UAE begins corporate tax roll-out, with free zones exempted
The UAE began rolling out a 9% business tax last week, with exemptions for the many free zones that power its economy, as the formerly tax-free oil producer seeks to boost non-oil revenue and remain a regional commercial hub.
The business tax follows a 5% value added tax (VAT) introduced in 2018, gradually eroding the United Arab Emirates’ tax-free status that helped it carve out a role as an international trade and tourism hub and magnet for the ultra-rich.
The Ministry of Finance, in new regulations last Thursday, said qualifying entities in the UAE’s more than 30 free zones — which export tens of billions of dollars of goods to neighbouring states — will be subject to a 0% rate, even when dealing with the mainland on certain strategic activities such as manufacturing, goods processing and logistics services.
“The regime has been designed to ensure strategic sectors will thrive in the free zones. Some level of migration may happen but the overall objective is ensuring the UAE remains attractive,” Shabana Begum, MoF’s executive director for tax policy told media, when asked whether the tax exemptions would encourage companies to relocate to free zones.
The government has said it introduced the tax to align with international efforts to combat tax avoidance, as well as to address challenges arising from the digitalisation of the global economy. The UAE does not levy personal income taxes.
Tax reform is gradually appearing across the Gulf Cooperation Council (GCC), which has historically funded budgets from hydrocarbon revenues. In 2017, GCC states agreed to introduce VAT.
S&P ratings agency estimates the tax could add 1.5%-1.8% of gross domestic product from 2025 to the annual revenues of the UAE’s seven emirates based on the VAT model, which gives 70% of receipts to the collecting emirate and the rest to the federal government.
“The tax will help diversify the UAE government’s revenue away from the oil sector. However, the full impact is unclear because it has not yet been announced exactly how the tax will be distributed amongst the individual emirates,” S&P’s Trevor Cullinan said.
The UAE’s 9% rate on taxable income above 375,000 dirhams — around $100,000 — is the lowest in the GCC, apart from Bahrain, which does not impose a general corporate tax.
Saudi Arabia levies 20%, Qatar 10%, and Kuwait 15% on foreign-owned firms, and Oman has a corporate rate of 15%, according to consultancy PwC.
IN LINE WITH BEST PRACTICES
Muhammad Rasoul CEO of Amana, a mid-sized UAE-based financial services company, said the corporate tax is a natural step to bring the UAE in line with best practices globally.
“The key will be to ensure the economy stays competitive, at both the regional and global level ... But let’s be clear — the tax rate doesn’t seem to be overly high, especially compared with what businesses must manage elsewhere in the world,” he said.
Firms from last Thursday became liable for corporate tax when their financial years start, meaning tax returns will not fall due until 2025.
The UAE tax coincides with a new global minimum corporate tax from the Organisation for Economic Cooperation and Development (OECD), signed by 136 signatories including the UAE, to ensure big companies pay a minimum 15% and make tax avoidance harder.
The UAE has yet to publish regulation on how the OECD tax will be implemented, but if it had not introduced its own corporate tax system, another country where the company has a presence would have the right to collect the 15%, tax experts say.
The UAE legislation levies 0% or 9%, but with caveats for smaller earners and excluding personal income from employment, investment and real estate.
“They wanted to make it as friendly as possible to small and medium enterprises and start-ups. And at the same time they don’t want to encourage companies shifting from the UAE,” said Wassim Chahine, head of corporate tax for KPMG Lower Gulf.