The UAE’s decision to increase corporate tax to 15% for multinational companies earning over EUR 750 million (AED 3 billion) in global revenues is expected to trigger a migration of businesses to the country’s economic free zones, according to industry experts. This adjustment, known as the Domestic Minimum Top-up Tax (DMTT), will take effect from January 1, 2025, aligning the UAE with the OECD’s Pillar Two framework for a transparent tax system.
Impact on Businesses and Strategic Adjustments
While businesses previously enjoyed a relatively low tax environment at 9%, the introduction of the higher tax rate will initially challenge profitability. Many companies are anticipated to relocate operations to free zones, where tax-exempt status remains unchanged. Free zones continue to be a key attraction due to their strategic location, infrastructure, and pro-business policies.
Bal Krishen, Chairman of Century Group, remarked:
“Initially, it [the 15 per cent tax] will inevitably impact profitability for businesses that were used to enjoying relatively lower taxes, making a teething period for many companies. Companies are more likely to shift their operations to free zones to minimise tax exposure while continuing to benefit from the UAE’s strategic location, strong infrastructure, pro-business policies, and favourable regulations.”
Focus on R&D and Skilled Talent
The new tax regime introduces refundable tax credits of 30–50% for research and development (R&D) activities and high-value employment roles, such as C-suite executives. These incentives are expected to encourage businesses to invest in innovation and skilled talent acquisition. Analysts predict that companies will prioritize operational efficiencies, diversification of revenue streams, and leveraging government incentives to offset the tax burden.
UAE’s Competitive Edge
Despite the increase, the UAE remains a favorable destination for global businesses, given its lower tax rate compared to countries like the UK (25%) and Saudi Arabia (20%). The country’s reputation as a low-tax jurisdiction, coupled with its tax incentives, ensures its continued appeal.
Krishen added:
“Ultimately, the 15 per cent tax hike is unlikely to impede the UAE’s non-oil sector growth significantly in the long run. Instead, it would encourage businesses to adapt strategically by leveraging free zones, government incentives, and R&D investments.”
Adapting to Change
Industry insiders believe businesses will adopt new financial strategies, similar to adjustments made following the introduction of the 9% tax in 2023. While some companies may face short-term profitability challenges, the UAE’s strategic advantages and pro-business environment are expected to drive long-term growth.
