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The New Corporate Income Tax Regime in the UAE

According to the United Arab Emirates Ministry of Economics, the United Arab Emirates received USD 19.884 billion worth of foreign direct investment in 2020. That’s an increase of USD 2.01 billion in foreign direct investment inflows compared to 2019 levels despite the COVID-19 pandemic. So, in 2020, the UAE took 15th place globally in foreign direct investments and first place in West Asia, the Middle East and North Africa.

Why do foreign investors like the UAE?

There are many reasons. One of these is the lack of a general corporate tax in UAE.

Favourable Taxation in the UAE

Data from the Tax Foundation indicates that the UAE is one of the 15 economies globally that have had a zero statutory federal corporate tax rate. Some ‌economies that belong to this group are Bahrain, Bahamas, Bermuda, Cayman Islands, Vanuatu, and the Isle of Man.

It’s true. The UAE federal government charges no corporate tax. However, its member emirates can levy corporate taxes on businesses within their jurisdictions. Additionally, free zone authorities can set the applicable corporate tax in free zones.

That being said, respective emirates have largely refrained from taxing business income. For the most part, they only tax companies in the business of extracting natural resources and branches of foreign banks. For example, emirate governments charge upstream oil and gas companies a progressive corporate tax rate that can go as high as 55%.

Free zone authorities‌ have also mainly practiced restraint in taxing free zone businesses. To encourage free zone company formation, free zone authorities often offer a 50-year, perennially renewable, corporate tax holiday or a variation of it.

To sum up, the federal government charges no corporate tax, but respective emirates and free zone authorities have the power and freedom to charge them. However‌, respective emirates and free zone authorities have practiced mainly a hands-off approach to corporate income, which is why most businesses in the UAE pay no corporate taxes.

This will soon change.

UAE to Charge Federal Corporate Tax

The UAE’s Ministry of Finance announced on 31 January 2022 that it would bring in federal level corporate income tax at the rate of 9% for in-scope taxpayers whose financial years begin on or after 1 June 2023.  

The decree that will usher in this new corporate income tax regime in the UAE is yet to be promulgated and released, so some provisions remain unclear at this time. Even so, here are a few conceptual policy frameworks around the corporate tax  (emanating through the FAQs) the announcement covers..

1. Schedule of Implementation

Barring changes to the planned implementation schedule, the new corporate tax regime will take effect on or after 1 June 2023 for in-scope taxpayers. If the taxpayer’s fiscal year starts in January, that company will become subject to the new corporate tax regime at the start of its next fiscal year (i.e., January 2024).

2. Taxable Income Threshold

The 9% corporate income tax applies only if business income exceeds AED 375,000. Therefore, small businesses that make AED 375,000 or less a year will enjoy a 0% corporate income tax rate.

However, the threshold may not be available for entities that form part of large multinational groups as the corporate tax regime shall have a different rate of tax for such entities.

3. Business Income

The corporate tax is intended to be charged only on business income. All the revenues earned by legal entities are deemed as business income, and thus, effectively, all legal entities (except for the ones engaged in extraction of natural resources) are in-scope of the said levy. 

However, as regards the natural persons, only the business income would be taxed. Therefore, individuals will still enjoy zero personal income tax on their salaries and wages.

However, any income an individual earns from activities requiring business registration or licence must be reported and will be subject to corporate income tax. Therefore, if an employed individual who also works as a freelancer, his salary will be exempt from personal income tax, but his freelancing income will be subject to corporate tax.

Note, however, that even in this case, the taxable income threshold still applies.

4. Exemptions

The 9% federal level corporate income tax will not apply to companies involved in natural resources extraction. Instead, individual emirates retain the authority to determine corporate taxation for these businesses.

The federal government will also set a different rate for large multinational corporations that meet certain conditions. Details about this special rate are yet to be divulged.

Implications of a Corporate Income Tax

Now that the UAE has decided to abandon its zero-tax haven status, what does this mean for the country’s foreign direct investments? Specifically, how will the new tax regime affect the country’s FDI inflows?

Of course, a 9% corporate tax rate is something unfavorable to foreign direct investors. On the face of it, one can probably expect a flattening of the country’s FDI growth.

However, it must be noted that even when the 9% corporate tax rate becomes effective, the UAE will still be among the countries with the lowest corporate tax rates.

These are the countries with the lowest statutory corporate tax rates (excluding those that don’t charge a general corporate tax):

  • Barbados: 5.50%
  • Uzbekistan: 7.50%
  • Turkmenistan: 8.00%
  • Hungary: 9.00%
  • Montenegro: 9.00%

As you can see, the UAE’s 9% tax rate is only higher than three other countries: Barbados, Uzbekistan, and Turkmenistan. 

Even in the Gulf region, it will have the lowest corporate tax except for Bahrain (with 0% general corporate tax). The UAE’s corporate tax will only be slightly higher than that of Uzbekistan and Turkmenistan in Asia.

Indeed, the UAE’s tax rate is relatively low compared to other economies. This low tax rate coupled with the country’s business-friendly policies, should be enough to guarantee the satisfaction of entities doing business in and from the UAE.

There’s also international pressure for countries to institute a minimum corporate tax rate to help enforce a fair global tax environment. In fact, initiating this corporate tax is the UAE bowing to such pressure. Thus, sooner or later, those with a zero tax scheme might have to begin charging taxes, too.

UAE Remains an Attractive Place of Business

The new corporate tax regime might indeed have a perception of dampening effect on the country’s FDI growth. After all, the 9% tax rate takes the UAE from its status as a tax haven like Vanuatu, the Bahamas or even Bahrain. However, such an effect‌ should be small, even negligible, and most likely temporary.

At the end of the day, businesses will have to accept that corporate income taxes will soon become inevitable, no matter where in the world they choose to do business. 

Besides, the many incentives the UAE government provides investors and enterprises could still outweigh the potential impact of its new 9% federal corporate income tax.

Marco Polo
Marco Polo is the admin of sparebusiness.com. He is dedicated to provide informative news about all kind of business, finance, technology, digital marketing, real estate etc.
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