What the UAE’s new corporate tax means for its status as a business hub

1. What is behind the UAE’s economic miracle?

After its formation in 1971, the federation of seven monarchies on the eastern tip of the Arabian Peninsula built its reputation as a center of global trade by leveraging its location between East and West. The third-largest crude producer in the Organization of the Petroleum Exporting Countries (OPEC), it has branded itself a business and tourist haven in the volatile region. Known for executing large-scale projects, it boasts one of the largest man-made islands, the tallest skyscrapers and one of the busiest airports in the world. Unlike the rest of the Middle East, foreigners can own real estate — everything from multimillion-dollar beach houses to small studios. There is also no personal income tax.

2. What are the disadvantages of living in the UAE?

Blue-collar workers, who make up the majority of the UAE’s expatriate population, can face harsh living conditions and dangerous working conditions. The government requires most foreign workers to be sponsored by their employers before starting work. Foreign men can then support their families, but they need to earn around AED4,000 (US$1,089) per month. Foreign women can sponsor their spouses and children in some circumstances, but are generally subject to stricter rules than men. Education is expensive, with public schools mostly excluding foreigners and private schools charging over Dh100,000 per year in some cases. Retirees are expected to leave the country unless they can show steady income. The influx of crypto millionaires, Asian bankers and wealthy Russians is driving up rental prices in Dubai, the most populous emirate, with the metropolis of more than 3 million people increasingly feeling like a playground for the ultra-rich. Summer weather is another downside, with temperatures topping 49C (120F).

3. What measures is the UAE taking to retain skilled foreigners?

It eased immigration rules, including the introduction of “golden visas” for highly educated or wealthy foreigners, allowing them to work, live and study in the country without a sponsor. In 2020, the government abolished the requirement that companies must have UAE shareholders. The following year, it unveiled plans to offer citizenship to selected foreigners. It also offers low business fees to retain foreign companies. The government has announced the decriminalization of “do no harm” and could end penalties for drinking or unmarried cohabiting partners. While prosecutions are rare, some cases involving drunkenness and extramarital sex have been well-publicized, undermining the Gulf state’s appeal to skilled foreign workers. In 2022, it changed from the usual Friday-Saturday Islamic weekend to a Saturday-Sunday rest, to align with much of the world.

4. Is the UAE still a tax haven?

yes and no. The new corporate tax, which came into effect on June 1, reflects the country’s efforts to align with new international standards, in particular the move towards the lowest global tax rate for multinational corporations approved by the G20 in 2021, and will continue to gain momentum. The 9% corporate income tax is still lower than regional peers and most global financial centers. It will only be levied on businesses or business activities that generate a turnover exceeding AED 1 million. And it doesn’t apply to businesses operating in the UAE’s “free zones” — areas where businesses operate under a different set of regulations than the rest of the country. Personal income from employment, real estate and other investments will remain tax-free, and there is no change to the 5% VAT introduced in 2018.

5. What about money laundering in the UAE?

The UAE government has faced accusations that the country has become a safe haven for those involved in questionable financial transactions. The influx of wealthy Russians looking to protect their assets following Ukraine’s invasion has fueled perceptions that Ukraine is turning a blind eye to black money. In 2022, the Paris-based Financial Action Task Force placed the UAE on its so-called “grey list” of countries subject to stricter scrutiny for shortcomings in combating money laundering and terrorism financing. For Wall Street banks and multinationals that use Dubai as a Middle Eastern hub, the condemnation complicates local business. The government said it was making progress in monitoring money inflows, but needed more time to prove it had done a good enough job to be removed from the list of global watchdogs.

6. What does this mean for the UAE’s regional influence?

The UAE is battling Saudi Arabia to maintain its status as the region’s commercial hub. As part of Crown Prince Mohammed bin Salman’s efforts to wean the kingdom off oil revenues, his government has warned international companies that they risk losing government contracts if they do not have their regional headquarters in Riyadh. That prompted nearly 80 companies to apply for permits to move their offices to the city in 2022, a move that has forced some employees and their families to follow suit. New corporate taxes and increased costs of doing business in the UAE are likely to push more companies across the border.

— With assistance from Adveith Nair and Paul Wallace.

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