< Previous30 CEO MIDDLE EAST FEBRUARY 2023 nnovation and competitiveness have always been the corner- stones of the UAE’s social and economic vision, and this is reinforced by the recently stated government objectives. One of the most discussed objectives is the Corporate Income Tax law effective June 1, marking the UAE’s corporate tax as one of the lowest in the world. This will have several implica- tions for foreign investors such as a more defined tax relief programme as well as a strengthened private sector. Among the changing tax landscape, foreign investors will see a rapidly chang- ing UAE that becomes more business- friendly by the day. As a critical part of the country’s vision is to increase the country’s non-oil exports and raise the value of foreign trade to AED4 trillion, attracting investors and stimulating the private sector will be key pillars of the country’s future. This means that inves- tors and businesses will have a critical role to play in the bigger picture, which could potentially lead to higher returns in investment for both smaller businesses as well as multinational companies. The UAE’s corporate tax regime on international trade The UAE’s corporate tax regime, with a headline rate of 9 percent on taxable profits of more than AED375,000, will be amongst the most competitive in the world, making it one of the countries with the lowest corporate income tax rates globally. It brings the Emirates in line with international standards while continuing to support small businesses and startups, and promotes the much- needed transparency and accountability for companies. For foreign investors, the low corpo- rate income tax rate means that they will have a higher return on their investments in the country compared to other mar- kets, which could lead to higher relative revenue. A higher return could also mean that companies can increase their invest- ment in their capital, which could poten- tially lead to enhanced quality products and output and improved talent in the country. To help understand these nu- ances, our tax team at Grant Thornton has already been helping finance teams in the UAE to prepare for the upcoming changes and ensure that they maximise their revenue while remaining compliant. However, a critical point to under- stand is that the development of the UAE’s corporate tax regime also means that businesses are also getting the right The UAE is getting more business friendly by the day, writes Steve Kitching and Sam Maycock, tax partners at Grant Thornton UAE CORPORATE TAX AND FOREIGN INVESTORS Business-friendly environment. The UAE’s corporate tax regime, with a headline rate of 9 percent on taxable profits of more than AED375,000, will be amongst the most competitive in the world TAX $599BN The UAE’s projected non-oil trade in 2023, according to the UAE Ministry of Economy IFEBRUARY 2023 CEO MIDDLE EAST 31 TAX Supporting businesses. Steve Kitching (left), and Sam Maycock, tax partners at Grant Thornton, are specialists in providing clients a gateway to business resources in the region tax relief. The UAE currently has an ex- tensive network of tax treaties with other countries, with more than 100 agree- ments with economies around the world. One of the key purposes of these treaties is to make it easier for international trade, such as providing relief for situa- tions where businesses are taxed on the same income in more than one country, making it simpler for investor flows and cross-border trade. The continued development of the UAE’s corporate tax regime is important for ensuring that businesses in the UAE have full access to the benefits available under the tax treaties. For premium foreign investors and businesses with the multinational footprints, this should provide comfort in investing in the UAE as it defines how they can benefit and optimise their operations. We’ve observed that tax relief is a knowledge gap for foreign investors looking into the UAE market, which is why we are diligent in ensuring that our partners re- ceive the right counsel about their relief qualifications. The investor-friendly environment in the UAE The UAE has always been a popular destination for foreign direct invest- ment given its high quality of life, stable economy, business-friendly regulations, state-of-the-art infrastructure and glob- al trading links. The UNCTAD World Investment Report 2022 puts UAE at the top in the Arab world and the 19th country globally for its ability to attract foreign direct investment. We can expect this momentum to be strengthened by the various government initiatives to attract more foreign investment. The Dubai Economic Agenda D33, which was announced earlier last month, also includes 100 transformational projects that will bolster trade and investment. Our team at Grant Thornton has seen the ripple effect of these welcoming corporate laws and initiatives among our client’s decision to invest to the UAE. The key drivers for their decision include there will be a higher demand in other sectors. The knock-on effect of this is more innovation from the private sector as it continues to flourish in its pursuit to meet the higher demand, reinforcing the country’s economic trajectory and its status as a lucrative and competitive investment destination. Likewise, the government has also stated several objectives to enhance the UAE’s social wellbeing. While it has not been specifically stated how the additional tax revenue will be spent by the UAE government, we saw from the recently approved UAE federal general budget that providing high levels of social welfare, healthcare and education in the UAE were key priorities. Similarly, the country also announced its goal to enhance its economic environment. The UAE government may look to increase their public spending as a way of stimu- lating economic expansion, establishing a stronger UAE economy that comple- ments overseas investment. With several ambitious goals in the horizon, changes such as the corporate tax regime mark concrete paths to realise the UAE’s vision. With strategic tax advisors such as Grant Thornton, foreign investors and the overall private sector will have unique opportunities to build the country’s economic landscape and sustain long-term presence and returns. Given global instability, the country’s boldness symbolises its confidence and commitment, and one of its top priorities is to be a strong partner to businesses around the world. “ONE OF THE UAE’S TOP PRIORITIES IS TO BE A STRONG PARTNER TO BUSINESSES AROUND THE WORLD” a more business-friendly regime offered, the ability to have 100 percent foreign ownership of certain onshore companies and diverse visa structures. In addition to this, there are about 44 free zones that cater to a range of sectors and provide focused support and opportuni- ties for companies set up within them. These businesses can also continue to maintain a zero percent tax position if they meet certain criteria. The UAE’s central geographical location and excel- lent infrastructure are other important factor for investors, especially for those who want a central hub for their global business operations. Corporate tax in an evolving UAE When we look at the bigger picture, the new corporate tax is a crucial step in the UAE’s goal to diversify the country’s economy away from the oil sector. New streams of government revenue mean that they will be able to sustain econom- ic growth through other projects beyond the energy industry. In other words, 32 CEO MIDDLE EAST FEBRUARY 2023 he year 2022 ushered in a new era for Dubai. It is likely to be remembered for the new milestones the emirate has crossed. Dubai consolidated its status as the world’s leading FDI hub, retaining its first rank globally for at- tracting FDI projects during H1 2022. At 11.4 million overnight international visitors during the first ten months of 2022, Dubai has shown more than 100 percent growth over 2021. By attracting property investors and hedge funds, Dubai has broken out of the league of other Middle Eastern nations. Dubai: Top FDI destination As per the latest numbers from Dubai’s Department of Economy and Tourism, the emirate attracted 492 FDI projects, registering an 80.20 percent increase over last year’s num- bers. Dubai also ranked first globally in terms of attracting greenfield FDI projects. These projects accounted for around 56 percent of Dubai’s FDI projects. In absolute terms, Dubai witnessed FDI inflows of AED13.72bn ($3.73bn) during H1 2022. These projects generated 15,000-plus jobs as investor confidence in the emirate remained high. Economic stability, liberal and inclusive growth laws and bright prospects are some factors that have contributed to the emir- ate’s success. In addition, not just the traditional real estate and trade sectors but the emirate has received sizeable inflows in other sectors, like data processing, financial services, and industrial equipment. Dubai: The hub of travel and tourism With more than 11 million visitors last year, Dubai aims to host 40 mil- lion hotel guests by 2031 and astro- nomically push the tourism sector’s contribution to GDP. It seeks to achieve this by increasing annually by AED27bn. Comparing the overall Dubai has begun its path to becoming a dominant force in global investment THE NEW INVESTMENT DESTINATION BEHEMOTH IN THE MAKING Detailed knowledge. The increased regional liquidity will help sustain the business opportunities and investments in Dubai, Valecha says INVESTMENT BY VIJAY VALECHA, CHIEF INVESTMENT OFFICER, CENTURY FINANCIAL TFEBRUARY 2023 CEO MIDDLE EAST 33 INVESTMENT Robust economy. Dubai witnessed FDI inflows of $3.73bn during the first half of 2022 numbers with the pre-pandemic era, the YTD average occupancy till Oc- tober 2022 was only 2.4 percent less than pre pandemic base. This is again reflected in revenue per room which reached AED362, above AED245 seen from January to October 2021 and AED295 number seen from Janu- ary to October 2019. As ranked by Euromonitor Inter- national’s Top 100 City Destinations Index 2022, Dubai is the world’s second most attractive destination for tourism. Dubai scores well on the six critical pillars of the survey rank- ing – economic and business perfor- mance, tourism performance, tourism infrastructure, tourism policy and attractiveness, health and safety and sustainability. For Dubai, the icing on the cake is another projection sug- gesting that the emirate will record the highest tourist spending among all the cities reaching $29.5bn. Dubai also emerged in the top five places amongst the top 10 busiest air travel routes last year. The MICE segment (Meetings, Incentives, Con- ferences and Exhibitions) has been the prime stimulus factor for Dubai’s tourism growth. Dubai: The newest fad amongst hedge funds Prominent names such as Millen- nium Management and Blue Create Capital are now part of a growing clutch of firms choosing to expand their operations base over here. For Dubai, the Brexit debacle and Hong Kong’s Covid-19 restrictions have been a blessing in disguise. Brexit has spurred many funds to seek new offices outside London. Dubai’s tax- free welcome mat makes it more lu- crative for such firms to set up a new base. Global consultancy firm Henley Global Citizen has projected that the UAE will attract more than 4,000 millionaires this year. In addition, the UAE’s digital nomad visa and several investor programmes offer an attrac- leaps and bounds. For example, in DIFC, one of the significant financial service’s free zones in Dubai, 537 new companies joined the free zone. With this 15 percent growth, DIFC is now home to 1,252 financial and innova- tive related companies. Capitalising on global reopening theme The Dubai economy has been growing at around 6.3 percent since mid- 2021 since the domestic Covid-19 restrictions were lifted. The services segment, which was the worst hit, is leading the gains amongst the other sectors. The increased regional liquidity will also help sustain the business opportunities and invest- ments here. Should the ongoing global reopening theme stay intact, the entire narrative of Dubai and UAE as the top investment destina- tion will only grow louder. With China yet to reopen completely, UAE, led by Dubai, will surely benefit from this low-hanging fruit. 1,252 The number of regional and international companies operating in DIFC “THE ENTIRE NARRATIVE OF THE UAE AS THE TOP INVESTMENT DESTINATION WILL ONLY GROW LOUDER” tive incentive to those willing to make this country their home. In the financial services indus- try, too, Dubai is trying to grow by 34 CEO MIDDLE EAST FEBRUARY 2023 n 1950, the global popula- tion stood at approximately 2.5 billion people. There are now 8 billion people in the world, and by 2050, an estimated growth of about 20 percent will make it nearly 10 bil- lion. Humanity has made enormous progress, but it has often been at the expense of the environment. As the number of people on our planet rises, increased demand for essential needs such as housing will have a negative en- vironmental impact unless solutions are adopted. LEED (Leadership in Energy and Environmental Design) projects have become one of the globally recog- nised solutions in real estate that allows cities, communities, and neighbour- hoods to be built consciously. In a world that revolves around profit margins, tackling global chal- lenges like climate change and over- population has not always been a priority. But the tide is turning. Global initiatives like the Paris Agreement, and regional ones like UAE Net Zero 2050, have been deployed to ensure that future residents of our planet can prosper. Moreover, the UAE has strategically laid out actionable steps to achieve this accordingly, as at last year’s COP 27 they pledged to increase their emission cuts from 23.5 percent to 31 percent to achieve an 18 percent reduction by 2030 and a 60 percent re- duction by 2040. LEED developments have also been effectively contributing to positively reshaping the real estate landscape. And it is required now, more than ever before. A symbol of sustainability achievement and leadership The LEED certification system was developed by the US Green Building Council (USGBC) in 1993 as a rating system for designing, constructing, op- erating and maintaining environmen- tally responsible buildings. Today, it is the most widely used green building rating system in the world and rates the health, efficiency, and cost-saving of developments across four tiers: • Certified (40-49 points) • LEED Silver (50-59 points) • LEED Gold (60-79 points) • LEED Platinum (80 points and up) Over 80,000 buildings were recog- nised as LEED certificated by 2015, and as of October 2022, there are now more than 100,000 projects that pos- sess this certification around the world. The rise of LEED-certifi ed projects in the UAE is a key dynamic the real estate industry needs to watch, writes Madhav Dhar, co-founder and COO of ZaZEN Properties LEEDING FROM THE FRONT Decarbonisation efforts. LEED-certified projects make a significant dent in minimising carbon footprint, Dhar says REAL ESTATE I 100,000+ The number of LEED-certificated projects around the world as of October 2022FEBRUARY 2023 CEO MIDDLE EAST 35 REAL ESTATE Environmentally sound. UAE developers are launching LEED residential projects at a faster pace than ever before The “LEEDerboard” today According to the USGBC, the UAE was the world’s sixth most LEED-certified country in 2021 with 73 projects span- ning a total of 13,733,832.33 square feet. With the UAE government citing that 121 LEED-certified buildings rose as a byproduct of Expo 2020 – 103 of which were LEED Gold – the country is poised to climb the global leaderboard; efforts like the Dubai 2040 Urban Mas- ter Plan have mapped out a blueprint for sustainable urban development to help see this through. For the time being, Mainland China boasts the top spot with a whop- ping 1,077 LEED-certified projects that span 152,325,125.75 square feet. Canada, India, Korea, and Spain round out the top five. The rapid rise of LEED residential projects In 2017, 1,415 LEED residential pro- jects were registered around the world. In 2021, an additional 3,572 builds were added to the global market. Dur- ing these five years, LEED residen- tial developments increased by 152 percent, and this trend is maintaining momentum. With buildings being responsible for almost 40 percent of global CO2, LEED-certified projects make a signif- icant dent in minimising carbon foot- print through a 34 percent reduction in emissions. Yet, more diligent efforts are needed especially when considering that experts expect emissions to be 50 percent higher this year than they were when the Industrial Revolution began. Making eco-friendly efforts profitable In terms of usability, green buildings are superior to ordinary buildings, but many developers have been reluctant to apply the concept to their projects. This is because high initial capital is required and the price tag is often perceived as too steep of an investment – however, this is not the case. LEED in the UAE The UAE has become a global leader in many facets of the world, and sus- tainability is no different. By 2050, when 68 percent of the world’s popu- lation will be living in urban areas, the country is aiming to reduce its carbon footprint by 70 percent. In real estate, UAE develop- ers are launching LEED residential projects at a faster pace than ever before to help achieve this, led by developers like Diamond Developers and Z a ZEN Properties. One of the largest challenges for the Middle East is the amount of energy used for cooling homes. Air conditioning can represent more than 70 percent of peak residential electric- ity demand in the region on extremely hot days. Z a ZEN Gardens, the first residen- tial and retail LEED Gold certified project in Al Furjan, will save more than 24 percent in annual electrical costs. Helping to combat the expected increase in global energy requirements for cooling homes, that are meant to triple by 2050. As the UAE continues its sustainable journey, the growth of LEED develop- ments in the country’s residential space is a welcome sign that will help the real estate sector move towards a positive contribution to the environment. LEED-certified buildings are cheaper from an operational stand- point. They have proven to be long- term assets for both developers and end-users. In fact, from 2015 to 2018, LEED-certified developments saved estimated expenses of $1.2bn in energy, $149.5m in water, $715.3m in mainte- nance, and $54.2m in waste. For such reasons, they command the highest rents, while lease-up rates typically range from average to 20 percent above average. Furthermore, vacancy rates for green buildings are an estimated 4 percent lower than non- green properties and this is why about 61 percent of corporate leaders believe that sustainability leads to market differentiation and improved financial performance. “THE UAE HAS BECOME A GLOBAL LEADER IN MANY FACETS OF THE WORLD, AND SUSTAINABILITY IS NO DIFFERENT”36 CEO MIDDLE EAST FEBRUARY 2023 t is no secret that we are all entering 2023 with a consid- erable amount of caution. The post-lockdown bounce back saw a resurgence in demand for everything from cars to phones, quickly exerting crippling pressure on supply chains and manufacturing facilities world- wide. The renewed appetite, following cash injections by some governments and increased liquidity, naturally stoked inflation in many countries, and interest rate hikes followed to limit consumer spending and curb demand. Meanwhile, in our Middle Eastern markets, a period of sustained high oil prices has helped us offset some of the uncertainty around the world as our economies enter the new year with healthier balance sheets. The IMF expects energy exporters in Mid- dle East and Central Asia to earn a cumulative windfall of about $1 trillion over 2022-2026, with the Kingdom of Saudi Arabia (KSA) and other GCC exporters likely to benefit the most. Swift government action in countries such as the UAE in response to the pandemic have also been instrumental in preparing the country for change and the next stage of growth. Real estate industry continues to thrive However, given our peg to the US dol- lar, our policy action – namely interest rate hikes – will also mirror that of the US and therefore does not make us entirely immune to economic shocks being felt around the world. On the real estate side of the busi- ness, we are already seeing the effects of tighter liquidity, more prominently in some sectors than the others. In the UAE, the prime residential real estate sector continues to thrive, as the desire to own a larger space in a location that offers a high-quality lifestyle continues to remain strong, amid thin supply. One of the main reasons that this market continues to see strong transaction activity is that Real estate continues to climb in the Middle East even amid global economic slowdown AMID GLOBAL UNCERTAINTY, THERE IS CAUTIOUS OPTIMISM FOR THE MIDDLE EAST IN 2023 Intuition. The office sector is expected to largely bear the brunt of potentially lower capital market investments globally, according to Morgan REAL ESTATE BY STEVEN MORGAN, CEO MIDDLE EAST, SAVILLS IFEBRUARY 2023 CEO MIDDLE EAST 37 REAL ESTATE In demand. Prime residential real estate sector continues to thrive in the UAE many buyers of prime property, espe- cially those buying for end-use, are not as reliant on the mortgage market and have the appetite to transact in cash. It would be premature and perhaps too optimistic to say that the pace of price growth in this segment will continue unabated in 2023. The other sector that will likely be more affected by tightening credit and economic uncertainties is com- mercial real estate. Whilst industrial warehouses continue to benefit from the deepening penetration of ecom- merce, the office sector is expected to largely bear the brunt of potentially lower capital market investments glob- ally. According to the Savills Global Capital Markets Quarterly Update for Q3 2022, transaction volumes globally have fallen sharply, with higher debt costs and the deteriorating economic outlook starting to weigh on invest- ment activity. On the regional side, a factor that will likely cushion the impact of this is improving occupier markets. KSA will be leading growth in the Middle East, with its economy likely to expand by 8.3 percent in 2022 according to the is on firm footing and the GDP is ex- pected to grow by 7.6 percent this year, according to the UAE Central Bank. Any continued growth in the non-oil sector will bode well for the overall economy and lead to high occupancy levels across the Grade A develop- ments, which are already scarce, thereby pushing rental values upward going forward. The region also boasts a strong development pipeline – the Middle East and North Africa have projects worth $1.4 trillion under various stages of development and planning. Regional economies are without a doubt proving more resilient than expected to global headwinds such as higher inflation and rising interest rates, helped by encouraging policy action, investments into infrastructure, and development of talent. However, any protracted global economic down- turn will naturally impact our region. The resilience of global labour markets, the pause or even potential reversal of interest rate hikes, and easing of persistent inflation amid supply chain stresses and geopolitical uncertainty will all be the defining themes of 2023. $1.4 TRILLION The value of projects in the MENA region under various stages of development and planning “REGIONAL ECONOMIES ARE PROVING MORE RESILIENT THAN EXPECTED TO GLOBAL HEADWINDS” World Bank, its strongest in a dec- ade, which will also augur well for the commercial segment. In the UAE, PMI data for the non-oil sector suggests that the country’s economic recovery 38 CEO MIDDLE EAST FEBRUARY 2023 he global downturn is here, but let’s not say it comes as a surprise. After almost three years of global health and geopolitical crises – what we might call plague and war – we are seeing top-end valua- tions of tech and growth companies being discounted, putting the markets in turmoil. The economic response to the pandemic that caused shocks to sup- ply chains and saw huge sums spent by governments to shore up their economies was always going to cause inflation changes in asset valuations. Unsurprisingly, this global reckoning has hit MENA’s comparatively young ecosystem of startups and founders hard. Quenched demand due to con- sumers spooked by rising living costs only increased the pressure. The data resembles a rollercoaster, reflecting market uncertainty and the ability of a few huge deals to create wide variations in investment totals. September 2022 had MENA startups raising $174m, marking a 50 percent drop year-on-year. While August had seen a notable uptick in investment activity, July recorded the year’s low- est amount to date, with only $105m raised by startups region-wide. Just a year ago, the region’s startup sector was showing signs of overheat- ing. While some young and unexperi- enced founders are now suffering the consequences of running unsustain- able businesses – it cannot be ignored they had investors and venture capi- talists who enabled all that growth (on paper, anyway). While funding headlines abound- ed, successful exits were less wide- spread. Instead, there were cases of startups that – after reaching several hundred million dollars of valuation without any semblance of profit – would start their exercises in financial gymnastics – to legitimise the next financing round. Questionable VC funding decisions contributed to a founder culture too little concerned After a rollercoaster few years, it’s time for a more sober outlook MIDDLE EAST STARTUP FUNDING IS OVERHEATING: IT’S TIME TO SLOW DOWN Business plan. Founders should present a clear path towards profitability, or at least self-sustainability, to investors early on, Sakr believes STARTUPS BY TAREK SAKR, CO-FOUNDER AND CEO OF 4SALE TFEBRUARY 2023 CEO MIDDLE EAST 39 STARTUPS Slower pace. MENA’s tech and startup ecosystem today is more sober, compared to the feverish environment of 2022 about long-term value creation. And that’s a big problem. This is not simply, or primarily, a notion about morals or business cul- ture or bringing value to consumers. An underappreciated downside of the current founder culture is – it does not financially reward founders, at least not permanently. Stellar valuations during the hype cycle are what might be seen as a sugar high. We also must stop using the flawed comparison with everyone’s favourite growth stocks like Google, Amazon, or SpaceX. These companies – all of them trailblazing and amazing busi- nesses – are not profitable because they choose not to be. ‘Planting’ potential profits into further growth to stay at the frontier of tech business, the value and vi- ability of their business models has been proven beyond doubt. Once these companies decide it is time to leave the growth path and give money back to their shareholders, their incredible valuations will reliably convert into massive dividends. The MENA tech company which convincingly could make a similar case using this business model has yet to be founded. MENA’s tech and startup ecosys- tem today is more sober, compared to the feverish market environment as recent as the start of 2022 when the world was coming out of the pandemic. Throw in the cold shower of the Russian/Ukraine war starting late February – and the sanctions that followed it – and the blast of uncertainty has resulted in public and private markets being nowhere near record valuations. Persistently elevated inflation has raised cost of capital around the globe and fears of recession are looming large. Contrary to becoming alarmed by what we are seeing I’d like to advance a daring but optimistic prognosis: what we are witnessing is the regenera- tion of the region’s start up ecosystem. Sure, there will be many down rounds, instead of relying on the next round when the last one has been burned through. Commercially viable prod- ucts should be outlined clearly at this point, and break-even become visible at the horizon. • If entrepreneurs and VCs can identify excess growth potential after having hit these milestones, additional or increased funding can be justified. This sounds arduous and less exciting, and indeed it is. Voices arguing for a less profit- focused approach by championing innovation are, however, deceptive. In fact the opposite is true – MENA’s startup culture over recent years has skewed incentives by elevating compelling narratives over practical application, and hype around buz- zwords over genuine progress. Such a culture stifles innovation, and will fail to adequately reward its innovators. Hence the correction at a time when markets are nervous. The current situation, at least in the Middle East, is more a re-evalua- tion than a recession caused by funda- mental problems within the economy. If it changes the Middle East’s startup culture, it might just be the wake up call we needed. $174M The funding MENA startups raised in September 2022 with disappointed founders, desper- ate VCs, and disenchanted investors. Certainly, MENA entrepreneurs will go through their fair share of bankruptcy filings, painful layoffs, and ambitious business dreams vapourised – like so many in other global markets. But – the one big learning inves- tors, VCs, and founders will share is – profit must be front and centre. A healthy founding culture for the MENA region would be a prize well worth the current pain. A sustainable approach could look like this: • Founders should present a clear path towards profitability, or at least self-sustainability, to investors early on. VCs need to be vigilant to make sure this requirement is met for all their investments. • Revenue goals must be reached with a reasonable amount of funding, Next >