The UAE Ministry of Finance announced on December 9th 2022 that the United Arab Emirates (UAE) will implement a federal corporate tax on business profits for the first time. This decision marks a significant departure for the country, which has attracted global businesses as a tax-free commerce hub. Starting from June 1, 2023, businesses will be subject to a 9% statutory tax rate on taxable income exceeding 375,000 UAE dirhams ($102,000). The tax rate will be zero for taxable income up to that amount to support small businesses and startups, making the UAE corporate tax regime highly competitive worldwide.
Individuals, on the other hand, will not be taxed on their employment income, real estate, equity investments, or other personal income unrelated to UAE trade or business. The tax will not apply to foreign investors who do not conduct business in the country.
The tax will be levied on the "adjusted accounting net profit" of businesses. Free zone businesses, which number in the thousands in the UAE, can continue to benefit from corporate tax incentives if they meet the necessary requirements. Free zone companies have historically enjoyed zero taxes, full foreign ownership, and other advantages.
The UAE's corporate tax regime has been designed to incorporate global best practices and minimize the compliance burden on businesses. It will apply to all businesses and commercial activities, with few exceptions and adjustments. However, the extraction of natural resources will still be subject to Emirate-level corporate taxation.
While the announcement created ripples when it was made, many business experts in the UAE were not surprised. The discussion around corporate tax in the UAE has been ongoing for several years, and neighbouring Gulf Cooperation Council (GCC) countries such as Saudi Arabia and Qatar already have corporate taxes in place.
As the UAE seeks to diversify its economy away from hydrocarbon revenue, the introduction of corporate taxes is seen as a means to establish income sources independent of corporate dividends and investment income, which can be volatile.
The introduction of corporate taxes gives UAE companies approximately eighteen months to prepare, but opinions are divided on whether this move will impact the country's attractiveness to businesses.
Some experts, like Mark Hemmings from Dubai-based firm Kent, view the decision as practical and sensible, ensuring compliance with anticipated new international tax rules while maintaining the UAE's appeal as a business location.
However, concerns have been raised about the relatively low threshold for taxation, which could negatively affect smaller enterprises with high setup and business renewal costs. Rupert Tait, co-founder of UAE-based start-up Procurified, believes that the corporate tax may lead small and medium-sized enterprises (SMEs) to reconsider their long-term plans due to upfront fees and subsequent taxes once they become profitable.
Despite potential challenges for SMEs, the proposed tax rate in the UAE remains low compared to other low-tax jurisdictions worldwide. Countries like Montenegro and Gibraltar have tax rates of 9% and 10% respectively, while Ireland and Lichtenstein offer a 12.5% corporate tax rate. Hong Kong, Singapore, and San Marino have tax rates ranging from 8.5% to 17%. It remains to be seen what benefits and services will be provided in exchange for the new taxes.
In summary, the introduction of corporate taxes brings the UAE in line with other competitive economies and the tax rate, while new for the private sector in the country, remains lower than in jurisdictions like Singapore and Hong Kong.
