The UAE has long attracted businesses from around the world thanks to its tax-free commerce hub status. From June 1, the country will introduce a corporate tax on business profits, representing a significant shift for a country that has consistently topped for ease of business. An affirmation of this being hundreds of multinational companies, including Microsoft, Meta, and Google, have set up offices in the country.
The country’s tax rate will be 9% for taxable income exceeding $102,000 (Dh375,000).
“The 9% statutory rate is one of the most attractive headline rates amongst developed economies,” says Charles Collett, UAE Corporate Tax Partner, PwC Middle East.
“In addition to the low headline rate, the corporate tax regime seeks to maintain the beneficial free zone framework which has been so attractive for foreign direct investment in the UAE. The regime also includes various targeted exemptions and reliefs for certain income, such as dividends and capital gains,” adds Collett.
MOST COMPETITIVE IN THE WORLD
There has been skepticism if the corporate tax regime would lead to businesses pulling out and moving home, with little incentive to stay, leading to less infusion of money and jobs into the UAE economy.
Will the country retain its attractiveness to businesses?
Experts dismiss the fears saying the UAE corporate tax regime is amongst the most competitive in the world and remains low compared to other low-tax hubs. Egypt, Jordan, Kuwait, Lebanon, Oman, Saudi Arabia, and Qatar corporate tax rates are between 10% to 35%.
The rate is also highly competitive compared to other global hubs such as Singapore and Ireland. When combined with other beneficial aspects of the regime, such as targeted reliefs and exemptions, it is expected to compare favorably with other economies.
Additionally, introducing a federal corporate tax will help the country meet international tax transparency standards and prevent harmful tax practices.
The move also highlights the UAE’s openness to working with the global economy and its commitment as a member of the OECD to the BEPS (Base Erosion and Profit Shifting) initiative.
“The BEPS initiative is about making the tax world catch up to the modern economy. Old tax laws did not fit to work with much of the realities of our digital and multinational era,” says Ibrahim Ghoul, a partner at Oliver Wyman and leader of its fiscal platform.
“These changes are something the whole world is preparing for – more than 135 countries are working with the OECD on the BEPS initiative – and for the UAE putting this corporate tax structure into place is an important step.”
Europe, the US, and much of the world have much more complicated tax codes and implementations. But countries across the GCC have newer tax systems and simpler rules, so they’re able to move quickly, which means BEPS may roll out in the region at the same time as places such as Europe.
“In certain areas of implementation and for some countries still at the nascent stages of the BEPS, the UAE may become a case study in how to transition,” adds Ghoul.
Additionally, the new federal corporate tax rate, which is 9%, is well below the average across OECD countries, which is above 22%.
“It’s also important to note that taxable income below a threshold of $102,000 will be subject to 0% corporate tax. This is designed to help support small businesses and startups,” says Ghoul.
Experts say UAE’s attractiveness to businesses will increase once everyone catches up on the BEPS framework.
“It’s important to note that such moves have the potential to be huge for GCC economies. It will lead to a professionalization of up-to-date data that will help drive and inform decision-making at the economic and governmental level – a major driver of regional economies,” says Ghoul.
“We saw a huge leap in this area with VAT. Before the GCC implemented VAT, there wasn’t a lot of standardized information on economic activity. The leap forward with corporate tax will be even more profound. There will be access to detailed and standardized information about what’s going on in the economy, and this, if harnessed, has transformative potential.”
WHAT DOES IT MEAN FOR FREE ZONE BUSINESS?
Meanwhile, thousands of free zone businesses in the country will continue to benefit from corporate tax incentives. Companies within the many free zones have long enjoyed zero taxes and full foreign ownership, among other benefits.
“A Qualifying Free Zone Person (QFZP) can benefit from 0% if they meet the relevant criteria. Otherwise, free zone companies are within the scope of the corporate tax and are obliged to file a tax return regardless of the rate they pay. However, the UAE Government is committed to honoring tax incentives as was initially intended,” says Tyne Hugo of BSA.
When a free zone company has a branch on the mainland, the income from the branch will be subject to the standard corporate tax rate. As for the free zone’s company income, it is excluded and will be subject to 0%, adds Hugo.
According to experts, the proposed tax might lead to many more companies entering the UAE’s free zones, which provide several potential benefits to businesses depending on their profile. These include infrastructure access, relevant business networks, legal and regulatory frameworks based on international principles, and easy movement of goods.
“The corporate tax profile is just one of many factors for businesses to consider when evaluating where to locate themselves. This was also the case when UAE VAT was introduced. For most businesses, we expect other business and commercial considerations will primarily drive the decision,” says Collet.
Businesses have been attracted to the UAE for the many benefits the country offers – stability, forward-looking policies, good infrastructure, access to talent and markets, a clear legal framework, and an open society. Taxation is only one part of that overall picture. What goods and services will be provided in exchange for the new taxes is yet to be seen.
“There is no denying that introducing a new tax will introduce new costs and administrative requirements. However, it will also bring the country further in line with international standards and best practices,” says Collett.
“For many in the international community, this move may strengthen the UAE’s position as a global hub for business and investment and as a leading international financial center. Particularly when one factor in the overall competitiveness and attractiveness of the UAE corporate tax regime.”
Ultimately, the move brings the UAE in line with other competitive economies. It has long been the policy of the UAE to modernize its economy and move away from oil reliance.
“It is standard in other modern global economies to have numerous taxes which permit the operation of the government. Corporate tax will have an effect on individual lives as well as prices will no doubt increase, but it is just another crucial and necessary step the UAE needs to take to ensure that when the time comes and it moves away from reliance on oil, it is ready and able to answer the challenge,” says Hugo.