The Introduction of Corporate Tax in the UAE: A Comprehensive Overview

The United Arab Emirates (UAE) has recently initiated the roll-out of a 9% corporate tax, marking a significant shift in the country’s fiscal landscape. Interestingly, this new measure exempts businesses operating within the country’s numerous free zones, further enhancing the UAE’s reputation as a leading regional commercial powerhouse.

This new business tax implementation comes on the heels of a 5% value-added tax (VAT) implemented in 2018, a move that gradually shifted the UAE from its tax-free status. This taxation evolution aligns with the nation’s broader ambition to fortify its position as a global trading and tourism hub, while continuing to attract the affluent population worldwide.

The UAE’s Ministry of Finance has outlined the new regulations. Qualifying entities within the UAE’s 30+ free zones, a significant source of export revenue, will be taxed at a 0% rate. This is applicable even when conducting strategic activities such as manufacturing, goods processing, and logistics services on the mainland.

This tax strategy has been carefully designed to nurture strategic sectors within the free zones. While a degree of migration may occur, the overarching objective remains to maintain the UAE’s appeal as an attractive business destination.

The rationale behind the introduction of this tax aligns with international measures aimed at combating tax avoidance, as well as managing the challenges posed by the digital transformation of the global economy. The UAE continues to be a region where personal income taxes are not levied.

The trend of tax reform is gradually emerging across the Gulf Cooperation Council (GCC), which has traditionally relied on hydrocarbon revenues to fund budgets. In 2017, GCC member states agreed to introduce VAT, marking a shift towards diversified sources of revenue.

According to S&P ratings agency estimates, this new tax could enhance the annual revenues of the UAE’s seven emirates by 1.5%-1.8% of gross domestic product from 2025, based on the VAT model. This model stipulates that 70% of receipts go to the emirate that collected the tax, with the remaining portion channeled to the federal government.

Notably, the exact distribution of tax revenues among individual emirates has yet to be detailed, and the full impact of the tax on diversifying government revenue away from the oil sector remains to be seen.

The UAE’s 9% rate on taxable income exceeding 375,000 dirhams (approximately $100,000) is the lowest in the GCC, with the exception of Bahrain, which does not levy a general corporate tax. In comparison, Saudi Arabia imposes a 20% tax rate, Qatar 10%, Kuwait and Oman 15% on foreign-owned companies.

This tax reform is seen by experts as a crucial step in aligning the UAE with global best practices. While maintaining competitiveness at both regional and global levels remains paramount, the tax rate is not considered excessively high, particularly when compared to other jurisdictions worldwide.

The new corporate tax will take effect when businesses’ financial years begin, with the first tax returns not due until 2025.

The introduction of the UAE’s corporate tax coincides with the global minimum corporate tax proposed by the Organisation for Economic Cooperation and Development (OECD). This global tax, agreed upon by 136 signatories including the UAE, mandates a minimum 15% tax rate to minimize tax avoidance by large companies.

While the UAE has yet to announce how the OECD tax will be implemented, the launch of its own corporate tax system is a proactive measure. If the UAE had not initiated its own system, another country where the company operates could potentially have the right to collect the 15% tax.

The UAE’s new tax legislation stipulates a 0% or 9% tax rate, with provisions for smaller earners and the exclusion of personal income from employment, investment, and real estate. This balanced approach aims to support small and medium enterprises and startups, while discouraging companies from relocating away from the UAE.