The UAE has long been known for its business-friendly policies and tax-free environment. Following the introduction of VAT back in 2018 and corporate tax being rolled out effective from June 2023, UAE businesses and investors are getting used to the new reality – tax is here and it’s here to stay. This change has implications for medium-sized companies, as they navigate the evolving landscape and consider the impact on their operations.
The 9% corporate tax can considerably affect medium-sized companies’ profitability and available funds for expansion, investment, or other business activities. The UAE Ministry of Finance recently announced that businesses and individuals that generate annual revenues of up to AED 3 million will be eligible to benefit from small business tax relief, which will be available for financial years beginning on or after 1 June 2023. The aim behind small business relief is to support small businesses that provide goods and services and operate within the UAE. If the business’s revenue exceeded AED 3 million in a prior tax period, then small business relief will not be available. Therefore, it is likely that medium-sized companies will not profit from such relief.
Therefore, it is crucial for medium-sized companies to seek expert advice to assist with incorporating tax planning strategies to optimize their tax liabilities and ensure sustainable growth. This may mean that businesses need to adjust their pricing models, increase revenue streams, or identify cost-saving measures to offset the impact of the tax. This could involve passing on some of the tax burden to customers through price adjustments or exploring alternative markets to maintain profitability.
The introduction of corporate tax introduces somewhat an administrative burden for medium-sized companies given they must establish internal systems and processes to track taxable activities, maintain accurate records, and file tax returns with the appropriate authorities in the UAE. This potentially requires additional resources and expertise and the incurrence of additional costs.
Companies may well need to invest in tax advisors or consultants to ensure accurate reporting and compliance with tax laws. In the long run, companies who do what is necessary to ensure that the company is well run and compliant with its various legal and statutory obligations will make it easier for it to market itself to potential investors when trying to raise additional capital or looking to exit in the future.
Medium-sized companies in Dubai must also contend with rising costs across various sectors. Dubai's real estate market has witnessed rising property prices, increasing office rentals and operational costs. The cost of living has also been rising, impacting the wages and compensation demands of employees. Additionally, the implementation of VAT has increased the overall cost of doing business in the UAE. Companies must carefully manage their operating expenses, explore cost-saving measures, and optimize their operational efficiency to mitigate the impact of tax and rising costs.
The introduction of corporate tax may influence the startup ecosystem in the UAE. While small businesses with low turnovers may be exempt from taxation, medium-sized startups that are growing rapidly may face tax obligations earlier in their development. This can impact their ability to reinvest profits into scaling their operations and limit their ability to compete with tax-exempt startups in other jurisdictions.
Broader economic development
On the flipside, the implementation of corporate tax aligns with the UAE's efforts to diversify its economy and reduce its reliance on oil revenue. By introducing corporate tax, the government aims to increase its revenue streams, which can be invested in infrastructure development, healthcare, education, and other public services. This broader economic development can indirectly benefit medium-sized companies through improved infrastructure and business support systems.
Financial implications, administrative burdens, and increased competition in the global landscape pose challenges to the growth and profitability of these businesses. Furthermore, when coupled with the rising costs in Dubai, medium-sized companies face an intricate web of challenges that require careful financial planning, operational efficiency, and strategic decision-making to navigate successfully in this evolving business environment. It is crucial for medium-sized companies to seek expert advice and adapt their business strategies accordingly to remain competitive and thrive in the new tax regime and cost environment in Dubai.