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For the first time ever, businesses in UAE Will Pay Corporate Taxes

3 February 2022

Announced at the end of January in Dubai, it was revealed that from 2023, businesses wishing to operate in the United Arab Emirates will pay federal corporate tax. Not all businesses will be eligible to pay and there is a minimum income threshold. Further details were made available from the country’s Ministry of Finance.

New Tax Rates Announced for 2023

From 1st June 2023, the statutory tax rate in the UAE will be 9% on adjusted accounting net business profits that exceed 375,000 UAE dirhams. This works out at around $102,000 US or €90,600. There is no tax payable beneath this income level – a threshold designed to help start-ups and small businesses operating in the Emirates.

Announcing the measures, the Minister of Finance stated that the new corporate tax regime will ensure the UAE remains one of the best places in the world to operate, continuing to make it hugely competitive. However, there is no plan to introduce personal income taxes, or tax on real estate or investments that are otherwise unrelated to corporate activity.

Foreign investors will also not be subject to tax so long as they do not conduct business in UAE.

Corporate tax will now become payable on profits generated in UAE by businesses as reported in the company financial statements; they do so while adhering to international accounting requirements. They will apply to businesses except for those involved in natural resource extraction. These have always and will continue to be subject to Emirate corporate tax standards and rates.

Will This Change Free Zone Businesses?

There are thousands of free zone business operating in the UAE; businesses there have long enjoyed zero tax rates, foreign ownership, and many other benefits. They will continue to enjoy the benefits of previous corporate tax incentives, according to the minister, so long as they continue to adhere to the existing stipulations.

State news further clarified that the new tax regime incorporates best global practices on tax reporting and taxation, while continuing to minimise compliance and regulation burdens.

Changes Predicted, but Not Everyone is Happy

The UAE now has around 18 months to prepare and implement its new taxation system. Initial reactions have been mixed on whether the UAE will continue to be an attractive place to operate.

However, others were quick to support the move, commenting that this had been under discussion for many years. Further, the Gulf Cooperation Council (GCC) already has corporation tax –in both Saudi Arabia and Qatar, for example.

Like many other countries in the region, the UAE is looking to diversify its economy and move away from hydrocarbon. Commenting, Chris Payne, chief economist at Dubai-based Peninsula Real Estate said it was important for the Federal government to become less reliant on corporate dividends and investment, noting that both income sources are currently volatile.

Others commented it was a practical and sensible move to do this now.

The vice president of tax and treasury at Dubai firm “Kent,” Mark Hemmings, said he’d be interested to see further details when they emerged. He was positive about the move, stating that it will permit UAE to comply with international tax rules which are yet to emerge while continuing to attract businesses.

Start-ups and Small Businesses are Concerned

Some critics have noted that the tax payment threshold of 375,000 UAE dirhams is low. Despite that the measures are designed to help smaller businesses it could still impact smaller enterprises already struggling with the high cost of setting up and business operations renewals.

Rupert Tait founded a construction tech company called Procurified. His is one such small business for which he sees potential headwinds in the near future.

Rupert wanted to establish his company in the most affordable place to grow his business. He is not opposed to taxation, he commented that small businesses are taxed indirectly even in the free zones. For example, his company based in the Dubai Multi Commodities Centre free zone pays 20,000 UAE dirhams every year regardless of whether it makes a profit. This is around $5,450 US or €4,800.

There are concerns that the new corporate tax rate may cause smaller businesses to consider their long-term futures, citing profit-based taxes and upfront fees.

Will UAE Remain Competitive?

It must be noted that this tax rates remains low when compared to other countries where there is a low rate of corporate tax.

  • Montenegro is currently 9%, the same as the proposed new UAE rate
  • Gibraltar is currently 10%
  • Lichtenstein and Ireland are both 12.5%
  • Hong Kong’s rates are a little more complicated, ranging from 8.5% up to 16.5% depending on a variety of factors
  • San Marino and Singapore are both 17%
Further details on which goods and services will be exchanged for the new taxes when introduced next year.

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