Shareholders’ Perspective on Corporate Income Tax
What Is Corporate Income Tax and Why Does It Matter to Shareholders?
Corporate Income Tax is a direct tax charged on a company’s net profit. People also call it business profit tax in some places. In the United Arab Emirates, companies must pay 9% corporate income tax if their net profit is above AED 375,000. At first, shareholders carry most of the tax burden, but over time, the effects spread across the company.
When a company pays corporate tax, the profit left for shareholders gets smaller. This sometimes makes investors move their money from corporate shares to safer places where taxes might be lower. Still, research from the Queensland University of Technology shows that companies paying more tax can give better returns to shareholders, both as dividends and capital gains.
How Do Shareholders React to Corporate Tax?
Shareholders often think about shifting investments when corporate tax goes up. They look for non-corporate investments to lower their tax burden. Sometimes, moving investments might reduce the money available for companies, which can slow down their business activities. Even though some shareholders switch to safer options, others still see good returns by holding on to their company shares.
Why Do Companies Use More Debt After Corporate Tax Is Introduced?
After the UAE introduced corporate tax, many companies started using debt along with equity. This is because interest payments on debt lower taxable profits. Companies that use debt can increase their Earnings Per Share (EPS) for shareholders. Let’s look at a simple example:
Example: The Effect of Debt on Shareholder Returns
Let’s say a company earns AED 500,000 as profit before tax, and it can choose between two capital structures:
Case 1: 100% Equity
- Capital: AED 400,000 (40,000 shares at AED 10 each)
- Earnings Before Tax: AED 500,000
- Tax at 9%: AED 11,250
- Profit After Tax: AED 488,750
- EPS: AED 12.21
- ROE: 1.22
Case 2: 50% Equity & 50% Debt (with 10% interest on debt)
- Capital: AED 200,000 equity (20,000 shares) + AED 200,000 debt
- Interest: AED 20,000
- Earnings Before Tax: AED 480,000
- Tax at 9%: AED 9,450
- Profit After Tax: AED 470,550
- EPS: AED 23.52
- ROE: 2.35
From this, you can see:
- Using debt can raise EPS and ROE.
- Debt interest lowers taxable income, so the company pays less tax.
- Shareholders may get higher returns when companies use a mix of debt and equity.
What Tax Planning Tips Help Shareholders?
Shareholders and companies both need smart tax planning to save money. Here are some useful tips:
- Invest in Tax-Efficient Assets: Bonds and other tax-efficient accounts can reduce your tax load.
- Plan for Depreciation: Buying equipment or long-term assets lets companies claim depreciation. This lowers taxable profits and saves money.
- Diversify Investments: Spread your investments across different types to balance risk and benefit from tax rules.
- Watch for Law Changes: Always check for new tax rules in the UAE.
- Use Professional Advice: Firms like Mubarak Al Ketbi (MAK) Auditing offer expert tax planning.
Why Does the UAE Attract Shareholders and Investors?
The UAE charges only 9% corporate income tax, which is lower than other GCC nations. This low tax rate makes the country attractive for both local and foreign investors. Lower taxes help companies grow and boost job creation, and they also encourage shareholders to invest more in UAE businesses.
What Are Some Common Concerns About Corporate Income Tax?
- Higher taxes might push some investors away.
- Companies might use more debt to lower tax payments.
- Some shareholders worry about getting less profit.
- The UAE’s low rate (9%) still helps the country compete for new investments.
How Mubarak Al Ketbi (MAK) Auditing Can Help
Mubarak Al Ketbi (MAK) Auditing helps shareholders and companies manage corporate tax the right way. Our team offers advice on tax planning, profit strategies, and ways to grow investments. Remember, “don’t let the grass grow under your feet”—get expert help before tax worries pile up!
- For more information, visit our office:
- Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Or contact/WhatsApp: +971 50 276 2132
