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BrandChannel: Decades-old taboos in the tax haven have been abolished

BrandChannel: Decades-old taboos in the tax haven have been abolished

The UAE, which has so far provided almost complete tax exemption, decided to abandon this status due to international pressure. They chose 9% as the corporate tax rate, which is the same as in Hungary.

Probably everyone is aware that the government of the oil-rich United Arab Emirates earns so much income that it has not needed to impose taxes on companies operating in its territory for many years. But the OECD and other Western countries did not look favorably on this matter for some time, which is why they tried to convince the leaders of the Arab country that this was not in the interest of international economic circulation. As a means of exerting pressure, they have already been included in all kinds of lists – black and gray – while many countries did not want to conclude a tax treaty with them because of their favorable tax system. A country that cares about its international reputation cannot afford this.

One in three

Until recently, there were three types of corporate taxes in the UAE – Dr. Kassaba Magyar, L Crystal Worldwide ZRT. CEO. Within the framework of one of them, it was possible to register the so-called offshore company, which did not carry out any activities there and therefore was not subject to tax. The other category could include those companies that are registered in one of more than forty so-called free zones, and can be 100 percent foreign-owned, but can only operate within the free zone, and even there only internationally. That is, they cannot work in markets within the Emirates. These companies were also exempt from taxes, and the free zone even promised many of them that this status would remain so for another 10 to 15 years. The third group belongs to the so-called master companies, which require at least one local owner (at least 51 percent stake) or a local sponsor.

This is what the new tax system looks like

The first gap in this shield was plugged when the UAE introduced a general sales tax (VAT) in 2021, entirely on the European model, i.e. for the sale of local products and the provision of local services, at 5 per cent. At the same time, transactions between international companies remained VAT-free. “This was also a milestone in the history of the federal state, because the Tax Authority was only created with the introduction of the value-added tax,” the expert points out. “Until then, the Ministry of Finance was considered sufficient to manage the few tax payments that were, for example, related to oil extraction companies.”

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However, now, not only VAT must be managed, but also corporate tax, as the UAE has done so as well, having bowed to the international pressures already mentioned. It is true that the amount of this tax, like the value-added tax, was not exaggerated either, it amounted to 9%, which is almost the same as in Hungary. The only benefit is that profit up to 375,000 dirhams (one dirham is approximately 100 Hungarian forints) is tax-free, only the above amount is subject to 9 percent tax. Additionally, you can deduct expenses under certain headings — for example, under the entertainment heading, for example, half the money spent on a business lunch. (This actually corresponds to the Hungarian representation, i.e. the costs of the trip – editor). But, of course, it is possible to deduct wages or expenses incurred in running the business.

Csaba Magyar said companies whose business year aligns with the calendar year – their first tax year runs from January 1 to December 31, 2024 – must prepare their tax returns and pay the tax based on them by September 30 at the latest. On the other hand, companies with a business year different from the traditional year will be taxed from July 1, so there will be companies that will have to pay for profit made between July 1, 2023 and June 30, 2024 – by definition, until March 31. .

“The new obligation to pay taxes also applies to offshore companies and free zones, and they can only be exempted from it under certain circumstances. What is interesting in the case of free zone companies is that, as mentioned earlier, they were promised that they would not have to pay taxes for 10 to Another 15 years. The official response they received was that the free zone promised tax exemption, but the tax was imposed by the state.”

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In many cases, you can be exempt from paying taxes

One of them is if the deal takes place within the free zone, that is, if two companies from the free zone deal with each other, but if there is already a transaction concluded with a non-free zone company, then the profit is already taxable.

Another exempt group includes profits generated from certain activities. Examples include product production or logistics. Within the company group, activities, financial consulting, services and financing are carried out. Regardless of this, companies with the above profile must register with the tax authorities in order to obtain the so-called qualified free zone person status.

At the same time, it is also an important condition that these companies maintain real economic activity, and not just be tied to a mailbox – this is the expectation of the OECD. In addition, a business report must be prepared every year and certified by an auditor.

The question is whether having a free zone still makes sense under the new tax rules. According to the General Manager of Crystal Worldwide Zrt., yes: “Since the above-mentioned activities are still tax-exempt and, moreover, they can still have only and exclusively foreign owners – unlike companies based on the mainland, Dr. Kassaba Magyar noted that in many cases the participation of local residents is mandatory.

In order to create a business-friendly environment, the UAE government has also introduced a temporary category, if we call it “Dubai Cata”, after which tax-exempt companies can apply. However, it is more favorable than the Hungarian situation since a company can qualify as a small taxpayer with annual sales of up to 3 million dirhams (not profits!), which corresponds to an upper limit of about 300 million forints. Up to this point, “cats” working in the UAE do not have to pay taxes, but if this limit is exceeded, the entrepreneur loses his positive rating and must pay taxes like “field workers”. However, those who manage to stay under the sales “threshold” of less than AED 3 million can be exempt from taxes for three consecutive years.

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So far, many people have provided services related to company formation in the UAE, as many foreign investors have set foot there. “Due to the tax changes, in addition to these changes, the value of the consulting function may increase in the future, as there will be more management, and it will not be enough just to register a company, but you have to consider whether the activity meets the conditions, while a certain level of accounting must also be carried out.” “- confirms Csaba Magyar. In other words, instead of an outsider, the Arab federal state will begin to resemble a location with favorable taxes.

However, it is interesting that there will be no personal income tax in the UAE, while there will be a tax on profits – this is undoubtedly an unusual combination. It is true that companies in two emirates – Abu Dhabi and Dubai – must offer private health insurance to their employees, but in Hungarian terms this is also a small amount, as the basic package can be purchased for 1,000 dirhams per year (or approximately 100,000 HUF). It is worth noting that these social security rules only apply to the employment of foreigners, and in the case of employing local citizens, the company must pay public fees, such as pension contributions, after them.

We have collected what is worth paying attention to for those who already run a company in the UAE or want to establish it in the future:

  • The company must certainly be registered with the IRS – whether tax-exempt or not – by the tax return deadline (see above)
  • The company will not be automatically tax-exempt if it operates in a free zone until then, and it will still have to meet additional conditions.
  • A tax-exempt company must also file a tax return and prepare an audited annual report
  • Your VAT return must be consistent with your corporate tax return – just to ensure this, it is recommended to enlist the help of an expert

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