One of the concerns for any business is taxation and compliance. Firms usually consider two factors in this regard. Firstly, the relevant tax rates in a jurisdiction, and secondly, the overall taxation system or framework. However, many other factors contribute towards a business’s decision to operate in or from a selective jurisdiction. For instance, factors such as ease of doing business, the overall economy, incentives, stability, and other macroeconomic aspects. Therefore, any entity must consider all relevant elements before entering a market. In this blog, we evaluate the UAE vs. global tax systems in the context of a business-friendly environment.
The UAE vs. Global Tax Systems – 7 Ways the UAE Remains a Business-Friendly Destination in a Taxed World
The tax system in the UAE is far better than many global tax systems. Apart from taxation, numerous factors contribute to the overall business-friendliness of the UAE region. The main credit goes to the government, which always strives to keep the UAE at the top.
In most developed economies, businesses are exposed to complex tax obligations. Interestingly, the tax regulations are making it even more complex and stricter day by day. For instance, the transfer pricing regulations in the USA and many Asian economies are quite intricate. Furthermore, in Europe and other mainstream economies, governments are tightening tax incentives to increase revenue. However, the UAE is focusing on making the tax compliance simple, competitive, incentivised, and business-friendly. How is the UAE achieving it? Let’s highlight 7 ways in which it is a better and business-friendly destination.
1. Lower Corporate Tax Rate
The first and foremost advantage of operating a business in this region is the lower corporate tax rate. The standard rate is 9%. However, it is only chargeable on taxable income of over AED 375,000 (approx. $100,000) in a tax year. Therefore, a 0% rate will apply to the taxable income of up to AED 375,000 in a tax period. If we compare to other parts of the world, the tax rates are higher in most developed economies. For instance, in the United Kingdom, the corporation tax rate ranges from 19% to 25%, while in the USA, it is 21%. Thus, it is evident that the UAE offers an attractive corporate tax rate.
2. Lower Value-Added Tax Rate
In addition to a lower corporate tax, the UAE also has a reduced value-added tax (VAT) rate. The standard VAT rate is 5%. This is lower than in many developed nations. For instance, in the UK, the standard VAT rate is 20%, which is considerably high. A lower VAT is in favor of businesses. This is because it will generally result in lower prices, keeping other factors constant. This, in turn, will increase sales volume.
3. Zero Personal Income Tax
One of the reasons why the UAE is an attractive hub for businesses, including entrepreneurs and expatriates, is no personal income tax. Therefore, salaries and personal income from investments are not subject to taxes. This is one of the deciding factors for most people living in the UAE. On the whole, zero income tax makes the UAE an attractive hub for businesses, as a higher disposable income will result in higher buying power.
4. Attractive Tax Incentives
The UAE has primarily focused on providing massive incentives to businesses. For instance, there is a 0% corporate tax rate for taxable income below the relevant threshold. Furthermore, there is a small business relief (SBR) that aims to provide relief to early-stage or small businesses. Fulfilling the conditions, a resident person might be able to get an exemption from tax liability.
Moreover, the UAE offers free zones, or designated economic zones, that provide relief to businesses. For instance, a resident operating in the free zone may enjoy 0% corporate tax on their qualifying income. However, it is subject to certain conditions.
5. Double Taxation Agreements (DTAs)
Sometimes, the same taxpayer can be subject to tax twice on the same income (same tax base). This will result in double taxation. In the modern business world, firms are now operating in various parts of the world. Therefore, similar taxation on the same income will adversely impact the entity’s economics. To cope with this problem, the UAE has Double Taxation Agreements (DTAs) and Bilateral Investment Treaties (BITs) through positive diplomatic relations. As a result, there are roughly 140 DTAs that protect taxpayers from double taxation.
6. Simple Compliance Structure
Most of the tax compliance responsibilities are simple in the UAE compared to global tax systems. For instance, corporate tax filing is generally digital and carried out once a year. The overall tax filing process is smooth and streamlined. Similarly, VAT filing is also electronic; however, the frequency of filing can be monthly or quarterly, depending on the revenue. Furthermore, there is no withholding tax in the UAE on incomes such as dividends or royalties. Therefore, in general, the compliance burden is lower.
7. The UAE – A Jurisdiction beyond Taxation
The tax incentives might not be beneficial for entities if the overall business environment and economy are not optimistic. People often term the UAE “the global business hub.” Apart from its strategic geographical position, there are many reasons for its attractiveness.
The political stability is the core of the UAE’s success. This, in turn, brings economic stability. The stable economic environment ultimately results in lower misconduct and thus brings peace in society, which boosts business. Furthermore, the infrastructure, both physical and digital, is endlessly improving and ensuring the best possible solutions for entities. Thus, the overall will is progressive, as is evident in policies such as the paperless economy and net-zero 2050 strategy. So, overall, a well-structured compliance model coupled with a region that is progressing beyond conventional benchmarks makes the UAE a top choice for corporations and individuals.
Conclusion
The UAE vs. global tax systems comparison brings together various key points. First, overall tax rates are lower in the UAE compared to the Western world. Second, there are numerous tax incentives available to businesses in the region. Third, the personal income is not subject to income tax; there is zero personal income tax. Fourth, massive double taxation agreements (DTAs) reduce the occurrence of double taxation. Fifth, the general compliance structure is simple; most of the tax filing is straightforward and electronic. Lastly, the favorable taxation systems are supported by the overall positive outlook of the country and the infrastructure, political, and economic stability.
Creative Zone Tax & Accounting (CZTA)
The UAE offers various tax incentives and exemptions; however, it is important to know the terms and conditions to claim them. Therefore, we, as experts, will analyse your business and recommend a suitable and beneficial course of action. Contact us today.
