Emerging Gulf tax order to challenge family businesses

• Family-owned businesses are the backbone of the world’s economy, contributing to over 70% of global gross domestic product (GDP). They hold even greater importance in the GCC, accounting for about 90% of the private sector economy. “We are the private sector in our part of the world,” wrote the Family Business Council-Gulf (FBCG) website, a Dubai-based non-profit family business organization.
• Most Gulf family businesses are household names in the region. The Olayan Group in Saudi Arabia was founded in 1947 and owns $8 billion in assets. The Alshaya Group, first established in Kuwait in 1890, is a leading brand franchise operator with over 4,000 outlets across the Middle East region, Turkey and Europe. UAE's Majid Al Futtaim Holding owns $16.5 billion worth of assets and operates 423 Carrefour hypermarket and supermarket stores. Cars importer Saud Bahwan Group was established in 1965 as Toyota’s distributor in Oman. The Alfardan Group in Qatar was established in 1954 from its roots in the once-vibrant pearling industry. Today its portfolio of activities ranges from jewelery to financial exchange, car dealing, hospitality and marine services.

Tax landscape

• The UAE will levy a 9% corporate tax from June 2023 on taxable income exceeding AED 375,000 ($102,000), irrespective of the company's ownership. The approach contrasts with practices in Saudi Arabia, Qatar and Kuwait, where companies owned by nationals and/or GCC citizens enjoy tax exemptions or highly favorable rates.
• The Gulf’s business hub introducing universal corporate taxation — which is already in force in Oman — sets the stage for a regional shift. Yet, equal treatment for multinationals and GCC-owned businesses will be slow to materialize, particularly in countries where populist forces, such as in Kuwait, exert substantial influence over economic policies in favor of their own citizens.
• Bahrain, the last GCC country not committed to levying non-oil corporate tax, has “incorporated” corporate tax into its plans, its minister of sustainable development said in January. An announcement could be made in the second half of 2023, said Mubeen Khadir, Head of Tax at accounting firm KPMG Bahrain, speaking in a personal capacity. “I think it will follow the UAE approach to taxation. Family businesses know that Bahrain needs to diversify its revenue base,” he told Al-Monitor.
• The key factor inciting corporate taxation in the Gulf, and a justification for extending it to local businesses, is a 15% Global Minimum Tax rate on multinationals. The OECD/G20 agreement pushes the region to take a slice of profits earned within their borders rather than seeing them taxed abroad. “We are witnessing the century’s biggest tax change. It is a historic moment globally and for GCC countries where tax dynamics are changing significantly,” said Rushabh Vora, a tax expert in the UAE.
• The tax era will compel family businesses to be “more organized,” to set up IT tools to produce real-time financial data and to “relook their business structures,” experts explained. “The mindset that prevailed for decades will not hold true today,” Vora said. Emirati family business Al-Futtaim Group partnered with software maker SAP in January 2023 to integrate its systems in the cloud and operate a “full digital transformation.”
• Vora added that “shifting profits from one entity to another can no longer be seen as moving money from one pocket to another. They need tax efficient legal structures.” According to Khadir, one of the “biggest challenges” ahead is to distinguish between business expenses and family expenses. “They will need to be clear on this demarcation.”

Market conditions

• “Many Gulf family businesses have operated for a very long time in a vacuum where they did not experience competition due to exclusive arrangements and foreign ownership restrictions. The lifting of some of these restrictions and introduction of taxation will require them to be more competitive,” Khadir said. A 2017 study found that increased competition was a concern for 48% of family businesses in the Gulf.
• Also, the Financial Times reported in December 2021 that the UAE “told some of its biggest business families that it intends to remove their monopolies on the sale of imported goods.” Family dynasties have thrived for decades on reaping profits from a regulation that compelled multinationals to appoint a local company to sell their goods across Gulf markets.
• Saudi Arabia is also opening up to global investments. It stripped the religious police of its privileges, relaxed gender segregation rules and allowed women to drive. But scratch beneath the surface and the greatest threat to family businesses is homegrown. The kingdom’s sovereign wealth fund, the Public Investment Fund (PIF), floods the market with new government-owned companies to lead economic diversification.
• Evolving is then a matter of survival to not fall behind new players, foreign and sovereign. “This is really 'let’s wait and see,' but in the past, the more resilient family businesses have shown that they are willing to engage in professionalization,” said Mohamed Al Moosa, a program manager at Pearl Initiative. The Emirati non-profit organization works to improve corporate accountability and transparency in the Gulf.

Opportunities

• Despite challenges, Gulf governments have little interest in throwing out of business companies run by some of the region’s most influential families, who are closely linked to key players in state institutions.
• Dubai launched the ‘Thabat’ program in September 2022 to “boost” competitiveness and continuity of family businesses. The program aims to “transform 200 family business projects into major companies by 2030.” On the regulatory front, the UAE’s new family business law came into force in January 2023 to regulate family businesses’ governance and “facilitate their continuity.” Al Moosa told Al-Monitor succession is a key concern. About half of Gulf family businesses’ are “transitioning” from second to third generation, with many unprepared for it, a 2017 study found.
• Al Moosa said the evolving landscape is “the sign of the GCC economies maturing and moving on to the next level.” He believes youth hold the key to lead a shift that will require “a lot more agility and openness.” He said: “The next generation is educated, capable and excited to take things to the next level. They do not see themselves exclusively as custodians of passing on the baton; they approach family businesses as platforms towards building something greater.” But luring tech-savvy youth would not happen overnight; family businesses will need to enhance their appeal.