The UAE has been a magnet for global businesses thanks to its tax-free regime. However, it has also drawn international scrutiny over transparency and housing tax-evading corporations.
As a result, the UAE now seeks to align itself with the international standard for housing global businesses. To achieve this goal, they will be imposing a 9 percent Corporate Tax that will be levied onwards from June 1, 2023.
This Corporate tax will be levied only on businesses that are operating on the mainland and is making more than 375,000 Dirhams in profit, which converts to approximately USD 102,000.
Businesses in the free zones or businesses that earn less than 375,000 Dirhams will still have zero taxable income. The authorities stated this was decided in order to support the small businesses and startups.
The undersecretary of the Ministry of Finance, Younis Haji Al Khoori said, “As a leading jurisdiction for innovation and investment, the UAE plays a pivotal role in helping businesses grow, locally and globally.
The certainty of a competitive and best in class corporate tax regime, together with the UAE’s extensive double tax treaty network, will cement the UAE’s position as a world-leading hub for business and investment.”
What played a part in this decision?
The Gulf Cooperation Council consists of a group of 20 major economies, and they have an ambitious plan to eventually set 15 percent as the base levy of global minimum tax. Their goal is to stem international competition between the Middle Eastern countries to offer more attractive tax rates.
The UAE so far settled on a 9 percent corporate tax for multinational corporations. Five other countries in the Gulf Cooperation Council also adopted the corporate tax regimes and are now operating number the levy.
Even with the 9 percent corporate tax rate, UAE still has the lowest tax rate among the big Middle Eastern countries. Qatar comes second with a corporate tax rate of 10 percent followed by the 15 percent tax rate of Kuwait and Oman.
Saudia Arabia has the highest corporate tax rate among the Middle Eastern Countries with a rate of 20 percent.
This low rate of corporate tax means that the UAE will retain its reputation as a low-tax country. At the same time, the country will get rid of its image as a tax haven for corporations practicing harmful tax practices. It will still keep working on its long-term plan to change the economic focus of the country from the oil and gas industry.
“The UAE continues to make progress in diversifying its budget revenue away from oil, and a corporate tax fits into this strategy. The tax rate remains low by global standards”, said Khatija Haque, chief economist at Emirates NBD.
What Steps had the UAE taken previously?
The UAE had already introduced a value-added tax at the standard rate of 5 percent on most goods and services in 2018. For the foreign branched of banks operating, it was even worse since they had to pay a tax of 20 percent.
At the emirate level, companies with concession agreements in the oil and gas sector had to pay a tax of up to 55 percent. Back then their goals were the same, they wanted to reduce its reputation as a tax haven for corporations. Later they also imposed a percent customs duty on imports.
These changes also only affected businesses on the mainland. Free zones were and are still free from all types of taxes and customs duties. These taxes are for corporations and corporate incomes only. Personal incomes are still free from taxes.
That means employees do not need to pay taxes for their incomes and shareholders do not need to pay taxes on dividends received. Other earnings that do not come from a corporation or a business are not taxable. For example, capital gains on investments and real estate are not taxable.
A chief executive of Dubai-based IMCapital Partners Ltd, who was a former senior banker at Goldman Sachs and Citigroup, Izzat Dajani Said, “It was just a matter of time before the UAE imposed corporate tax in line with some other Gulf Cooperation Council countries. The levels announced of 9% base are quite reasonable in international standards.”
What are the global standards?
The Organization for Economic Co-operation and Development (OECD) made a proposal to establish a global minimum tax of 15 percent starting from 2023. The UAE also plans to eventually set the base corporate tax rate to 15 percent.
The move will stem international competition and UAE’s competitiveness to offer attractive rates to corporations.
By definition, a global corporate minimum tax means a standard tax rate that will be levied on corporate income worldwide. So far, 136 countries and jurisdictions agreed to set their base corporate tax rate at 15 percent.
The Organization for Economic Co-operation and Development (OECD) proposed this framework with the intent to discourage nations from having competitive tax rates that allow corporations to shift profits.
As the UAE planned to improve its non-oil economy by attracting investors and entrepreneurs through competitive tax rates. The country faced criticism that it is not doing enough to counteract terrorist financing and money laundering.
However, these recent changes will ensure that these allegations are a thing of the past.
The new taxes may discourage new investors and entrepreneurs from setting up shop in the UAE. However, the UAE has also loosened ownership laws in 2020. The government of the UAE made amendments to its existing laws and regulations so that companies no longer required an Emirati shareholder.
Previously, all companies outside the free zones were required to have a local sponsor who would own at least 51 percent of the company. They also switched to the Saturday and Sunday weekend system to better synchronize with the global standard.
The head of macroeconomic research at investment bank EFG Hermes in Cairo, Mohamed Abu Basha said, “I don’t think it will much affect UAE’s ability to attract investments.
First, companies in free zones will continue to enjoy their tax benefits, hence are shielded from the decision. Second, most other Gulf countries already impose a corporate income tax on multinationals operating in the economy, including 20% in Saudi, 15% in Oman, and 10% in Qatar.“
What does this mean for existing companies?
Businesses in the free zones and businesses earning less than 375,000 Dirhams do not need to pay taxes for their income. However, businesses that are situated on the mainland that are earning more than 375,000 Dirhams or USD 102,000 will have to pay the 9 percent corporate tax.
The head of Nomura Asset Management’s Middle East unit, Tarek Fadlallah said, “The introduction of corporate tax will apply from June 2023 so there is an adjustment period for listed companies to prepare. But this will necessarily impact net profit forecasts going forward.”
State news agency WAM wrote, “The UAE corporate tax regime has been designed to incorporate best practices globally and minimize the compliance burden on businesses. Corporate tax will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with internationally accepted accounting standards, with minimal exceptions and adjustments.
The corporate tax will apply to all businesses and commercial activities alike, except for the extraction of natural resources which will remain subject to Emirate level corporate taxation.”
The corporate tax will not come as a surprise to the companies existing on the mainland as a corporation tax has been in discussion by the UAE government for several years. The announcement will give companies one and a half years to prepare.
Many experts in the UAE see this decision as practical and sensible since it is gets rid of UAE’s reputation as a tax haven and the tax rate is low at the same time.
Will the change discourage foreign investors and entrepreneurs from moving to the UAE?
If someone ones to move to the Middle East or start their business here, the UAE is still the best option for them. And as we have mentioned before, the 9 percent tax rate is relatively low and only applies to businesses with an income of 375,000 Dirhams (USD 102,000) or higher.
Companies that want to perform their business activities internationally and not locally can still choose the free zones where there are still no corporate taxes.
The corporate tax only applies to corporate incomes. That means personal incomes earned through wages, investment gains, dividends, etc. are still free from taxes even if your income exceeds the 375,000 Dirhams or USD 102,000 limit.
This means that investors who want to move to the UAE do not have to worry about this new 9 percent corporate tax.
Major competitors like the US have an astonishing tax rate of 27 percent and countries in the European Union have an average tax rate of 20.7 percent. The UAE’s 9 percent tax rate will ensure that its competitive advantage remains intact.
Since there is no better alternative, this move will not affect the decision of foreigners who want to start their businesses in the UAE.
One expert says that since the UAE has a large population of ex-pats who sees the UAE as their retirement destination, personal taxation will be introduced any time soon.
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