UAE Aims to Aligns with Global Practices with First-Ever Corporate Tax
The UAE adopts corporate tax for the first time, in a competitive move
The UAE is one of the leading FDI destinations, having attracted 46.4 billion in foreign capital with an FDI component of $21.8 billion in 2021.
The UAE has always been an attractive destination for businesses and investors with a no-tax policy, no local shareholding in businesses, and its near-perfect location, halfway between Europe and Asia.
As the market matures, the UAE plans to implement the corporate tax in 2023. Read on to know when and how it will be implemented and why it is advantageous.
The Ministry of Finance has confirmed that the UAE will introduce a federal corporate tax on profit from the financial year that begins on or after June 1, 2023.
A standard statutory tax rate of 9% will be applicable for companies.
Foreign taxes paid by the businesses will be credited against any payable UAE corporate tax to ensure there is no double taxation. A zero-tax rate would be there to support small and medium-sized enterprises that have taxable profits up to Dh375,000 (US$ 102,000).
The Ministry said that the tax regime will be among the most competitive in the world and it will be in line with the rules established by World Trade Organisation.
Businesses involved in extracting natural resources, especially oil and gas production, will be exempt as they already pay emirate-level taxes.
Free zone businesses which don't conduct business onshore will also be exempt. Similarly, foreign investors who don't conduct their business in the UAE will not be required to pay taxes. Withholding taxes on domestic and cross-border payments will also not be imposed.
The businesses of the UAE will also be exempt from paying tax on dividends or capital gains received from their qualifying shareholdings.
Generous Loss Utilization Rules
Generous loss utilization rules will also be in place to help the businesses. Younis Haji Al Khoori, Undersecretary of the Ministry of Finance, stated, "UAE groups can be taxed as a single entity or can apply for group relief in respect of losses and intragroup transactions and restructurings."
Impact on individuals
UAE Corporate tax will not be applicable on individual salaries or employment incomes of individuals working in public or private sectors.
If an individual has a business license/permit or is required to have one, including a freelance license or permit, the activities of the individual might be treated as a business and might be subject to the new corporate taxes.
Shabana Begum, partner and head of transfer pricing at KPMG Lower Gulf, said, "The corporate tax (CT) rate of nine per cent announced is highly competitive both within the GCC and globally and will consolidate the UAE's position as a leading global hub for business and investment, accelerating the nation's development and transformation."
Sami Fadlallah, Economic Researcher, Healy Consultants Group PLC, said, "Worldwide average statutory corporate income tax in 2021 stood at 23.54 percent, and other 'low tax' hubs, such as Singapore and Hong Kong, impose taxes at nearly double the UAE's proposed rate. Additionally, the absence of personal income tax and lifestyle offered in the Emirates will continue to be desirable for the top talent driving these organisations."
Izzat Dajani, Chief Executive at Dubai-based IMCapital Partners and a former senior banker at Goldman Sachs and Citigroup, said, "It was just a matter of time before the UAE imposed corporate tax in line with some other GCC countries. The levels announced of a 9 per cent base are quite reasonable in international standards. I'm glad to see that SMEs and small businesses will most likely be exempt from the corporate tax burden."
Advantages of the New Corporate Tax Regime of the UAE
There are several advantages of the new corporate tax regime of the UAE. Some of them are listed right here.
Meeting international standards
An advantage of the new tax regime is also highlighted on the UAE website. It reads, 'Introducing a CT regime reaffirms the UAE's commitment to meeting international standards for tax transparency and preventing harmful tax practices.'
- Lower rates at the global level
Another advantage of the new corporate tax regime of the UAE is that the proposed tax is quite reasonable. The corporate tax among EU27 nations is 21.3%, while it's 23.04% in OCED nations and as high as 69% in G7. It is even lesser than one of its key competitors, Saudi Arabia, which levies a corporate tax of 20%.
- A Source of revenue for the government
The new tax regime will increase the government's revenue by adding another source of income. The UAE government would most likely spend this money for the public's welfare.
- Reduced reliance on oil-generated money
The new tax regime will also reduce the reliance of the UAE on oil-generated money. UAE will have more diversified sources of income, which signifies a healthy and matured economy.
- Minimal impact on FDI
The corporate tax will have a minimal impact on corporate savings and FDI. It will develop investors' confidence in the long run and increase future growth.
In a nutshell, the new corporate tax regime will help UAE meet global standards and provide a stable environment for the economy.