Corporate Tax and the New Pension Scheme: With the UAE’s introduction of a federal corporate tax (at 9% on taxable profits) in 2023, the structure of employee end-of-service benefits can directly influence a company’s tax bill. Under the traditional gratuity system, employers would accrue a liability but generally only recognize the expense when paying out the gratuity at employee termination. Now, if a company opts into the Alternative End-of-Service Benefits Savings Scheme, each monthly contribution is an expense on the income statement – and thus likely deductible for corporate tax purposes in the year it’s paid. In effect, companies get to accelerate the tax deduction of end-of-service benefits.
For example, consider a company with a large workforce that would owe AED 5 million in gratuities annually (when averaged out). Under the old system, if that AED 5 million wasn’t actually paid in a given year (because employees didn’t leave), it wasn’t a realized expense for tax purposes. Now, by contributing that amount into the pension fund throughout the year, the company can deduct it against revenue, potentially saving up to AED 450,000 in taxes (9% of 5 million). This aligns with the stated benefit that employers receive corporate tax advantages through voluntary participation
Over time, these tax savings can significantly offset the administrative costs of the new scheme.
It’s important for CFOs to ensure these contributions are properly documented and comply with the tax authority’s requirements for deductibility – e.g. payments must be made into an approved scheme (the UAE requires choosing a SCA-licensed fund provider) and within the deadlines (contributions must be remitted within 15 days of month-end)
Failure to comply might risk the deductibility of those contributions, so partnering with a compliant provider like HAYAH (which is SCA-licensed and experienced in the process) adds assurance that your tax benefits are secured.
Treatment of Investment Income: Another angle is how the investment returns within the pension fund are treated tax-wise. In many countries, pension fund growth is tax-exempt or tax-deferred to encourage saving. In the UAE, there is currently no income tax on individuals, so when the fund generates returns (interest, dividends, capital gains), those accrue to the employee’s benefit without any tax drag – a significant advantage. Essentially, the employee’s portion grows tax-free, and the employer isn’t taxed on those returns either, since the funds are not on the employer’s balance sheet but in an independent trust/fund. This is akin to the treatment of retirement funds in most jurisdictions (e.g., a 401(k) in the U.S. grows tax-deferred for the individual).
From the corporate perspective, once contributions are made, any future growth is off the company’s books. This means shifting to the funded scheme might slightly reduce the company’s future reported profits compared to a scenario where it held onto cash (because instead of the company earning interest on cash reserves that were for gratuities – and then paying tax on that interest – the cash is moved to the fund). However, this is usually a minor consideration and is outweighed by the benefits of securing employee funds and getting immediate tax deductions.
VAT and Other Taxes: The UAE doesn’t impose VAT on financial services in the straightforward sense, and contributions to a pension fund are not subject to VAT (they’re not a payment for a service; they’re more like a transfer to a trust for employees). The fees charged by a pension provider might have VAT implications if the provider’s services are deemed standard-rated – however, most life insurance and saving schemes in the UAE are exempt or zero-rated for VAT. HAYAH, being regulated by the UAE Central Bank, structures its products in compliance with VAT laws, so employers typically would not see a VAT cost on the pure pension contributions. It’s wise to confirm with providers if any part of their administration fee is subject to VAT, but these are usually minimal and often embedded.
Personal Tax for Employees (Local and Home Country): For employees, one huge advantage of the UAE remains zero income tax. This means whether they receive a lump-sum gratuity or a pension payout, the UAE will not tax that benefit. Under the new scheme, employees can take payouts as a lump sum when leaving or even keep the money invested until retirement age – all without any UAE tax. This contrasts with many Western countries where pension payouts can be taxable income. Expatriate employees should be aware, however, of their home country rules. Some countries might tax their citizens on global income or have specific provisions for foreign pension funds. The UAE scheme being voluntary and new, it doesn’t automatically fit into, say, a U.S. 401(k) or UK pension definition. Employees from countries like the US (which taxes citizens globally) might need to consult advisors to ensure that contributing to the UAE scheme doesn’t have unforeseen consequences (for instance, a U.S. citizen might want to know if the IRS views the contributions as taxable or the fund as a foreign trust). Generally, though, because the contributions come from the employer (and are part of an employment benefit), most expats will treat it similarly to how they treated gratuity – often as end-of-service compensation which, in many cases, is tax-free in the country where it’s earned.
Employers can assist here by providing clarity: for example, giving annual statements of contributions which employees can use for any home country reporting. HAYAH’s digital platform can generate such statements and any needed documentation, simplifying compliance for employees. This is another value-add of HAYAH’s system – seamless administration and reporting that can produce tax-relevant documents at the click of a button, both for corporate accounting and employees’ personal needs.
Choosing Between Gratuity vs. Funded Scheme – A Tax Perspective: Some companies, especially smaller ones or those in free zones, might initially hesitate to join the new scheme. It’s worth examining the tax trade-offs. If a company opts to stay with the traditional gratuity, what happens? They will continue to carry the gratuity as a provision and only expense it at payout. With corporate tax now in play, that means potentially paying tax on profits that are essentially “owed” to employees in the future. For instance, if in 2024 a company would accrue AED 1 million in gratuity liability but no one leaves that year, the company’s taxable profit is higher by that AED 1 million (since it didn’t pay it out). They’d pay AED 90k in taxes on that “phantom” profit, and then in a later year when an employee leaves and they pay that AED 1 million, they’d get the tax deduction then. This deferral might not be ideal. By contrast, under the funded scheme, the company could contribute that AED 1 million into the fund in 2024 itself, reducing taxable income immediately. Over the long term, joining the pension scheme can lead to a permanent tax saving if the business is growing, because effectively each year you’re deducting the end-of-service cost of current service, whereas under gratuity you might be deducting it later when salaries (and gratuities) are higher. In financial terms, there’s a time value of money benefit in getting deductions earlier.
HAYAH’s Role in Seamless Administration: Ensuring compliance with the scheme’s rules and maximizing tax benefits requires good administration. HAYAH’s digital ecosystem is built to handle these requirements. For example, the system will confirm that contributions are deposited within the 15-day window each month (and can send reminders or auto-debit to ensure timeliness), which is crucial for both regulatory compliance and to firmly establish those contributions as expenses in the relevant period. HAYAH also provides clear documentation for each payment made into the fund, creating an audit trail. Come tax audit or financial audit time, the company can easily show proof of contributions and that they are irrevocably committed to employee benefit (a likely criterion for tax deductibility). This reduces the risk of any disputes with tax authorities over whether a payment was actually an allowable pension contribution.
Moreover, HAYAH’s platform can accommodate corporate tax reporting needs by, for instance, categorizing contributions per employee or department, which some sophisticated companies might do to allocate costs internally. And as tax regulations evolve (the UAE’s corporate tax law is new and likely to have clarifications over time), HAYAH’s team – with their deep domain experience – will stay on top of compliance. They can update clients on any changes (for example, if the government ever offers tax credits for matching contributions or similar incentives, HAYAH would communicate how to take advantage).
Cross-Border and Double Taxation Treaties: While the UAE has no income tax, some employees might be from countries that tax foreign pensions. However, many countries have double taxation treaties with the UAE that often allocate taxation rights in favor of the UAE for employment income – which in this case is moot since UAE doesn’t tax, effectively making it tax-free. An interesting scenario is if an employee moves to another country after years of accumulating funds. If they leave their money in the HAYAH-managed pension fund until retirement, and then withdraw it while residing in another country, how that payout is taxed will depend on that country’s laws. It could be treated as a foreign lump-sum pension distribution. Some countries might tax it, others might not (for instance, the UK typically does not tax foreign service gratuities for non-UK employments; how they’d treat this new scheme is yet to be seen but likely similarly if the employment was abroad).
From an employer’s standpoint, it might be prudent to provide high-level guidance to expatriate employees to seek advice, but they don’t need to become tax experts on every country. The focus should be on maximizing benefits within the UAE’s framework – which is very favorable. HAYAH’s digital education tools could include informational modules or FAQs on taxation (for example, an explainer that since UAE has no income tax, the growth and payouts are tax-free locally, encouraging employees to keep money invested as long as possible without worry of local tax erosion). This reassurance can increase employee participation – people are more likely to embrace the new pension if they clearly understand that “100% of what you and the company put in, plus 100% of all investment gains, belong to you without any tax deductions by the government.” That’s a powerful message, and one that HAYAH can help communicate via its platform and engagement efforts.
In summary, the new pension structure offers a win-win on taxes: companies get current deductions and lower taxable profits, and employees enjoy tax-free growth and withdrawals (under UAE law). The key is proper compliance and administration to unlock these benefits. By leveraging HAYAH’s expertise and digital solutions, employers can ensure the tax implications remain purely positive – seamless deductions, no penalties, and full documentation – while employees can maximize their take-home value. As tax becomes an integral part of business strategy in the UAE, structuring pension benefits efficiently is now a strategic financial decision, not just an HR one.
Sources:
Additiv News – Employers receive corporate tax benefits by participating in the voluntary scheme, in addition to talent retention perks
UAE Government – Contribution deadlines (15 days of each month) and requirement to use SCA-licensed funds ensure transparency and compliance
EY Tax Alert (Dec 2023) – UAE’s alternative end-of-service scheme is part of a strategy to provide a secure financial system for expatriate workforce
International Adviser – HAYAH’s fully digital administration aligns with regulatory requirements, helping maintain transparency and trust
UAE Federal Tax Authority – General corporate tax framework (reference to 9% rate introduced in 2023)
(implied from context)
HAYAH Press (Additiv) – Employees can choose traditional or Shariah-compliant funds and enjoy flexibility, implying investment returns accrue to their benefit
MOHRE Announcement – Emphasizes the scheme’s role in attracting and retaining global talent by providing more secure benefits (hinting at international tax competitiveness)
HAYAH Insurance – Expert commentary indicates HAYAH’s ecosystem creates a comprehensive digital financial experience, streamlining processes like contributions and reporting