Startups that will thrive in this evolving ecosystem will become the ecosystem, thus fuelling the two economies

In 2009, I visited the UAE for the first time on a family trip that was planned on a whim. I had little time to think about what to expect in the UAE. At the Dubai airport, I was surprised to find myself exchanging pleasantries in Hindi with the immigration officer. At that moment, the shared history of the UAE and India became obvious. Over the past many decades, the UAE and India got plenty of trading done between them. But it was in the last few years that the UAE-India synergy has reached its full potential.

I recently met a couple who had recently set up their own company in Dubai. They were filled with excitement about following their dreams. I also spoke to an entrepreneur who successfully incubated his startup in the UAE and was now looking at scaling it in India. This constant flow of talent, enterprise, and funding between the two nations has motivated so many entrepreneurs like me to take chances, seek new opportunities, dream bigger, adapt, and try harder. This means pooling of resources within industries such as food, technology, retail, which straddle both countries.

The movement of talent between India and the UAE has not been a one-way street. Indians have tended to move back and forth between the two countries, to take up jobs, conduct business and invest. When Covid normalized remote working, several large companies in the UAE, especially banks, set up their back offices and development centres in India. A virtuous talent bubble between India and the UAE has driven innovation for several years. This transnational bubble is now fostering a startup ecosystem, where funding could come from one country and talent from another; incubation could happen in one country, and growth in another.

Startup success stories spread across the two countries have diverse scripts. Sometimes the UAE serves as a petri dish for a new idea. At other times, entrepreneurs start out in India by tapping an abundant talent pool. They later extend to the UAE to get better access to capital and infrastructure. The UAE gives them an international presence and access to new markets. Sometimes such decisions are driven by regulation and policy. For example, uncertain regulation in India has prompted many Web3 startups to set up their headquarters in the UAE. Polygon, the Ethereum-based layer 2 aggregating platform moved to Dubai, while still nurturing talent in India.

Centuries ago, Arabs took advantage of the monsoon winds and sailed through the Suez Canal to trade with Indians. This commercial inter-dependence left an imprint on both cultures, to an extent that it is hard to establish the origins of certain shared cultural practices and food habits. Trade tended to flourish where the political dispensation made it conducive for traders to operate unhindered. Traders historically would flock to ports that offered a favorable environment. Likewise, startups today want a transnational presence to maximize opportunities. They look for ease of doing business, access to finance, favorable policies, and modern infrastructure.

An idea that germinates on a kitchen table or within a dorm needs resources to grow into a full-scale business. These resources could exist in any country. The startups’ digital foundation allows them to seamlessly operate across international borders. They often rely on accelerator programs to become viable transnational businesses from their early bootstrapped days through to late-stage venture funding.

International cooperation is creating new accelerator programs with influential networks. Under the India-UAE Comprehensive Economic Partnership Agreement (CEPA) that was signed in early 2022, India and the UAE pledged to jointly nurture startups by strengthening relations with ecosystem stakeholders such as accelerators and incubators.

The two governments followed through by launching the India-UAE Startup Bridge. This will allow UAE startups to explore incubation opportunities in India and vice versa. Additionally, investors in one country can fund startups in the other’s jurisdiction. Dubai International Financial Centre (DIFC) and FICCI LEADS India’s major incubator, have launched the India-UAE Start-Up Corridor. They have agreed to identify 50 promising early-stage startups from both countries in the next 5 years. A $150M fund has been launched with an aim to develop at least 10 such startups into unicorns by 2025.

The UAE-India startup synergy has happened at a decisive moment. In 2022, India celebrated its 100th Unicorn, while UAE ranked No.1 worldwide in the latest Global Entrepreneurship Index. Both countries have stepped up from a position of strength when building a shared startup ecosystem.

Startups that will thrive in this evolving ecosystem will become the ecosystem, thus fuelling the two economies. They will help create new jobs and attract capital. However, in tough market conditions, they will be the most vulnerable. Such inter-government initiatives can provide a protective padding to fledgling startups in tough times, and the thrust to help them take-off in the new digital world of Metaverses and Blockchains.

Source:https://www.khaleejtimes.com/opinion/uae-india-innovation-bubble-boosts-startup-ecosystem?_refresh=true

Each free zone has its own framework. Based on these frameworks, the income of the free zone persons will not be subject to corporate tax for a specific period

Free Zones are a crucial part of the UAE economy and have a key role to attract foreign investment that plays a pivotal role in the development of the country. Keeping in view the importance of the free zones special rules have been proposed in the corporate tax (CT) public consultation document for the businesses registered in the free zones (hereinafter referred to as ‘free zones persons’).

Each free zone has its own framework. Based on these frameworks, the income of the free zone persons will not be subject to corporate tax for a specific period. According to the consultation document, the CT regime will honor the tax incentives being offered to the free zone persons subject to the condition that free zone persons maintain adequate substance and comply with all regulatory requirements.

To understand the proposed application of CT on the free zone persons, we have considered all possible options and classified the transactions into the following four categories.

Income from businesses in the rest of the world

It has been proposed in the consultation document that the income earned from transactions with businesses located outside of the UAE will be subject to zero per cent corporate tax. The consultation document is silent about the income earned from transactions with individuals located out of the UAE, which we believe will be subject to the same zero per cent corporate tax.

Income from businesses in the same free zone

The consultation document highlights that the income earned from trading with businesses located in the same free zones will be subject to zero per cent corporate tax. The document is silent about the income earned from transactions with individuals located in the same free zones, which we believe will be subject to the same zero per cent corporate tax, but we will have to wait for the law for further clarification regarding this.

If the free zone person is located in the designated zone for value-added tax (VAT) purposes and selling goods to the mainland person on INCO term where delivery of the goods is being given in the designated zone and the mainland party is clearing the goods in its own import code, still designated zone person can benefit from the zero per cent corporate tax.

Income from the persons in other free zones

The consultation document is clear about the proposed application of the corporate tax on the income earned from persons located in other free zones, and these transactions will be subject to zero per cent corporate tax.

Income from persons on the mainland

Free zone persons may have transactions with persons located on the UAE mainland. It is clearly stated in the consultation document that if the mainland entity and free zone person are part of the same CT group, then income earned by the free zone persons will be subject to zero per cent corporate tax. However, to ensure the CT neutrality of such transactions, payments made to the free zone person by a mainland group company will not be an allowable expense to calculate the taxable profits of the group.

If the mainland business and free zone person are not part of the same CT group, then the legal structure of the free zone person is critical. Like, if the free zone person has a branch on the mainland, then the income of the free zone person will be taxed at the regular CT rate on its mainland sourced income, whilst continuing to benefit from the zero per cent CT rate on its other income. However, if the free zone person has no branch on the mainland, then free zone person can continue to benefit from the zero per cent CT rate of its passive income from mainland persons. The passive income would include interest and royalties, dividends and capital gains from owning shares in mainland UAE companies.

Where a free zone person earns income from the mainland persons which is subject to a zero per cent CT rate, such income would be subject to a withholding tax of zero per cent.

Source:https://www.khaleejtimes.com/finance/how-to-file-an-application-for-corporate-tax-on-free-zones-businesses?_refresh=true

The median corporate tax rates in leading economies worldwide fell to a new low of 25.1 per cent in 2021, which is nearly three times of the nine per cent tax rate that the UAE is going to implement from June 2023

Businesses worldwide are bracing for higher tax costs as cash-strapped governments seriously consider increasing taxes on corporates following a period of low tax regime, according to a study by a leading accounting network.

The median corporate tax rates in leading economies worldwide fell to a new low of 25.1 per cent in 2021, which is nearly three times of the nine per cent tax rate that the UAE is going to implement from June 2023.

The study by UHY, the international accounting and consulting network, says that with the Covid-19 pandemic leaving a gaping hole in the public finances of countries around the world, the trend of declining corporate tax rates worldwide is likely to be over for the foreseeable future.

“Countries around the world have wanted to remain competitive by keeping the tax burden on companies as low as possible in recent years. The cash strapped governments of 2022 will likely now be considering increasing taxes on corporations,” said Subarna Banerjee, chairman of UHY.

He said public finances will have to be shored up somehow and corporations can be an easier target politically than individuals. “Businesses worldwide should be prepared for their tax costs to begin to rise in the coming years.” Several countries have announced their intention to raise the tax rate. The UK already announced its intention to raise corporation tax rates to 25 per cent from April 2023, more than two percentage points higher than the European average.

President Joe Biden has also pledged to raise federal corporate income tax to 28 per cent, after it was cut to just 21 per cent by his predecessor Donald Trump in 2017.

Global corporate tax rates have been steadily decreasing over recent years, with the G7 average for a business recording profits of $1.0 million falling from 32 per cent in 2014-15 to just 26 per cent in 2020-21. Many countries sought to incentivise businesses to invest in their economies with attractive tax rates. France, often seen as a higher tax European economy, has lowered its headline rate from 31 per cent to 26.5 per cent in just the past three years.

The UAE, typically renowned as a low-tax jurisdiction, recently introduced corporate tax at one of the lowest rates across the globe — nine per cent — for financial years starting on or after June 1, 2023. “This measure is in line with the UAE’s ambition to establish a more transparent local economy while continuing to retain its attractiveness as a global hub for foreign investment,” the study said.

With the SME and start up sector constituting up to 94 per cent of the UAE economy, the UAE leadership has ensured the economic engine of the business landscape is empowered towards growing strategically while striking a balance in meeting compliance and regulatory obligations that protect businesses in the long haul, said the study.

“In the realm of multinationals, UAE will adhere to the global minimum tax rate of 15 per cent, which 136 countries have agreed to under the aegis of the Organisation for Economic Cooperation and Development (OECD),” it said.

James Mathew, chief executive and managing partner of UHY James Chartered Accountants, said the introduction of corporate tax in the UAE clearly reiterates the nation’s commitment towards aligning its economic environment with global best practices.

“However, the investor friendly corporate tax rate of nine per cent is indicative of the country’s efforts in cementing its position as a destination of choice for foreign investment while building a foundation on tenets of regulatory compliance, legislative obligations, and robust AML (anti-money laundering) measures.”

Mathew said corporate tax will bring a positive ripple effect into play in the UAE economy.

“The arrival of corporate tax in the UAE in 2023 has already put into motion discussions around effective tax planning,” he said.

“SME’s make up 94 per cent of the UAE economy and almost two thirds of the SMEs feel constrained due to lack of access to finance at a reasonable cost. With the introduction of VAT in the UAE in 2018, banks adopted a favourable approach in channelising finance to SMEs and now with corporate tax coming into force, the SME sector will stand to gain significantly with measures that increase the transparency factor of their business,”

Source:https://www.khaleejtimes.com/business/uae-readies-for-gccs-lowest-tax-regime-as-global-corporates-brace-for-tariff-hikes

Majed Al Suwaidi, Managing Director, Dubai Media City explains to Khaleej Times about what makes the Emirate a one-stop destination for startups and entrepreneurs.

Majed Al Suwaidi, Managing Director of Dubai Media City, shares deep insights into the Emirate’s ease of doing business that’s striking a big chord with global innovators and entrepreneurs. in5, an enabling platform for entrepreneurs and startups, also falls under his remit.

Edited excerpts from an exclusive interview: