Shareholders’ perspective on Corporate Income Tax

 Corporate taxation has an impact on investment behavior. High tax rates discourage investment, whereas low tax rates encourage it. These assumptions are supported by different studies, particularly in the case of direct investment. This assumption is supported by a large body of highly credible research journals. Nonetheless, it cannot be considered part of the standard agreement in the public discussion of tax practitioners. Shareholders and organization heads have mixed views about corporate income tax.

Dubai was once a tax-free zone, which is why it was titled a Tax Haven. Dubai has become a business hub where small businesses can thrive due to the non-existence of tax rates and implementation. However, the UAE government has decided to impose Corporate Income Taxes on firms in the UAE. We will discuss what shareholders and business owners think about this newly implemented tax.

What do we know about Corporate Income Tax?

A corporate tax is imposed on the profits of a corporation. Taxation is imposed on taxable income, which includes revenue minus the cost of goods sold (COGS), administration costs, marketing, and advertising cost. It is also imposed on the cost of maintenance and other operational expenses.

Corporate tax rates vary significantly from country to country. Some countries are considered tax havens due to their low rates of corporate income taxes. We can take advantage and eliminate various deductions from corporate income tax through subsidies and loopholes in the tax system. So, the actual amount we pay as the corporate income tax can be much lower than the proposed rate by the government.

When is the UAE Government Implementing Corporate Income Tax?

Historically, many business owners in the UAE have paid no income tax on their profits. This is about to be revolutionized, with the Ministry of Finance (MOF) announcing that the UAE government will implement a federal corporate income tax (CIT) in the UAE. This tax implementation announcement was made on January 31, 2022. This new era of CIT implementation is expected to take effect for financial years beginning on or after June 1, 2023.

This move is motivated by the wish of the UAE government to meet international tax benchmarks. Similar activities in the neighboring Gulf States inspired this tax imposition. The government will impose taxation on established business organizations, and small businesses and start-ups will be protected. The UAE will continue to have one of the lowest corporate tax rates in the world. Still, this tax will help the government to get income other than that from hydrocarbons.

Shareholders’ perspective on Corporate Income Tax Implementation in Dubai

After announcing a new corporate income tax, the UAE government stirred up a further discussion among business owners and shareholders. Shareholders and business owners have mixed feelings about these newly imposed corporate taxes. Some see it as an opportunity for the government to increase the country’s revenue, which will benefit businesses in the long run. In contrast, others consider it a burden on their already struggling businesses.

Who are Shareholders?

A shareholder is a person, corporation, or organization legally owning a share of a corporation’s stock. Shareholders invest in an organization and, in return, get some share or equity of the company. Shareholders own the company in principle and enjoy various rights and duties. This type of ownership allows them to benefit from a company’s success without involving themselves in operational matters of the company.

Shareholders are entitled to capital gains and dividend payments as they own shares of the company, which makes them co-owners. Shareholders also have certain rights, which are as follows:

  • Shareholders have the privilege of voting in shareholders’ meetings which gives them a role in authorizing the board of directors
  • Shareholders can also vote on distributions of dividends or merger process

Shareholders may lose their entire investment in the event of bankruptcy as they are co-owners of the business.

How do Shareholders pay Corporate Income Tax?

Corporate earnings are taxed at two levels. A corporation pays corporate income tax on its revenues, and its shareholders pay an extra tax on dividends from the corporation’s after-tax profits. The shares of a company become more valuable when they reinvest their earnings for the betterment of the organization. As a result, when shareholders sell their shares, they must pay capital gains tax.

The corporate income tax plays its role minimize after-tax returns for shareholders. As a result, shareholders must move some of their investments away from the corporate sector. Shareholders will try to move some of their assets to non-corporate businesses and others to foreign companies that are not subject to UAE corporate income tax. Rolling out these investments to these other businesses reduces the after-tax return on these sectors’ investments.

Shareholders’ Perspective on Corporate Income Tax

Different business owners and shareholders have shared their perspectives on the newly imposed Corporate Income tax in UAE. Some of the significant opinions about this new tax are presented below:

Chris Payne’s Perspective

Chris Payne is a significant personality in Dubai’s finance and economic sector. He shared his perspective on corporate income tax. Payne said in the interview that this announcement of the new taxes shouldn’t be a surprise for the people of UAE. He believes that it is an important decision by the Government of UAE as it will help to establish a source of income for the government. Also, this income source will not depend on volatile sources such as corporate dividends and investment income.

Financial Professional’s Perspective

Mark Hemmings, a finance and tax professional, admitted that the mixed reaction of the shareholders to this corporate tax is understandable. On the other hand, he believes this decision is very practical and sensible. He thinks that corporate tax will help companies in UAE comply with global tax rules better.

 .1 Economic Researcher’s Perspective

Taufiq Raheem is an economic researcher and has worked thoroughly to research this newly imposed Corporate Income tax. He shared his perspective that this tax will help UAE to compete with developed economic powers. He also believes that the UAE’s corporate tax rates are way lower than other developed countries.

.2 Ministry of Finance’s Perspective

Younis Haji Al Khoori is a secretary of the Ministry of Finance (MOF) of UAE. While announcing the corporate tax implementation in UAE, he shared his perspective that UAE is a country that helps various business start-ups to grow and become global. It is done by providing innovation and investment opportunities. He believes that this new corporate tax era will establish UAE as a business hub due to its various tax treaties and investment opportunities arising from this Corporate Tax regime. He affirms that imposing this corporate tax will bring a new era of business expansion to the UAE.

 These statements indicate that most of the shareholders believe that corporate income tax will benefit the UAE’s economy in the future. Some have doubts about its effect on already struggling businesses. But according to the unanimous perspective of shareholders, corporate tax is a step in the right direction for economic growth.

Objectives of Corporate Tax according to Shareholders’ Perspective

Throughout its history, the UAE has been tax-free due to the reliance on oil and gas reservoirs to meet its needs. However, as the world shifts toward electrical transportation and appliances, the UAE government is looking for other sources to generate revenue for the betterment of the country. According to the shareholders’ perspective following can be the reason to impose corporate tax in UAE:

  1. Meeting Global Standards

The UAE is far behind the rest of the world regarding taxation. From shareholders’ perspective, this new tax will help comply with global tax standards.

  1. Source of Revenue

The government of UAE recognizes that the country’s overall revenue cannot be purely based on the oil and gas reservoirs. The implementation of corporate taxes has provided the country with a new revenue source. As a result, the long-term goal of imposing corporate tax in the UAE is to support the country’s economy.

  1. Protecting Small Businesses

The government has stated that it will lessen the financial burden on small businesses while protecting them. Corporate tax is primarily imposed on multinational corporations or companies with high annual revenues. So, according to the shareholders’ perspective, corporate tax will benefit small businesses and start-ups in the long run.

Why Choose Lynchpin for Corporate Tax Consulting & Training in Dubai?

Lynchpin Training and Consultancy is one of Dubai’s most well-known institutes for accounting and financial training courses and consultancy services. As we all know, the government will impose corporate income tax in the UAE on June 1, 2023. So, our training and consultancy services will assist you in preparing your business for the upcoming corporate tax. We provide an in-depth understanding of corporate tax through our consultancy services. Training courses related to the corporate tax regime in the UAE are also designed by Lynchpin Training. We will provide you with assistance to grow your business in this new financial environment.