On 31st January 2022, the United Arab Emirates’ Ministry of Finance vide its press release, announced that the government plans to introduce a federal-level corporate income tax regime in the UAE.
Whilst the corporate tax law is yet to be published and the executive regulations are yet to be released, the said corporate tax regime is set to take effect on or after 1st June 2024 for in-scope taxpayers.
Current Corporate Income Tax Regime in the UAE
At the time of this writing, the UAE does not have a federal corporate income tax regime. The emirates that make up the UAE — Dubai, Abu Dhabi, Sharjah, Ajman, Umm al-Quwain, Fujairah, and Ras Al Khaimah — have full autonomy on whether they will levy corporate taxes and at what rate they'll set it. Typical emirate-level regulations indicate a corporate tax rate that can go up to 55%.
However, in practice, each respective emirate typically levies corporate income tax on enterprises involved in extracting natural resources such as oil and natural gas. Branches of foreign banks are also generally subject to emirate-level corporate tax. Therefore, the rest of the businesses in the UAE typically enjoy zero corporate income tax.
Further, certain free zones (which have their own regulatory framework), have also committed tax holidays up to 50 years.
In other words, the UAE currently is a corporate income tax free jurisdiction. Only specific businesses are subject to corporate tax at the emirate level.
However, this is set to change on or after 1st June 2023.
Proposed Federal Level Corporate Income Tax Regime in the UAE
The following are the salient features of the proposed federal level corporate income tax regime in the UAE.
1. Single Digit Corporate Tax Rates of 0% and 9%
According to the Ministry of Finance, the federal level corporate tax rate shall be 0% up to taxable income of AED 375,000 and 9% on taxable income above AED 375,000. However, a different rate of tax shall be communicated for entities which are part of a large multinational group.
2. Business Income Tax, Not Individual Income Tax
Corporate income tax applies to business income. Individuals’ personal income, such as the following, will remain tax free:
- Income from employment
- Income from real estate investments
- Capital gains and dividends earned from personal investments in securities and shares of stocks
- Income and interest earned from bank accounts (savings and deposit)
However, there’s an important caveat to this provision.
If an individual engages in an activity that, by law, has to be registered or must have a business license, that individual's income from that activity is taxable. In other words, they are liable to pay corporate income tax on that particular income.
The following pertains to individual incomes subject to corporate income tax:
- Income from freelancing, retainer, and consulting: Therefore, an employed individual who engages in freelance copywriting is liable to pay tax on their copywriting income.
- Income from investments made as a business with a commercial license: If you have an investment (requiring a business license) which earns you income, such earnings are subject to corporate tax.
3. Businesses on Which the 0% / 9% Rate Does not Apply
- Companies involved in natural resource extraction: Respective emirates will retain autonomy on the corporate income tax on petroleum companies and other similar operations within their jurisdictions.
- Large multinational group entity: Entities that are part of a large multinational group which meets certain conditions will be subject to a different corporate tax rate. The rate and the other requirements in this respect are yet to be determined and set.
4. Free Zones and Corporate Tax
Free zone entities, per se, are in-scope for the federal level corporate tax regime. However, it has been communicated by the Ministry of Finance that tax holidays committed by the respective free zones shall be honored.
Further, it has also been communicated that incomes earned by a free zone entity having sources from the UAE mainland would be subject to taxation.
2023 UAE Corporate Tax: Effect on the UAE’s Tax Haven Status
The institution of a federal level corporate income tax regime beginning on or after June 2023 may be discouraging news to few foreign direct investors.
However, the 0% / 9% corporate tax rate is one of the lowest corporate tax rates in the world. It is undoubtedly the lowest corporate tax rate in the Middle East, except Bahrain, which has no general corporate income tax but charges a progressive corporate tax rate on petroleum companies.
Therefore, even when the corporate income tax takes effect — and considering the country's economic advantages — the UAE will still be one of the most desirable destinations for foreign investors.
A Balancing Act
The UAE is in a quandary. On the one hand, the absence of a general corporate tax regime makes the UAE more desirable to foreign direct investors.
On the other hand, there is increasing international pressure from countries agitating for a fairer tax system where they share a minimum global tax rate. This helps ensure multinational corporations will not circumvent the system by routing profits through economies with zero or very low tax rates.
The UAE’s announcement of a federal level corporate income tax regime seems to be the country's compromise. Levying a corporate tax shows a willingness to align itself to global interests while keeping the rate at 0% / 9% maintains its attractiveness to foreign investors. As a bonus, it can also activate a new non-oil related stream of revenue for the government.
Naresh Manchanda is CEO at MBG Corporate Services, an international organization supporting clients across Asia, Europe and the Middle East and providing sustainable solutions and strategies that drive business transformation. Established in 2002 and headquartered in Singapore, MBG is a 450-strong member team that operates out of Europe, the Middle East and Asia, providing Legal, Risk, M&A, Tax, Strategy, Technology and Audit Services. Further, the company is one of the approved certifying partners for the National In-Country Value Program.