In a pivotal juncture of fiscal evolution, the United Arab Emirates (UAE) has embarked on a historic journey by ushering in a corporate tax regime, which officially took effect on June 1, 2023. This landmark fiscal policy overhaul not only signifies the UAE’s alignment with global trends advocating for a minimum corporate tax structure but also bolsters its allure as a premier destination for businesses seeking to expand their horizons or establish their headquarters.
The introduction of this transformational corporate tax regime, masterminded by the Federal Tax Authority, follows the trailblazing implementation of the value-added tax (VAT) in 2018. Its overarching objectives extend beyond mere taxation, seeking to curtail the UAE’s longstanding reliance on oil-generated revenue while preserving its competitive edge in the global economic arena.
This sweeping reform, of profound consequence to the business landscape and overall economic trajectory, casts its net wide, encompassing all commercial activities and businesses within the UAE’s borders, excluding activities related to the extraction and non-extraction of natural resources. These sectors shall continue to be subject to the purview of Emirate-level corporation tax.
Meticulously designed to harmonise with international best practices and alleviate the compliance burden on businesses, the new tax regime boasts a rate that is second only to Bahrain in terms of being the lowest. For UAE-based businesses, the tax rate stands at a modest nine percent, calculated exclusively on the taxable profits rather than the gross revenue generated by the business. To offer support to small enterprises, the tax authorities have generously exempted profits up to Dh375,000 (approximately $102,112) from taxation. This move is poised to underpin and fortify the thriving ecosystem of small businesses and startups.
Economists and financial experts concur that while this profound reform will undoubtedly affect a significant portion of businesses across various sectors, it is unlikely to tarnish the UAE’s hard-earned reputation as a competitive business hub and a coveted destination for investors.
Moreover, this momentous shift towards corporate taxation reaffirms the UAE’s unwavering commitment to meeting global standards for tax transparency and the eradication of harmful tax practices. However, it is worth noting that this tax law applies only to businesses with a turnover or gross income exceeding Dh1 million annually, which approximates to $270,000. By forging a simplified corporate tax system, the UAE remains committed to nurturing a conducive business environment that champions the growth of small businesses, startups, and the broader economy.
The introduction of a nine percent corporate tax rate, while marking a significant departure from the UAE’s tax-free haven status, still places the nation well below the global average. As of 2022, the global average corporate tax rate stood at approximately 23 percent, underscoring the UAE’s continued attractiveness to businesses on the global stage.
For medium-sized companies, the implications of this tax reform are profound, as it could significantly affect their profitability and the funds available for expansion, investment, and other operational endeavours. Tax experts have noted that this reform introduces an “administrative burden” for medium-sized companies, necessitating the establishment of internal systems and processes for tracking taxable activities, maintaining meticulous records, and filing tax returns with the relevant UAE authorities. This process may require additional resources, expertise, and, inevitably, increased costs.
In an effort to mitigate the impact on smaller enterprises, the UAE Ministry of Finance has introduced a lifeline in the form of small business tax relief, available to businesses and individuals generating annual revenues of up to Dh3 million. However, it is important to note that medium-sized companies are unlikely to benefit from such relief, especially if their revenue exceeded Dh3 million in a prior tax period.
Younis Haji Al Khoori, Under-secretary of the Ministry of Finance, emphasised that corporate tax compliance is a shared responsibility for all taxable entities, aligning with the highest global standards.
Medium-sized companies are advised to seek professional guidance in order to devise tax planning strategies that optimise their tax liabilities and ensure sustainable growth. Such strategies may entail adjustments to pricing models, diversification of revenue streams, cost-saving measures, and, where applicable, the consideration of alternative markets to safeguard profitability.
Mahar Afzal, Managing Partner at Kress Cooper Management Consultants, affirms that corporate tax policies benefit emerging businesses and SMEs in the UAE. These policies streamline operations, ensure compliance with tax laws, and foster transparency in day-to-day operations. “The nine percent corporate tax is one of the lowest in the world and it reaffirms the UAE’s openness to trade and supportive ecosystem, positioning the emirate as the premier hub for business and investment,” Afzal stated.
The scope of the corporate tax system encompasses all businesses and commercial activities conducted across the seven emirates, with certain exceptions. These exceptions pertain to businesses involved in the extraction of natural resources, individuals earning income in a personal capacity (e.g., salary, investment income), and businesses registered in Free Trade Zones, provided they adhere to all regulatory requirements and refrain from conducting business with the Mainland UAE.
Furthermore, the following income categories, in general, are exempt from income tax:
- Dividend income earned by UAE companies from qualifying shareholdings (to be defined in the law)
- Capital gains
- Profits from group reorganisation
- Profits from intra-group transactions
In addition, there will be no UAE withholding tax on domestic and cross-border payments. The UAE’s approach to foreign banks, which were previously subject to Emirate-level banking tax decrees, has shifted. These banks will now fall under the purview of the Federal Tax Law, according to KPMG. Local banks, like other businesses, will be subject to the new corporate tax.
The new corporate tax regime institutes a tiered system with three rates. All annual taxable profits below a threshold of Dh375,000 will be subject to a zero percent rate, while all taxable profits exceeding that threshold will incur a nine percent tax.
Additionally, multinational enterprises with consolidated global revenues exceeding Dh3.15 billion ($857.7 million) will be subject to different rates, guided by the OECD’s Base Erosion and Profit-Shifting rules.
This tax reform, while a monumental stride towards fiscal transformation, poses a pertinent challenge to medium-sized enterprises, impacting their profitability and available resources for expansion and investment. It necessitates the establishment of internal systems and processes for tracking taxable activities, maintaining meticulous records, and filing tax returns with the relevant UAE authorities.
It is imperative for businesses to take proactive measures and consider the impact of this tax reform on their operations, including potential adjustments to pricing models, diversification of revenue streams, and exploring alternative markets to maintain profitability.
Roberto d’Ambrosio, Chief Executive Officer at Axiory Global, acknowledges that the nine percent standard tax rate applied to the accounting net profits of taxable entities and individuals, while one of the lowest globally, will undoubtedly impact the profitability of the businesses it encompasses. However, he asserts that this move was both timely and prudent, representing a necessary step for the UAE’s fiscal landscape.
The UAE’s federal tax system is all-encompassing, applying to all businesses and commercial activities within the nation’s seven emirates, with exceptions carved out for certain sectors, as previously delineated. Furthermore, charities and public benefit organisations are eligible for exemptions, subject to approval by the finance ministry and the cabinet. The same applies to wholly government-owned UAE companies engaged in specific activities, provided they receive cabinet approval.
The corporate tax will not be levied on regulated
investment funds and real estate investment trusts (REITs) that meet specific requirements, and these entities can seek exemptions accordingly.
In a strategic deviation from its erstwhile approach, foreign banks operating under Emirate-level banking tax decrees will now fall under the Federal Tax Law, according to KPMG. Local banks, aligning with other businesses, will adhere to the new corporate tax regime.
Additionally, the UAE has endeavoured to ease the tax burden for companies registered in Free Trade Zones by implementing a zero percent corporate tax rate or offering exemptions that span up to 50 years, contingent upon compliance with regulations and refraining from business dealings with the Mainland.
However, all entities within Free Trade Zones will be required to register and file annual corporate tax returns. Consequently, businesses with a presence in both the Mainland UAE and Free Trade Zones, along with those operating under a dual license scheme, are advised to scrutinise the potential implications on their operational models.
As four of the six GCC countries already enforce corporate taxes at higher rates, the UAE’s decision to implement corporate taxation is unlikely to diminish its attractiveness as a regional business hub. Saudi Arabia imposes a 20 percent tax on resident capital companies and non-resident entities conducting business activities within the kingdom. Kuwait and Oman levy a 15 percent tax on corporate profits, while Qatar enforces a 10 percent tax. Bahrain, on the other hand, applies a 46 percent corporate tax to activities like the exploration, production, or refining of hydrocarbons, with all other companies enjoying a zero percent rate.
In closing, the UAE’s foray into corporate taxation signals not just a fiscal transformation but a strategic recalibration towards economic diversification and global fiscal alignment. While this historic shift undoubtedly ushers in new challenges for businesses, it also underscores the UAE’s commitment to international tax standards, transparency, and a sustainable future beyond oil revenue dependency.