The Ministry of Finance, UAE has announced that they will introduce a federal corporate tax on business profits from June 1, 2023. A standard tax rate of 9% applies for all companies, placing UAE in a competitive position when compared to other global financial centres.
The average top corporate tax rate among EU27 countries is 21.3 percent, 23.04 percent among OECD countries, and 69 percent in the G7, according to the Tax Foundation based in Washington DC. Foreign taxes paid will be credited against any payable UAE corporate tax, meaning there will be no double taxation.
To support small and medium-sized enterprises there will be a zero tax rate for taxable profits up to Dh375,000 ($102,000). The legislation has yet to be issued and the details for the corporate tax regime are subject to finalization.
“The tax regime will be among the most competitive in the world,” the ministry said. It will be in line with World Trade Organisation rules.
There will be no tax on personal incomes “from employment, real estate, and other investments, or on any other income earned by individuals that do not arise from a business or other form of commercial activity licensed or otherwise permitted to be undertaken in the UAE”.
Businesses involved in the “extraction of natural resources” — oil and gas production — will be exempt, as they are subject to emirate-level taxation already, the ministry said.
Corporate tax incentives offered to free zone businesses that do not conduct business onshore are unaffected.
Withholding taxes on domestic and cross-border payments will not be imposed. Foreign investors who do not carry on business in the UAE will not be subject to corporate tax.
UAE businesses will be exempt from paying tax on capital gains and dividends received from their qualifying shareholdings.
There will be “generous loss utilization rules” and “UAE groups can be taxed as a single entity or can apply for group relief in respect of losses and intragroup transactions and restructurings”.
“As a leading jurisdiction for innovation and investment, the UAE plays a pivotal role in helping businesses grow, locally and globally,” said Younis Haji Al Khoori, Undersecretary of the Ministry of Finance.
“The certainty of a competitive and best in class corporate tax regime, together with the UAE’s extensive double tax treaty network, will cement the UAE’s position as a world-leading hub for business and investment.”
One corporate tax return will be filed each financial year. Advance tax payments or the preparation of provisional tax returns will not be required.
“The introduction of a corporate tax regime will help the UAE achieve its strategic ambitions and incentivize businesses to establish and expand their activities in the UAE,” said Mr. Al Khoori.
The ministry said it would give businesses “ample time” to prepare for the introduction of corporate tax.
More details are expected to be announced in the coming weeks and months.
“I think 11 months is an acceptable time frame for listed companies and even non-listed private companies to adjust for a tax regime,” Ali El Adou, head of asset management at Dubai-based Daman Investments, said.
Although it is not something that “everyone has been talking about” or that the market has been expecting, there have been UAE talks with different parties around the subject of corporate tax, he said.
“In the international tax treaties the UAE has done, you will see that,” Mr. El Adou said.
The new tax will support government finances and will add to its revenue sources and there will “definitely be more income” at the federal level to reinvest back into the economy, he said. The government has already done that extensively during the pandemic to support the economic recovery, he said.
“I think the initial announcement is in line with the broader view to diversify the income by increasing the tax base and implement changes in different parts of the economic structure,” said Faisal Hasan, chief investment officer at Al Mal Capital in Dubai.
The corporate sector will await further details to “gauge the full impact”, especially the implementations related to compliance and reporting, he said.
“Also, the other parts of taxation such as personal income tax, withholding tax, capital gains taxes have not been affected, which will help in the continuity of the processes,” Mr. Hasan said.
Corporate tax rates have rapidly declined in the last 40 years. Hence, the global weighted average of corporate taxation has dropped to about 25 percent in 2021 from what it was in the 1980s (around 50 percent).
Corporate tax rates have continuously declined over the past 40 years, with the worldwide average declining from more than 40 percent to between 25 and 30 percent, according to Tax Foundation data.
