If not for the “no tax” regime or “tax-free” tag, would the United Arab Emirates still remain favourite amongst investors and business persons from the world over? We don’t know. For the time being what we know is federal corporate tax is on its way to the UAE and will reach here next year.
The talk of the town
What’s this buzz around? The UAE is going to impose federal corporate tax on the companies operating within the nation? Yes, you heard that right. For the first time, the UAE is going to impose federal corporate tax on the profit of businesses from the financial year beginning on or after June 1, 2023, the Ministry of Finance announced on Monday. The federal corporate tax rate has been confirmed as 9% and the low base has been set as Dh375,000. The country by and large still is tax-free. The corporate tax will not apply to personal income from employment, real estate and other investments, or to income earned from a business licensed outside the UAE, relieved the Finance Ministry.
A quick recap
From upgrading labour laws, loosening restrictions on business ownership rules, granting longer-term visas for some, offering talent pass to freelancers, liberalising some of its Islamic laws pertaining to alcohol, unmarried couples and gaming to embracing a Monday-Friday workweek, the UAE has recently taken several measures to try and retain foreign investors while pegging away to achieve its strategic goal of making the nation one of the top five happiest places in the world to live and work.
Salient features
The recently announced UAE corporate tax is applicable for all businesses registered or operating in the UAE, except the companies involved in the extraction of natural resources as they are still subject to Emirate level corporate taxation. Foreign entities and individuals will be subject to federal corporate tax only if they carry on a trade or business in the UAE in an ongoing or regular manner. Below are the key features to make a note of:
- No corporate tax will apply on individuals in the UAE who are generating income from employment, real estate, investment in shares or other personal income sources that are not related to a UAE trade or business will not be subject to corporate tax.
- Foreign investors are not subject to corporate tax if they do not conduct business in the UAE.
- Corporate tax will be calculated on the adjusted accounting net profit of the business which is the taxable income after expenses have been deducted.
- Free zone businesses are still eligible to benefit from corporate tax incentives only on meeting all necessary requirements.
- The extraction of natural resources will continue to be subject to Emirate level corporate taxation.
- There is no withholding tax applicable on capital gains and dividends obtained by a UAE business from its qualifying shareholdings.
- No corporate tax will be applicable on qualifying intragroup transactions and restructuring.
- Foreign tax qualifies to be credited against UAE corporate tax payable.
- Generous loss transfer utilisation rules will be available to businesses.
Intentions behind the surprising volte-face on taxes
Labelled as a tax haven, the UAE is infamous for not levying taxes and this is one of many reasons why people from around the world don’t shy away from moving to their favourite emirate to live and work or to do just business without even residing there. But common-sense economics dictates that no state can survive without taxes. And this statement is enough to break the widespread myth about the UAE that none of its seven emirates including Dubai levy taxes in any forms, direct or indirect on its people. Have you ever thought about who finances the lavish incentives provided by the country to the Emirati people? There is a long list of taxes being charged in the nation, some as old as the hills, some johnny come lately. And the government will not hesitate to add more taxes to the list just like federal corporate tax, a tax levied by the government from the companies on their profits (net income) as a source of income.
The UAE government is to impose a standard corporate tax rate of 9% on businesses with a minimum profit threshold next year despite knowing that the decision can have a negative impact on the foreign investments in the UAE. But the government has their own good reasons behind tucking one more tax in the fabric of taxation. The major ones of them are:
- Small businesses and start-ups have always been on the radar of the UAE. The government believes that the implementation with the threshold will not affect the small and medium enterprises and the tax threshold of AED 375,000 is set keeping them in mind. Considering the threshold amount, SMEs will most likely be exempt from the corporate tax burden.
- The decision has been taken not only to cement the UAE’s position as a world-leading hub for business and investment but also to meet international standards for tax transparency and to safeguard the nation from unhealthy tax practices while accelerating the nation’s development and transformation to accomplish strategic objectives.
- The international tax landscape has been changing at a lightning speed. For the UAE government it was time to put the money where their mouth is. The corporate tax came into the picture because UAE intends to align itself with the new international standards, specifically the transition to a global minimum tax.
- Oil, petroleum and natural gas are the mainstays of the UAE’s economy and tourism and fines are of Dubai’s economy. One of the government’s noticeable intentions behind the corporate tax implementation across the emirates is to decrease the country’s income dependence on oil.
- By fixing the standard statutory tax rate at 9 percent, the UAE is able to position the nation competitively in the world market where most financial centres and developed economies have higher rates. For instance, the average top corporate tax rate among EU27 countries is 21.3%, 23.04% among OECD countries, and 69% in the G7, as per the Washington DC-based Tax Foundation.
Federal Corporate Tax: Impact
Not just UAE, be it any country, changes in laws, rules and regulations are inevitable. The introduction of federal corporate tax in the UAE is pretty logical and was expected for large companies operating in the UAE. However, it dawned on the corporations too soon. Businesses across various sectors in the UAE are still reeling from the consequences of the COVID-19 pandemic. Untold numbers of foreigners, who comprise around 90% of the UAE’s population, lost their jobs amid the pandemic and salaries were slashed in key industries such as tourism, real estate and the construction sector. Moreover, the favourable tax regime was acting as a magnet for the UAE to attract investors across the globe and with the new corporate tax regime to remain competitive, regionally and globally is going to be challenging for the nation.
Oil businesses and foreign banks have already been paying corporate taxes so the decision is not a shocker for them. However, the step is sure to hit some sectors severely such as the telecom sector and services industry (like hospitality) as they are already coughing up fees up to 20%. It is also foggy to comment on how the new 9% corporate tax on business earnings will influence consumers as some companies could inflate their prices to combat the implications.
Although according to the UAE government the decision will not affect the SMEs, some business specialists think that an annual profit of just $100,000 is fairly low for being subject to taxation and could be detrimental for smaller enterprises with high set-up and business renewal costs. Looking mere, a 9% tax despite being quite reasonable in international standards is enough to shift some establishments from profitability to loss by slashing investor appetite and reducing the share price. Many will be biting their nails wondering whether the royalties or fees will change too in the coming time. Furthermore, the issue that’s pretty visible with implementation for SME is what’s to stop business owners from paying off the salaries to evade paying the tax. Generally, the strings of many of those businesses are pulled by a few shareholders. Analysts see no meaningful impact on equity markets due to the corporate tax rates announced. Counterintuitive to customary expectations, a study suggests that the S&P 500 index had higher average returns on every occasion of an increase in corporate taxes in the US. Additionally, foreign taxes paid will be credited against any payable UAE corporate tax meaning there will be no double taxation. Moreover, since the consequences of the new tax regime will only kick off June 2023 onwards, businesses do have some time to roll with punches. Business and financial institutions will have to set off accounting for a corporate tax that will touch their net earnings. Hence, a leaner workforce alongside more efficient operations may come into place to compensate for the tax impact on profitability.
To sum up, the implementation of corporate tax at a federal level may withdraw the UAE’s tax-free status from it but the move will prove to be beneficial for the country in the long run. As far as adverse impact on attracting businesses and investment is concerned, the government doesn’t think the initiative will much affect the country’s ability to lure investments, considering tax leeway given to free zones plus the corporate income taxes imposed by Gulf countries (20% in Saudi, 15% in Oman and 10% Qatar) on MNCs operating in their economy. However, to deny there is a strategic shift in the business world that needs to be addressed, is to have one’s head in the clouds.
The UAE is a tax-free country… for real?
Do we need to remind you that the United Arab Emirates already tops the list of countries that have the world’s highest corporate tax rates (for taxing oil businesses and foreign banks at 55%)? True that the country does not impose income tax on most of the people working here. But you’ve got to take this truth with a pinch (maybe a spoonful!) of salt because not everyone is exempt from tax, especially if they are doing business in the UAE. Some specific businesses have to pay taxes. For instance, the UAE taxes the oil businesses at a mammoth 55% rate and foreign banks (operating in their country) at a mediocre 20%. The UAE government generates a great deal of revenue from these taxes. Besides some sectors contributing a lion’s share to the taxes, there are some other sectors as well for whom the “tax-free” UAE is simply a myth such as restaurants and hotels. Alcohol is also taxed heavily with 50% taxation on imports and 30% tax at the point of sale. Similarly, there is a 100 percent excise tax on the products like tobacco items including cigarettes, electronic smoking devices, and energy drinks. Council tax levied when utility bills are produced and excessive toll taxes. Various other taxes levied on property like municipality tax at 2.5% and 5% (on annual rental value) for commercial properties (paid by property owners) and for residential properties (paid by tenants) respectively. Apart from these mind-boggling taxes, there are certain other charges that are burning a hole in the pockets of the common public living in the UAE. Case in point: parking charges, ID renewal fee, licence renewal fee, salik and speed fines. And now the federal corporate tax. Therefore, in the light of massive taxes and duties charged in some or the other form, calling UAE (or Dubai) tax-free is not right and can be misleading.
UAE corporate tax has become the hot button issue in the sphere of UAE taxation. The UAE probably will not pop up now on your screen, if you search “tax-free countries in the world”, however, it may still be there in the “list of countries without income taxes”. The country will still continue to be one of the most sought-after destinations for investment for so many other reasons such as low tax, a great location, and supportive regulations.
Time and again, countries amend their laws and rules for certain reasons. And sometimes it becomes difficult to adjust to the change especially if you are a foreign investor as it needs a huge time to be prepared for the implications. Implementation of corporate tax might disrupt your business in significant ways leaving you in need of professional help. Also, to set up a business in Dubai or any part of the UAE, one has to get acquainted with all the old new rules and regulations. To find out more about the latest changes to regulations, or to commence your trade license application, contact our expert team of Dubai Business Advisors at Adam Global.