On 31 January 2022, the United Arab Emirates (UAE) announced that it will introduce a federal corporate tax on business profits from 1 June 2023 in a first for the country.[i] Businesses will be subject to a 9% tax—albeit with several exemptions. For instance, small businesses and start-ups that generate less AED 375,000 (EUR 90,000) profit will not be subject to taxation. Neither will it apply to personal income from employment, real estate and other investments or to other personal income unrelated to a UAE trade or business. Foreign investors who do not conduct their business in the country will not have to pay the tax either. The announcement comes four years since the UAE introduced a 5% value-added tax (VAT) in 2018.[ii]

 

The Motives Behind Corporate Tax

 

The decision to introduce a corporate tax comes as the UAE attempts to align itself with global standards. The Ministry of Finance referenced that the tax supports the Organisation for Economic Co-operation and Development (OECD) landmark framework for international tax reform — announced in July 2021 — which sets a global minimum corporate tax rate of 15%.[iii] In that respect, the new tax regime consolidates efforts to ensure that large multinational companies ‘pay their fair share of tax everywhere’ to combat tax avoidance.[iv]  Additionally, it paves the way for addressing challenges that emerge from the digitalisation of the global economy vis-a-vis the physical presence (or lack thereof) of firms in foreign markets.[v] Finally, it reaffirms the UAE’s commitment to encourage tax transparency and prevent harmful tax practices, according to Younis Haji Al Khoori, Undersecretary of the Ministry of Finance.[vi]

 

Crucially, the introduction of the corporate tax will bolster Abu Dhabi’s efforts to diversify its revenue streams away from its reliance on hydrocarbons — particularly, as globally, countries are starting to wean off oil in favour of alternative and more sustainable sources of energy — in line with its economic development plan UAE Centennial 2071. To that end, the move will help improve the country’s fiscal trajectory in the mid- to long-term as it transitions to a knowledge-based economy.

 

Abu Dhabi Remains Competitive

 

Despite the costs that businesses will incur from the tax, the introduction of a corporate tax is unlikely to significantly harm the UAE’s international competitiveness as a global business and investment hub. The 9% rate will be among the lowest globally in comparison to other low-tax hubs around the world such as Ireland (12.5%), Singapore (17%) and Hong Kong (8.5%-16.5%). The same goes for its standing regionally as it is still lower than Saudi Arabia (15%) and Qatar (10%). And, to further mitigate the rise in costs for businesses, Dubai has said it is reviewing the possibility of reducing government fees on commercial activities.[vii]

 

The UAE has also introduced a number of other initiatives to remain an attractive destination for foreign companies. For instance, in 2021, the government amended the Commercial Companies Law to permit 100% business ownership, and it shifted the weekend to the western Saturday-Sunday to align with global markets.[viii] This is complemented by revisions to visa regulations in the same year to make it easier for skilled workers to move to the Emirates, such as expanding those eligible for the Golden Visa, a longer-term visa without sponsorship, to encompass further groups (e.g. entrepreneurs, professionals and specialised individuals in the field of science, knowledge, culture, art and sports).[ix] The government also created the Green Visa to allow highly skilled individuals, investors, entrepreneurs and top students/graduates to sponsor themselves to come to the UAE.[x]

 

What’s to Come?

 

In order to maintain a competitive edge, Abu Dhabi is likely to continue introducing new measures related to attracting foreign businesses as it attempts to diversify its economy away from hydrocarbons and generate further revenue streams, while aligning with international standards. In that respect, the UAE is on the right track. It should continue introducing measures to maintain a competitive business environment within the perimeters of international standards. And it should partner with other countries — as it has done through in the context of the OECD’s framework — to combat tax evasion and harmful tax practices. Together, this will further the UAE’s ambitions of transitioning to a knowledge-based economy and creating a robust taxation system.

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24 February 2022

 

References

 

[i] Emirates News Agency, ‘Ministry of Finance to introduce federal corporate tax on business profits, effective for financial years starting on or after 1 June 2023,’ Emirates News Agency, January 31, 2022. http://wam.ae/en/details/1395303016461.

[ii] Emirates News Agency, ‘MoF announces readiness of Federal Financial System to implement VAT,’ Emirates News Agency, January 1, 2018. http://wam.ae/en/details/1395302657573.

[iii] Ministry of Finance, ‘The Ministry of Finance announces the introduction of a Corporate Tax in the UAE,’ Ministry of Finance, January 31, 2022. https://www.mof.gov.ae/en/media/materials/News/Pages/31012022.aspx - :~:text=With a standard statutory tax,most competitive in the world.; OECD, ‘130 countries and jurisdictions join bold new framework for international tax reform,’ OECD, July 7, 2021. https://www.oecd.org/newsroom/130-countries-and-jurisdictions-join-bold-new-framework-for-international-tax-reform.htm.

[iv] OECD, ‘130 countries and jurisdictions join bold new framework for international tax reform.’

[v] OECD, ‘130 countries and jurisdictions join bold new framework for international tax reform.’

[vi] Emirates News Agency, ‘Ministry of Finance to introduce federal corporate tax on business profits, effective for financial years starting on or after 1 June 2023.’

[vii] Emirates News Agency, ‘Dubai's Department of Finance reinforces efforts to further enhance emirate's business environment,’ Emirates News Agency, February 1, 2022. https://wam.ae/en/details/1395303016856.

[viii] Emirates News Agency, ‘Effective June 1st, UAE Commercial Companies Law allows 100% foreign ownership,’ Emirates News Agency, May 19, 2021. https://wam.ae/en/details/1395302935804; Emirates News Agency, ‘UAE Government announces four and half day working week,’ Emirates News Agency, December 7, 2021. https://wam.ae/en/details/1395303000412.

[ix] Emirates News Agency, ‘UAE Ministers announce the first set of 'Projects of the 50',’ Emirates New Agency, September 5, 2021. https://wam.ae/en/details/1395302966902.

[x] Emirates News Agency, ‘UAE Ministers announce the first set of 'Projects of the 50'.’