Here's How The UAE's New 9% Corporate Tax Could Impact The Country's Entrepreneurial Ecosystem To evaluate the impact of this new tax structure on UAE's competitive entrepreneurship positioning, it is important to understand the key decision making criteria for entrepreneurs in selecting a base for their innovation.
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The recently introduced 9% corporate tax in the UAE, which will take effect as of June 2023, has been a topic of debate in the country's small business and startup community for the last two weeks. Indeed, the traditional association of tax and declining innovation is fueling discussions around the expected impact on entrepreneurship in the UAE.
As it currently stands, the 9% corporate tax will apply to all businesses registered in the UAE and conducting commercial activities within mainland UAE, provided the minimum annual taxable income threshold of AED375,000 (approximately US$102,000) is reached. This corporate tax will also apply to businesses registered within UAE free zones, and it will extend to individuals on a freelance visa who meet the same threshold of annual taxable income sourced through their commercial freelancing activities.
To evaluate the impact of this new tax structure on UAE's competitive entrepreneurship positioning, it is important to understand the key decision making criteria for entrepreneurs in selecting a base for their innovation. "Achieving profit growth is key for my startup, and I can expect this to take a small hit in the short term as a result of the new corporate tax," says Ahmad Sharaf Aldine, one of the founders of a regional executive coaching startup established in 2021 within a UAE free zone, and also a Manager at Simon-Kucher & Partners. "However, sitting within a nurturing entrepreneurship ecosystem is equally if not more important of a value driver for me as I eye long-term success, and why I expect my startup to continue its operations out of the UAE," he continues.
Keeping that sentiment in mind, the question thus becomes: what can small businesses and startups expect to reap in benefits as a result of the tax? Here are three ideas:
1. The concept of free zones in the UAE will continue to protect current entrepreneurs, while inviting new ones to the dance with a more attractive packaging and pricing structure
The corporate tax announcement underlined that free zone businesses can continue to benefit from corporate tax incentives, as long as they comply with the necessary requirements. Free zones were established to attract innovation to the UAE and house entrepreneurs. Consequently, they have underlying legal foundations that allow their registered businesses to enjoy tax exemptions for the duration of the free zone laws. Companies registered in the Dubai International Financial Centre (DIFC), for example, will remain subject to 0% tax until 2071, as highlighted by The National Law Review.
In a positive twist for entrepreneurs and other free zone-registered companies, a new trend that is likely to arise is increased competition amongst free zones, as they try to retain their current customer base and attract new ones. Free zones currently charge anywhere between AED10,000 ($2,720) and AED 70,000 ($19,000) or more in certain cases for annual license renewals, regardless of profit or revenue. In light of the new financial burden, entrepreneurs -many of whom bootstrapping their startups, and as a result, can be considered price-sensitive- will consider switching free zones if they do not get a financially attractive package from the entity they are currently a part of. Ultimately, this will drive the 40+ free zones to revise their packaging and pricing structure to become more competitive. We predict that this might lead to the reduction of annual license fees, or additional inclusions and free add-ons to be introduced to support entrepreneurs.
Related: UAE To Allow 100% Business Ownership For Companies As Part Of Changes To Visa System
2. Corporate tax will drive up in-flowing investments, and incentivize small businesses and startups to self-invest
Companies in the UAE can expected to rate one of three routes in reacting to corporate tax:
- accept that their net profits will decrease by 9%- which virtually no one will choose
- or, increase prices to achieve the same "after tax" profit
- or, increase their investments (i.e. increase their costs) to lower the tax burden.
Small businesses and startups are thus well-positioned to reap the benefits of an increased economic appetite in investment, as bigger companies and attempt to reduce their tax burden. Additionally, corporate tax will push most companies to further invest in their own growth. Our latest study shows that the percentage of net profits invested in research and development (R&D) in the GCC is amongst one of the lowest in the world. Along this line, we can expect an increase in R&D investment in the UAE for both established mid-to-enterprise businesses as well as small businesses and startups, ultimately driving innovation and growth up within the entrepreneurship ecosystem.
3. The UAE government will likely ramp up even further on incentive programs and entrepreneurship ecosystem-building
History tells us that entrepreneurship is already treated as a priority in the UAE. From governmental project tendering process perks, to quotas on awarding a minimum of 15-20% of contracts to startups, we can expect UAE to amplify the volume of support it provides small business and startups with to ensure the sustainability of the sector. Entrepreneurs will be able to benefit from expanding incubation programs that equip promising startups with strategic partners, advisors, and investors. This is exemplified by the recently announced Area 2071 ecosystem, overseen by Dubai Future Foundation, as well as other government-run or sponsored business incubators and accelerators. This is in line with the UAE eyeing the launch of 20 unicorns over the next 10 years.
Looking at how the UAE has addressed transitioning into new legislation and business practices, it is without doubt that international best practices in entrepreneurship support and nurturing will be employed to soften the impact of corporate tax on this segment, meaning we can expect to see more detail on tax exemption, relief applications, and subsidies as more detail is rolled out ahead of June 2023. The new order will thus demand high quality entrepreneurs doubling down on competitive edge development, which will only be successful if small business and startups adopt commercial excellence practices from innovative pricing and packaging models, to a different revolutionary take on marketing, sales, partnerships, and other levers that will be the sole criteria in achieving commercial success once corporate tax is rolled out.
