Corporate tax debuts in the UAE

The United Arab Emirates is all set to become the 4th GCC country to incorporate a federal corporate tax regime with its recently announced federal Corporate Tax (CT) effective from the financial year commencing from June 1, 2023. Not only joining 4th in the list, the UAE’s corporate income tax rate, a standard rate of 9% is amongst the lowest of all GCC countries, except for Bahrain.

In the recent few years, UAE encompassed several amendments to its tax regulation to streamline the entire system and align with international best practices. Being a member of the Organisation for Economic Co-operation and Development (OECD), the new CT tax regime is in line with its aim to commit to the global minimum effective tax rate concept proposed by Pillar II of the OECD Base Erosion and Profit Shifting project (“OECD BEPS”).

Until now, the CT in the country was determined on a territorial basis with each Emirate having its tax decrees. Foreign oil companies involved in upstream petroleum activities and foreign banks were levied CT until now. Under the new tax regulations, now companies generating more than Dh375,000 net profit per year will be paying 9% of the net profit made as taxes. To adhere to the OECD BEPS framework, multinational enterprise groups (MNE) will be subjected to different tax rates.

To remain conducive for SMEs and MSMEs which make up more than 80% of active businesses, a 0% tax rate will be levied if the net profit is up to 3,75,000 AED. Today, 40+ free zones are operating with their own set of rules and regulations. Businesses set up in these free zones are offered ‘tax holidays’ that exempt them from taxes for a period between 15 and 50 years depending on the respective free zone. Given regulatory requirements are met and no business is conducted with mainland UAE, free zone businesses will continue to enjoy these benefits.

The path ahead

A list of compliance advisories and guidelines is still awaited from the government to gain a deeper sense of clarity on the tax regulations. The tax regulations announced seemingly maintain the existing tax benefits and the rates announced remain highly competitive which are sure to continue to entice businesses. In July 2022, the total number of registered active business licenses in the country accounted for 665,000+ marking a nearly 2% rise compared to December 2019. Complying with a federal tax regime will thus, secure companies’ competitiveness in the UAE, hence increasing business valuation and fueling investor sentiments. Companies now have to strategically streamline their resources to identify and indulge in best practices to prepare for the impact.

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