The United Arab Emirates (UAE) has undergone astonishing development during the last few decades. It has evolved from a cluster of pearl fishing villages into a financial powerhouse with a strong and diverse industry base. Moreover, the country has a stable political structure, robust capital flows, and open trade regulations. Foreign entrepreneurs are flocking to the UAE, as starting a business there is fairly easy.
It’s important to note, however, that although there are no federal or emirate-level tax implications for personal income, there are flat rates for both value-added (VAT) and corporate taxes. Since the implementation of 5% VAT in 2018, businesses with annual revenues of more than AED 375,000 are required to register for VAT. Effective June 2023, the UAE will now also levy a 9% corporate tax on corporate income over AED 375,000. “Small business owners are always looking for ways to stay solvent and, at the same time, minimize their company’s tax liability. But for that, they must stay up-to-date with the latest regulations, evaluate their company’s financial health, and make necessary adjustments to their tax strategy,” says Wahaj Siddiqui, Managing Director of Oblique Consult, a trusted financial advisory firm in the UAE.
The first tax return is due in late 2024, and you still have a few months to file your taxes. Ahead, find six best practices for small businesses in the UAE to get through tax season, save money, and set the stage for future success.
1. Learn About Your Tax Responsibilities
Like we mentioned earlier, without a federal income tax or a hefty corporate tax, the UAE’s tax system is far more straightforward than that of other countries. Still, as a small business owner in the UAE, knowing your tax responsibilities should be your first priority. Eligible businesses in the UAE are required to register for VAT, collect VAT from consumers, and file regular VAT returns as part of the value-added tax system. You can avoid fines and non-compliance issues by familiarizing yourself with the VAT regulations and due dates beforehand.
2. Select the Right Business Setup
Your business’s legal structure can substantially influence your tax liabilities. For instance, in a sole proprietorship, you report your business income on your personal tax return, bearing full responsibility for taxes, debts, and legal issues. In partnerships, profits and losses pass through to individual partners, who report them on their personal tax returns. LLC, on the other hand, offers tax flexibility, allowing owners to choose taxation as a sole proprietorship, partnership, S corporation, or C corporation. In short, every option has its pros and cons, so seek advice from a tax professional to understand the tax implications and choose the best business structure.
3. Take Advantage of Tax Deductions and Incentives
Explore the tax deductions and incentives available to small businesses in the UAE. Knowing which deductions and credits you qualify for is essential to reduce your tax burden. Startups can benefit from tax breaks and incentives in the UAE, such as research and development (R&D) tax credits and exemptions tailored to specific industries. Certain free zones, too, offer tax exemptions or reduced rates for qualifying businesses. To maximize these opportunities, work closely with tax experts to identify relevant deductions and incentives in your industry.
4. Maintain Accurate Financial Records
Keeping accurate financial records is vital for strategic tax planning. Thorough documentation of income and expenses allows businesses to pinpoint opportunities for minimizing tax liabilities effectively.
Additionally, in the UAE, where businesses are required to maintain financial records for at least five years, well-organized financial records ensure compliance with local regulations. By keeping detailed and up-to-date records of all transactions, including sales, expenses, and purchases, businesses can streamline tax return preparation and maximize eligible deductions. This practice not only supports sound financial management but also fosters adherence to tax regulations.
5. Review and Revise Your Tax Strategy Regularly
Tax laws for businesses change frequently in the UAE. To stay compliant, consulting a qualified tax advisor is crucial. They vigilantly monitor tax updates, help implement adjustments, and minimize risks of penalties. Use their expertise to review your tax strategy and modify it to accommodate any new laws or revisions. Non-compliance in any shape or form poses serious financial threats. Staying updated and proactive will help your business prepare for regulatory shifts, optimize tax planning, capitalize on new deductions or incentives, and reduce potential obligations.
6. Plan Your Payroll Strategically
Employee remuneration is an important factor in the corporate world. Because salaries, benefits, and bonuses have different tax implications, it is important to understand how taxes apply to each of these components. To achieve the best balance, consider industry standards, business goals, and tax efficiency. Again, a UAE tax advisor can help you optimize compensation structures to meet your financial objectives and comply with tax regulations.
