UAE introduces first corporate tax, to start in 2023

DUBAI, United Arab Emirates – The United Arab Emirates will introduce a federal corporate tax on corporate profits for the first time, the Ministry of Finance announced on Monday.

The news represents a major shift in the country, which has long attracted businesses from around the world due to its status as a duty-free business hub. Businesses will pay tax from 1 June 2023.

The country’s statutory tax rate will be 9 percent for taxable income above AED 375,000 ($102,000), and zero for taxable income “supporting small businesses and start-ups,” the ministry said, adding that ” The UAE corporate tax system will be among the most competitive in the world.”

The ministry said individuals will still not be taxed on employment income, real estate, equity investments or other personal income not related to UAE trade or business. The tax also does not apply to foreign investors who do not conduct business in the country.

As for what constitutes profit, corporation tax will apply to the “adjusted accounting net profit” of the business.

Meanwhile, free zone businesses – there are thousands in the country – can “continue to benefit from corporate tax incentives” as long as they “fulfill all necessary requirements”, the ministry said, without elaborating. Companies in many of the UAE’s free zones have long enjoyed benefits such as zero taxes and full foreign ownership.

“The UAE corporate tax regime is designed to incorporate global best practice and minimize the compliance burden on businesses,” wrote state news agency WAM.

“Profits reported in the financial statements of UAE businesses prepared in accordance with internationally accepted accounting principles will be subject to corporate tax, with minimal exceptions and adjustments. Corporate tax will apply to all corporate and commercial activities, except for the extraction of natural resources which will Continue to pay corporate tax at emirate level.”

While the news caused a stir following Monday’s announcement, many in the UAE business community said the development should not come as a shock.

Chief Economist Chris Payne said: “I don’t think this announcement should come as a surprise; corporate tax in the UAE has been discussed for several years. The Gulf Cooperation Council, such as Saudi Arabia and Qatar, already has companies Taxes,” Dubai-based Peninsula Real Estate told CNBC.

As the UAE, like many of its oil-rich regional counterparts, pushes to diversify its economy away from hydrocarbon revenues, “it is important for the federal government to establish revenue streams that are not dependent on corporate dividends and investment income, both of which can fluctuate.” ,” Payne added.

The announcement gives companies in the UAE about a year and a half to prepare their taxes, but there has been mixed reaction to whether the move will allow the Gulf emirate to retain its attractiveness for business.

Mark Hemmings, vice president of tax and finance at Dubai-based professional services firm Kent, called the decision “practical and sensible”.

“It will be very interesting to see the details, but at first glance, this seems like a practical and sensible approach to ensuring that companies in the UAE can comply with the expected new international tax rules, while ensuring that the UAE remains an attractive location for business operation,” Hemings said.

Still, the tax threshold — just over $100,000 in profits per year — is fairly low and can penalize small businesses that are expensive to set up and renew their business. Rupert Tait, co-founder of UAE-based construction technology startup Procurified, sees potential headwinds for small businesses like his.

“I think as founders of a startup, we want to base ourselves in the most affordable environment possible,” he told CNBC. “While I understand the need to start collecting taxes, I also know that we are being taxed indirectly in the free zone,” he said, explaining that his company, based in the free zone of Dubai’s multi-commodities hub, already pays AED 20,000 a year (approximately $5,450), regardless of profit.

“So corporate tax could cause SMEs to rethink where they plan to stay (in the long run) because of the high upfront costs, and then tax after the business has made a profit,” Tate said.

Still, the proposed taxes are low compared to other low-tax centers around the world.

Montenegro and Gibraltar have tax rates of 9% and 10% respectively, while Ireland and Liechtenstein both have corporate tax rates of 12.5%. Tax rates in Hong Kong range from 8.5% to 16.5%, while Singapore and San Marino both have 17%. Still, it remains to be seen what goods and services will be offered in exchange for the new tax.

Ultimately, the move “puts the UAE in line with other competitive economies,” said Taufiq Rahim, a non-resident fellow at the Mohammed bin Rashid Academy of Government in Dubai.

“And the rate – while new to the private sector here – is still lower than in other jurisdictions such as Singapore and Hong Kong.”