The United Arab Emirates, known worldwide for its extremely favorable policies and attracting investors worldwide, has introduced a federal corporate income tax (CIT) which becomes effective from June 1st, 2023. The statutory CIT rate is set at 9% and within this article, we’ve outlined the existing tax framework of the UAE and assessed the impact that the introduction of the CIT could have on UAE businesses.
Taxation in the UAE
The United Arab Emirates has for a long time attracted multiple wealthy investors from across the world to establish their presence in the region as well as to enjoy one of the most preferential tax regimes in the world in a jurisdiction, which has multiple bilateral double taxation agreement signed with other countries globally.
The UAE has long enjoyed the role of a leading international financial, commercial, energy, and tourism center in the Middle East region. Furthermore, no personal income applies to the residents of the UAE. Only in 2018 did the UAE introduce value added tax on goods and services sold domestically at the standard rate of 5%. Furthermore, the UAE imposes a CIT of 20% on branches of foreign banks in the country and up to 55% CIT on the oil and gas sector at the Emirate level.
Nevertheless, the tax authorities, i.e., the UAE Finance Ministry, have announced that it shall introduce CIT in the Emirates in order to combat international tax avoidance practices and unite efforts with the tax bureaus of other countries to set a minimum global tax rate for multinational companies. This is likely referring to the agreement reached by the Organisation for Economic Cooperation and Development (OECD) with more than 130 countries globally, aiming to set a minimum tax rate of 15% for multinationals.
New CIT Regime in the UAE
The new CIT will be levied on the profits derived by businesses from commercial activities in the country. The only category of the activity which is subject to a separate CIT at the individual Emirate level is the extraction of natural resources.
However, for small businesses with taxable profits not exceeding AED 375,000 (approximately USD 102,100) the CIT rate is set at 0% in order to facilitate the development of startups.
The dependence of the federal budget on the revenues from sales of oil is another factor why the UAE is introducing the new CIT regime. By diversifying away from the natural resources sales and deriving revenues elsewhere, the UAE can bring further stability and assurances for the future prosperity of the country.
Furthermore, the CIT rate of 9% is considered relatively low among global financial centers, for example, a 16.5% CIT rate is applied in Hong Kong for businesses deriving profits in the territory of Hong Kong SAR.
What about companies registered in the Free Zones?
The UAE, and in particular, the Emirates of Dubai and Abu Dhabi are home to many different Free Zones. Many of these Free Zones offer different incentives to companies and they have seen a number of both multinational and small and medium-size enterprises registering 100 percent foreign-owned subsidiaries, not requiring the need for a domestic shareholder. Free Zones also offer certain tax incentives to businesses registered there.
The Ministry of Finance has indicated that businesses registered in Free Zones will be subject to the new CIT; however, it is noted that the tax incentives offered by the Free Zones will be honored by the new regime for the businesses therein that meet all compliance requirements and do not conduct business domestically with mainland UAE enterprises or individuals. Further comments from the authorities are expected to bring about additional clarity and transparency on the matter.
D’Andrea & Partners Legal Counsel and PHC Advisory Tax & Accounting (companies of DP Group) offer full-scale legal, compliance, and tax advisory support and consulting to businesses willing to or already conducting business both in mainland UAE and the Free Zones. For more information or in case of any questions, please feel free to contact us at firstname.lastname@example.org.