1. TAKE ADVANTAGE OF CORPORATE TAX EXEMPTIONS FOR SPECIFIC SECTORS
Family-owned businesses that operate in certain industries may qualify for certain exemptions from tax or preferential rates of tax. Below is a selection of opportunities.
Free Zone Companies: If your family-owned business is an established business in the UAE free zones and satisfies the criteria, you may qualify for 0% corporate tax on qualifying income. Many free zones still offer tax holidays or exemptions for a period of years, which can significantly reduce tax obligations.
Eligibility Criteria for Qualifying Income in Free Zones:
- Income from Trading Activities: This income is earned by the activity of buying and selling goods and services.
- Income from Investment Activities: Income from dividends, along with capital gains and interest, and income derived from holding shares and bonds, comes under this category.
- Income from Holding Intellectual Property (IP): Royalty and licensing income arising due to ownership of intellectual property should be treated under this tax category.
- Income from Financial Services: The financial services sector businesses that earn revenue through lending and asset management, and investment services can qualify their income for tax benefits.
- Income from Shipping and Air Transport Services: Businesses operating in shipping or air transport services can receive tax benefits from their generated business income.
- Real Estate and Holding Companies: The family businesses which concentrate on investment real estate and asset management operations stand to gain tax relief through specific requirements. The approach allows companies to cut down their taxable earnings through asset management practices.
Below are the conditions to qualify for tax exemption for Family businesses engaged in holding and managing investments in real estate or other assets:
A family business should engage in Income-Generating Core Activities (CIGA) that lead to income being generated from the real estate or other assets. These must be active as engaged managers making decisions, with the following CIGA potentially being relevant for family businesses.
Key CIGA for Family Businesses:
- Real Estate Activities: If the family business operates in real estate, activities include, but are not limited to, leasing, development, maintenance or management of real estate.
- Investment Management: If the family business manages its portfolio investments (e.g. stocks, bonds, or other assets), the activities must be decision-based, i.e. to buy, sell, and hold.
- Asset Development: If the family business is developing real estate or improving current real estate, those activities are CIGA.
Actionable Tip: Evaluate your business’s geographic area and the activities to anticipate your eligibility for free zone tax incentives or sector exemptions.
2. STRUCTURE YOUR BUSINESS FOR MAXIMUM TAX EFFICIENCY
The way a family business is structured has a direct impact on tax efficiency. Here are some strategies to consider:
Separate Legal Entities:
Creating separate legal entities for different components of the business, such as using a holding company for investments/assets separate from operations, can allow for tax efficiencies. By setting up legal entities for profits and losses to offset each other, there could be a reduced overall tax exposure.
Holding Companies:
Utilising a holding company for the management of investments for family purposes, put to use in either Commercial Real Estate or other investments, could also be tax efficient. Holding Companies may achieve exemptions in certain industries, and for management purposes, it is always easier to establish legal entities and manage the income and assets through a holding company.
Income Allocation:
You may also create various income sources across different family members or legal entities to reduce the tax payable. This could be through a salary, for members in the family business, or by paying income to family members in tax-efficient ways.
Actionable Tip: Find a tax consultant to look at the tax structure of the business that limits tax exposure but supports the future goals and objectives of the family business.
3. EFFICIENT USE OF DIVIDENDS AND PROFIT DISTRIBUTIONS
Dividends and profit distributions are other tax-efficient ways to transfer wealth from the family business to each family member.
Tax-Exempt Dividends:
In the UAE, dividends from companies are generally paid tax-free. Therefore, family business owners can effectively withdraw Business profit Tax-free (doubling/gaining tax-free investment opportunities).
Strategic Profit Distribution:
Dependent family members who are in lower tax bands can receive distributions, thereby reducing the entire tax paid by the company. However, profit distributions must be balanced with the retention of profits to grow the entity in the future.
Actionable Tip: Profit distributions should be planned with a proper assessment of the tax position of family members and the company’s future cash demands.
4. ADHERE TO TRANSFER PRICING REGULATIONS
Companies in the UAE must now deal with transfer pricing rules that require businesses with related-party transactions to ensure prices are set at an arm’s length in line with commercial realities. These rules are meant to properly allocate profits to the relevant jurisdiction and therefore reduce the penalties for failing to comply.
Arm’s Length Pricing:
Related-party transactions can include the transfer of tangible goods, tangible services, or intangible property (e.g., intellectual property) from one family-controlled entity to another and must comply with an arm’s length pricing approach; that is, prices should reflect what unrelated and unaffiliated parties would have paid in arm’s length pricing relating to the same transaction.
Documentation and Compliance:
There are subsequent documentation protocols that all businesses must comply with to establish procedures to justify the pricing approach. Failure to comply with any of the above may result in fines or an adjustment to taxable income.
Actionable Tip: Any transactions with related parties must be arms-length, at fair value, and must be documented accordingly to comply with UAE laws.
5. LEVERAGE THE UAE’S NO INHERITANCE TAX POLICY
One of the key advantages of family-owned businesses in the UAE is the lack of inheritance tax or estate duty. That is a significant advantage for businesses wishing to preserve wealth across generations.
While they may not have inheritance tax, families must still plan carefully if they wish to pass ownership smoothly to the next generation:
Estate Planning:
When asset ownership and management are smoothly transferred to the next generation, it is important to have a full estate plan in place. There are several legal tools available to manage the transferring of ownership, but two of the most constructed are wills and family trusts. As with succession planning, it aims to keep control over the distribution of the wealth while avoiding potential conflict or dispute over ownership in the future.
Succession Planning:
If proper succession planning is in place, it will allow continuous ownership for future generations. And if proper estate planning is done, the conflict between the family can likely be minimised (some conflict is bound to occur), thereby also retaining the value of its business.
Actionable Tip: Speak to estate planning professionals to determine how best to structure your business and wealth to ensure a seamless transition to ownership.
CONCLUSION
UAE family businesses can use a range of tax-efficient strategies to maximise profit and foster long-term success – these include the Corporate Tax exemption, minimising their tax liability via tax-efficient business structure, directing dividends regularly amongst family members in a compliant manner and complying with transfer pricing regulations.
At Creation Business Consultants, we know how family businesses operate, and we help family businesses with the right tax structures to achieve their overall business goals. Contact us today to see how we can help you improve tax efficiency and plan for future success. Email: [email protected], or call UAE: +971 4 878 6240 | Saudi Arabia: +966 56 865 2329
