1. TAKE ADVANTAGE OF CORPORATE TAX EXEMPTIONS FOR SPECIFIC SECTORS
Family-owned businesses operating in certain sectors may be eligible for tax exemptions or preferential tax rates. Here are key opportunities:
Free Zone Companies: If your family business is an established business in the UAE free zones and meets eligibility criteria, you may qualify for a 0% corporate tax rate on qualifying income. Many free zones also offer tax holidays or exemptions for a set number of years, which can significantly reduce tax liabilities.
Eligibility Criteria for Qualifying Income in Free Zones:
- Income from Trading Activities: This refers to revenue generated from buying and selling goods or services.
- Income from Investment Activities: This could include dividends, capital gains, interest, and income from holding investments such as shares or bonds.
- Income from Holding Intellectual Property (IP): For businesses that own intellectual property, income generated from licensing or royalties related to IP may qualify.
- Income from Financial Services: For businesses in the financial sector, income from lending, asset management, investment services, etc., may be considered qualifying income.
- Income from Shipping and Air Transport Services: For companies engaged in shipping or air transport services, income generated from these activities can qualify.
- Real Estate and Holding Companies: Family businesses focused on holding and managing investments in real estate or other assets may also benefit from tax exemptions or favourable tax rates, provided they meet specific conditions. This can be an effective strategy for reducing taxable income through asset management.
Specific conditions to benefit from tax exemptions for Family businesses focused on holding and managing investments in real estate or other assets:
The family business must be engaged in Core Income-Generating Activities (CIGA) that contribute to generating income from the real estate or other assets. These activities must not be passive, but rather involve active management and decision-making.
Key CIGA for Family Businesses:
- Real Estate Activities: If the family business is in real estate, the activities may include leasing, property development, maintenance, or real estate management.
- Investment Management: If the business manages a portfolio of investments (e.g., in stocks, bonds, or other assets), the activities must involve decision-making, such as determining when to buy, sell, or hold assets.
- Asset Development: If the business is engaged in developing real estate or improving existing properties, these activities qualify as CIGA.
Actionable Tip: Review your business’s location and activities to determine eligibility for free zone tax benefits or sector-specific 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:
Setting up distinct entities for various aspects of the business—such as holding assets separately from operational activities—can provide tax benefits. This approach allows businesses to offset profits and losses, reducing overall tax exposure.
Holding Companies:
Establishing a holding company for managing family investments—such as real estate, stocks, or other ventures—can be a tax-efficient approach. Holding companies may qualify for exemptions in certain sectors, and their structure allows for better management of assets and income.
Income Allocation:
By strategically allocating income across different family members or legal entities, you can lower the overall tax burden. This could involve paying salaries to family members involved in the business or distributing income in a tax-efficient manner.
Actionable Tip: Work with a tax consultant to design a business structure that minimizes tax exposure while supporting the long-term goals of the family business.
3. EFFICIENT USE OF DIVIDENDS AND PROFIT DISTRIBUTIONS
Dividends and profit distributions offer tax-efficient ways to transfer wealth from the business to family members:
Tax-Exempt Dividends:
In the UAE, dividends paid by companies are generally tax-exempt, allowing family business owners to withdraw profits without incurring additional tax liabilities.
Strategic Profit Distribution:
Family members in lower tax brackets may benefit from receiving distributions, reducing the overall tax burden of the business. However, it’s important to balance profit distribution with the need to reinvest in the business for future growth.
Actionable Tip: Plan profit distributions carefully, considering the individual tax positions of family members and the financial needs of the business.
4. ADHERE TO TRANSFER PRICING REGULATIONS
Transfer pricing in the UAE has introduced rules that require businesses with related-party transactions to ensure pricing is in line with market standards. These rules help ensure that profits are properly allocated between jurisdictions, avoiding penalties for non-compliance.
Arm’s Length Pricing:
Related-party transactions, such as the transfer of goods, services, or intellectual property between family-controlled entities, must follow arm’s length pricing. This means the prices must reflect what unrelated parties would pay in similar transactions.
Documentation and Compliance:
To comply with transfer pricing regulations, businesses must maintain proper documentation that justifies pricing decisions. Failure to do so can result in fines or adjustments to taxable income.
Actionable Tip: Ensure that related-party transactions are priced correctly and maintain the necessary documentation to comply with UAE regulations.
5. LEVERAGE THE UAE’S NO INHERITANCE TAX POLICY
One of the key benefits for family-owned businesses in the UAE is the absence of inheritance tax or estate duty. This can be a significant advantage for businesses looking to maintain wealth across generations.
However, while there is no inheritance tax, careful planning is still required for the smooth transfer of ownership:
Estate Planning:
Implement a comprehensive estate plan to ensure a smooth transition of ownership and management to the next generation. This can include legal tools such as wills and family trusts, which help preserve control and minimize potential disputes.
Succession Planning:
A well-thought-out succession plan ensures the family business’s continuity, protecting its value for future generations. Proper estate planning also helps mitigate the risk of family disputes, which can hinder the business’s success.
Actionable Tip: Consult with estate planning experts to structure your business and wealth in a way that ensures a seamless transition of ownership.
CONCLUSION
Family-owned businesses in the UAE can take advantage of several tax-efficient strategies to enhance profitability and ensure long-term success. From leveraging corporate tax exemptions and optimizing business structure to strategically using dividends and complying with transfer pricing regulations, there are multiple ways to minimize tax liabilities.
At Creation Business Consultants, we specialize in helping family businesses create tailored tax strategies that align with their goals. To find out how we can help you enhance tax efficiency and plan for the future, contact our team today, Email: [email protected], or call UAE: +971 4 878 6240 | Saudi Arabia: +966 54 995 267.
