United Arab Emirates (UAE) announced on Monday that it will establish the first federal corporate tax on business profits on June 1, 2023. But that the rate will remain low, at 9%, to keep the country attractive to enterprises.
The Gulf Arab oil exporter has long benefitted from its tax-free status. The cause was to carve itself a place as an international commercial, energy, and tourism center, attracting the world’s ultra-rich.
Much of this tax-free environment is still in place, including no personal income tax. The Finance Ministry, on the other hand, claimed it was introducing a corporate tax to coordinate worldwide efforts. It is to combat tax evasion and to meet issues posed by the global economy’s digitization.
The “extraction of natural resources,” will continue to be taxed at the emirate level. But the new tax will be imposed on all enterprises and commercial operations in the country.
As per the ministry’s statement, the new regime includes a basic statutory tax rate of 9% and a 0% rate for taxable profits up to 375,000 dirhams. It is to help small firms and entrepreneurs.
The measure, according to the ministry, will prepare the way for the implementation of a worldwide minimum tax rate. It will then apply a separate corporate tax rate to large multinationals that meet certain conditions.
It didn’t go into detail. But this appeared to be a reference to new guidelines agreed to by the Organization for Economic Cooperation and Development and 136 nations, including the UAE. It was in October to ensure that large corporations pay a minimum tax rate of 15%.
UAE first federal corporate tax: Diversify budget revenue
The move to a 9% tax chimes with the country’s goal to diversify budget revenue to minimize reliance on petroleum. It has been the economy’s mainstay for decades.
“The UAE continues to make progress in diversifying its budget revenue away from oil, and a corporate tax fits into this strategy. The tax rate remains low by global standards,” said Khatija Haque, chief economist at Emirates NBD.
“With the international tax treaty signed at the end of last year, many corporates may still have to pay a top-up tax in their country of residence. It is positive for the UAE to earn the tax on the business conducted and income sourced domestically,” said Monica Malik. She is the Chief Economist at Aby Dhabi Commercial Bank.
In 2018, the UAE imposed a standard rate of 5% VAT on the majority of goods and services. The UAE levies a 20% tax on foreign bank branches operating in the country. Also, a 55 percent tax on corporations holding concession agreements in the oil and gas sector at the emirate level.
Businesses in the UAE are also exempt from paying taxes on capital gains and dividends earned from shareholdings.
Individual income tax exemptions, capital gains tax on real estate and other investments, and other non-business incomes were all preserved under the new policy.
The ministry states UAE corporate tax regime would continue to honor corporate tax incentives now available to free zone enterprises. They should likewise meet all regulatory requirements and do not conduct business with the mainland UAE.