Partner at Averyx Group and Advisor at Kreston Awni Farsak
Jadd Shalak, a distinguished Partner at Averyx Group and Advisor at Kreston Awni Farsak, is a seasoned professional in Tax, Accounting, Finance, and Management Consultancy. As a Registered Tax Agent in both Australia and the UAE, and a Certified Fraud Examiner, Jadd brings a wealth of expertise to the table. He’s renowned for championing best practices for clients, both on national and international scales. Jadd’s role as Client Lead Partner further underscores his commitment to delivering unparalleled service and insights.
How does the corporate tax rate in the UAE affect business?
October 19, 2023
The corporate tax rate in the UAE was introduced in 2023. For decades, the UAE has existed as a low-tax jurisdiction, with limited requirements on companies operating in the region. However, with the recent introduction of a federal corporate tax in June 2023, the landscape for businesses and investors in this area is changing.
The corporate tax is the first of its kind to be adopted in the UAE, applying at a standard rate of 9% to businesses and commercial activities. There are exemptions in certain circumstances, including for those operating in free trade zones.
This transformation follows the introduction of VAT in 2018, another tax milestone for the UAE.
We spoke to Jadd Shalak, partner at Averyx Group and consultant for Kreston Global firm in the region, Kreston Awni Farsakh & Co, whose experience advising on tax in the UAE and multiple other jurisdictions, including Australia and Ireland, offers him a unique perspective on the changes.
Restructuring for the new tax regime
“It’s really interesting to see how accounting in the UAE is changing,” says Jadd. “Previously you had a very laissez-faire business environment that was very dynamic, but not very structured.
“Then they introduced VAT, which required companies to have accounting records, follow standards, and report on a quarterly basis. With the introduction of the corporate tax, we’re seeing that companies are increasingly restructuring their operations.”
Where previously, one person might have carried out business through multiple companies, Jadd explains, businesses are now looking to establish an optimal tax and organisational structure that will hold up under the new tax regime.
The corporate tax law also includes new transfer pricing rules, under which businesses must ensure
transactions between related parties or connected persons are made at ‘arm’s length’
or ‘open market’ value. Because of this, Averyx Group has seen increasing numbers of businesses requiring a valuation as part of their corporate restructure.
This, in turn, means an increased demand for advice: and this advice must be accurate, comprehensive and reliable.
“Companies are no longer just looking for the cheapest advice,” says Jadd. “They require a high quality of work. The burden of proof is on the taxpayer, so it’s very important to business owners that they are protected, and that they have enough evidence to show the tax authority that what they are reporting
is correct .”
UAE companies will need to ensure they are operating effectively from a tax perspective while remaining compliant with the law and understanding its scope – including the different taxable entities, exemptions and more.
Impacts on investment
The implementation of corporate tax for the first time poses another key question: will the UAE remain as attractive to businesses and investors as it has thus far? Where it was previously common for companies to consolidate income from various territories and hold it in Dubai, that money will now be subject to tax. However, as Jadd notes, the 9% rate is still competitive relative to other jurisdictions in Europe:
“We’re finding that people are looking at those impacts. But we’re also noticing a lot of companies that think, ‘Okay, 9% is not that high’. We all see Ireland and Cyprus as places with tax benefits, and the tax rate in those countries is 12.5%.
“So people are accepting it, but accounting for it. It’s still a competitive tax rate, and it’s still very lucrative for companies to move into the UAE because of the lifestyle, and in terms of tax rates and operations .”
Upcoming changes and OECD Pillar Two
The UAE’s new corporate tax rules run alongside global initiatives by The Organization for Economic Cooperation and Development (OECD) to improve tax transparency and address the challenges of a digitalised economy. In 2015, the organisation released base erosion and profit sharing (BEPS) action plans to tackle the double non-taxation of multinational enterprises, which were structuring their organisations to shift profits to low or no-tax locations.
This led to the proposal of a two-pillar solution. Pillar One aims to adapt profit allocation rules for the largest and most profitable multinationals, while Pillar Two is designed to introduce a global minimum tax rate of 15%.
While the technical details of Pillar One are still being finalised, many countries around the world have already published draft legislation or implemented Pillar Two.
In the UAE, however, the rules are still under review and are not expected to be implemented in 2024.
“We envisage that Pillar Two is definitely going to have an impact, but not a drastic one,” says Jadd.
“Furthermore, there are tax credits. If you’re paying tax in a jurisdiction that has a higher tax rate than the UAE, you will obtain a tax credit provided you have a double tax treaty, which the majority of the countries have these days.”
A new era in corporate taxation
The rollout of corporate tax is a landmark change for the UAE, aligning its tax laws with international standards while maintaining its position as a competitive place to do business. It also marks a shift in the globalisation of tax regulation and accounting standards – a shift that companies and professional tax advisors must adapt to. “The world has become a very small place,” says Jadd. “It used to only be
multinationals that needed international tax advice. Now we’re getting SME clients, operating in various jurisdictions, that need the same guidance.
“Businesses already operating or looking to expand into the UAE should ensure they understand global taxation implications and are up to date with evolving regulations. Using a local advisor to provide efficient and effective advice will help them stay ahead of developments .”