

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

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

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

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

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

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

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

Role of Neo banking in the UAE Economy

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

Digital banking v/s Neo banking

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

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

 Case study – Wio

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

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

The Future Role of Digital and Neo Banks

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