The UAE plans to introduce a 9% tax on corporate profits from June 2023 as part of its plan to diversify the economy from oil and gas revenues.
While the country’s tax-exempt status has long attracted global businesses, the finance ministry said the new tax regime would be “one of the most competitive in the world”.
Among the key points of the new tax regime are:
- Zero tax rate for taxable profits up to 375,000 dirhams ($102,000)
- No corporate tax will apply on personal income from employment, real estate and other investments
- No corporate tax in free zones
- No tax on capital gains and dividends
What does the new tax mean for businesses and government in the GCC’s second-largest economy? Zaouya seek expert advice. Their answers have been edited for length.
Support for public finances:
The tax is part of a series of measures – including the introduction of a value added tax in 2018 – by the UAE to reduce dependence on hydrocarbon revenue and ease fiscal pressures.
“We are seeing the escalation of new taxes in the GCC as part of a diversification effort. There is a gap between income and expenditure that rising oil prices are not helping at the moment, but the trajectory is not sustainable. So the taxes will come,” said Karen Young, director of the economics and energy program at the Middle East institutes.
“For the UAE, the introduction of a federal tax helps Abu Dhabi balance the tax budget and pay for services across the federation. But Dubai is likely to be the biggest source of corporate tax revenue. Government tax revenue generation will be uneven, just as oil revenue is uneven and important to Abu Dhabi as an emirate and is then used to partly finance the federal government budget.
According to Moody’s, the introduction of corporate income tax is the most significant tax reform since 2018. “Only Oman in the GCC currently has a corporate income tax that applies to companies owned by citizens and foreigners. Most other GCC countries impose corporate taxes. foreign companies (and only Bahrain not taxing any foreign companies).
The new tax will broaden the revenue base of the federal government and, most likely, individual emirates as well, in line with the current approach to distributing VAT revenue – representing a new source of revenue in addition to license fees, service and volatile taxes. land sales. “Nevertheless, the tax benefit will be limited by the important role of free zones in the non-oil economy of the UAE, where the new tax will not apply,” he added.
Effect on small businesses:
The new tax would bring many additional benefits to small businesses in the UAE, as in some ways the UAE has alleviated this problem through the reduction of fees and charges, said Stuart Cioccarelli, Partner and Head of Tax, and Shabana Begum Partner , Head of Transfer Pricing, KPMG Lower Gulf. “It’s better to pay a CIT on profits rather than a loss-making business still having to pay fees and charges,” they said.
Moody’s said the tax is overall negative for domestic businesses in the UAE, as it will reduce their operating cash flow. “However, the overall impact on the credit profile of large companies will be mitigated because they have several compensating levers, such as increasing the prices of products or services, optimizing their cost structure and reducing shareholder dividends.
Rima Mrad, Corporate Partner, BSA Ahmad Bin Hezeem & Associates LLP said the tax should not directly affect start-ups and small businesses as a minimum threshold has been announced. “This will give space to start-ups and companies making limited profits below this threshold to expand their businesses and operations before they fall under the terms of this new law.”
Ayman Youssef, vice president of Coldwell Banker, UAE, told Zawya that the new corporate tax regime will not affect business competitiveness in the country. “Additionally, the 9% corporate tax rate is an attractive rate globally and no tax will be levied on personal real estate investment.”
Young said that for Dubai, this reinforces the free zone model, which had lost importance as investors’ rights to hold property and own businesses have expanded. “Now businesses and investors may want to withdraw to free zones. Retail operations will bear the heaviest tax burden and their operating cost is already taxed by VAT,” she said .
On the UAE’s ability to attract new businesses and talent
The new regime will meet international standards for transparent tax structure and transparency and prevent “harmful tax practices” according to the statement by Younis Haji Al Khoori, Undersecretary at the Ministry of Finance.
According to KMPG’s Cioccarelli and Begum, this will help companies attract talent and expand into new sectors, “because they operate in a country whose laws are in line with the international tax transparency and governance agenda, which should be result in stability and the ease of doing business internationally.”
This will be an incentive, especially for globally taxed groups or investors from jurisdictions that tax income generated outside their territory, Mrad said.
“I believe that today, with growing concerns about tax havens and increasing restrictions on non-taxable businesses in some jurisdictions, private sector companies will benefit,” she said.
The Emirates’ corporate tax regime will be one of the most competitive in the world, said Hanan Abboud, Partner – M&A & International Tax at PwC.
“The UAE would also continue to offer the most competitive corporate tax regime in the region, with Egypt, Jordan, Kuwait, Lebanon, Oman, Saudi Arabia and Qatar imposing the tax at rates between 10% and 35%,” she said.
Soham Chokshi, CEO and co-founder of Shipsy, said that while the corporate tax system may initially disrupt the business environment, and investors may also consider considering other prospects for a brief period, it will “eventually calm down”.
He said the tax is designed to support the government’s strategic ambitions that will drive long-term business growth. “It is possible that this is part of a series of strategic announcements that help position the UAE as an integral part of the global system but still a relative tax haven,” he added.
Bal Krishen, President and CEO of Century Financial, said that in addition to the UAE’s extensive network of double tax treaties, the new regime will enhance its status as a global hub for business and investment.
“Through this scheme, the UAE will be able to meet the challenges of digitalizing the global economy. Following the new corporate tax, the UAE reaffirmed its commitment to comply with international standards of tax transparency and to prevent harmful tax practices.
(With contributions by Cleofe Maceda, Brinda Darasha, Seban Scaria and Anoop Menon; editing by Seban Scaria)
Disclaimer: This article is provided for informational purposes only. The Content does not provide tax, legal or investment advice or an opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer here.
© ZAWYA 2022