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The UAE introduces a corporate income tax. Comparison of the impact of the new tax for doing business in the main territory and in the free zone The UAE is introducing a corporate income tax. Comparison
Introduction
The United Arab Emirates, known around the world for its extremely favorable policies and attracting many investors from all over the world to do business, has introduced a federal corporate income tax (CIT), which comes into force on June 1, 2023. The established income tax rate is 9%. This article describes the current tax system in the UAE and assesses the impact that the introduction of income tax could have on UAE businesses.
Taxation in the UAE
The United Arab Emirates has long attracted many wealthy investors from around the world to establish their presence in the region, as well as enjoy one of the most favorable tax regimes in the world in a jurisdiction that has signed several bilateral agreements to avoid double taxation with other countries of the world. . The UAE has long played the role of a leading international financial, commercial, energy and tourism center in the Middle East region. In addition, personal income does not apply to residents of the UAE. In 2018 alone, the UAE introduced a value-added tax on goods and services sold domestically at a standard rate of 5%. In addition, the UAE levies income tax of 20% on foreign bank branches in the country and up to 55% on the oil and gas sector at the Emirates level.
However, the tax authorities, i.e. the UAE Ministry of Finance, have announced that they will introduce an income tax in the Emirates to combat international tax avoidance practices and will join forces with tax bureaus of other countries to establish a minimum global tax rate for multinational companies. This probably refers to an agreement reached by the Organization for Economic Co-operation and Development (OECD) with more than 130 countries around the world to set a minimum tax rate of 15% for transnational corporations.
New corporate income tax regime in the UAE
The new income tax will be levied on profits made by businesses from commercial activities in the country. The only category of activity that is subject to a separate income tax at the level of an individual emirate is the extraction of natural resources.
However, for small businesses with taxable income not exceeding AED 375,000 (approximately $102,100), the income tax rate is set at 0% to facilitate the development of start-ups.
The dependence of the federal budget on oil revenues is another reason why the UAE is introducing a new corporate income tax regime. Diversifying from the sale of natural resources and generating income from other sources can provide additional stability and confidence in the country's future prosperity. In addition, the 9% income tax rate is considered relatively low among global financial centres, for example, compared to the 16.5% income tax rate applied in Hong Kong for businesses making profits in Hong Kong.
What about companies registered in Free Zones?
In the UAE, the Emirates of Dubai and Abu Dhabi are home to many different free zones. Many of these free zones offer various incentives for companies, and a number of both multinational and small and medium-sized enterprises registered in these zones have registered subsidiaries with 100% foreign capital, which do not require a local shareholder. Free zones also offer certain tax incentives to businesses registered there.
The Ministry of Finance has indicated that businesses registered in free zones will be subject to a new income tax; however, it is noted that the tax incentives offered by the free zones will be respected by the new regime for businesses in them that meet all eligibility requirements and do not do business domestically with businesses or individuals in the UAE mainland. Further comments from the authorities are expected to bring further clarity and transparency to this matter.
