UAE corporate tax: Key elements to consider

As has been much publicised in recent weeks, the UAE announced that it was introducing a federal corporate tax on business profits. Given the country has built a remarkable landscape with minimal taxation, the announcement represents a major (if not entirely unsurprising) change in the way businesses will operate in the UAE.

The introduction of corporation tax is a natural consequence of the UAE signing up to the OECD’s BEPS 2.0 regime. As of June 1, 2023, taxable profits of UAE companies above Dhs375,000 ($102,000) will be taxed at 9 per cent. Multinationals with earnings in excess of Dhs3.15bn will be subject to the OECD BEPS 2.0 rate of 15 per cent.

Some of the UAE’s GCC neighbours already impose a corporation tax (such as Saudi and Qatar). With investment levels at their current high in the UAE, timing to introduce a corporate tax appears ripe.

Corporate tax will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with internationally acceptable accounting standards, with minimal exceptions and adjustments. Subject to certain conditions being met, losses incurred by entities subject to corporate tax may be carried forward for offset against future taxable income. Tax losses may also be utilised against taxable income of another group company, subject to certain conditions being met.

It was also announced that freezone businesses will be subject to corporate tax. However, the tax incentives currently offered to freezone establishments will endure, although whether they continue to be granted in their current form, to new companies or on the same terms is uncertain.

Given it is not uncommon for freezone businesses to derive some of their revenues from the supply of good or services onshore, it remains to be seen how the final legislation will treat onshore to freezone revenue streams. It is worth noting that, given the UAE’s recent relaxation of local ownership requirements (which potentially could have alleviated freezones of their principle selling-point – permitting 100 per cent foreign ownership), UAE economic freezones appear to have been given a further breath of life.

Despite this legal reform, the UAE will likely continue to attract highly qualified individuals into the country because, as it currently stands, it will maintain its zero-income tax rate and there is currently no tax levied on income or gains deriving from personal investments (save for a tax charged by the Dubai Land Department on transfers of real property).

It is noteworthy that businesses involved in the extraction of natural resources will be exempt from the new levy and the UAE will also not impose withholding taxes on domestic and cross border payments, or subject foreign investors to corporation tax if they do not conduct business in the UAE. The legislation will likely provide further exemptions and exclusions when published.

This change in legislation raises numerous academic and practical questions, such as how the country intends to structure its tax system in the long term, and what ultimate consequences higher taxes will have on those living in the UAE. At present, it is not anticipated that this new tax would see investment diverted to other GCC countries given that the UAE presents a considerably different social and economic proposition from its neighbours.

In comparison to other commercial hubs around the world, a 9 per cent (or even 15 per cent) corporate tax is relatively low. For example, Gibraltar has a tax rate of 10 per cent, while Ireland offers a 12.5 per cent corporate tax rate. Hong Kong’s taxes range from 8.5 per cent to 16.5 per cent, and Singapore has a tax rate of 17 per cent.

The UAE’s new corporate tax appears to have been received in a positive manner by businesses. With the introduction of corporation tax, the UAE reaffirms its commitment to meeting international standards for tax transparency and preventing harmful tax practices. In readiness for the introduction of corporate tax, we anticipate businesses will begin to assess their current operating, holding and trading structures (as was the case when VAT was introduced in the UAE).

In particular, businesses will generally want to: (i) assess the impact of corporate tax and whether their existing tax model and governance are sufficient to address the requirements of the corporate tax regime; and (ii) identify potential exposures and opportunities to drive tax efficiencies prior to the corporate tax implementation.

Adela Mues is a partner, and Tufayel Hussain is an associate at Reed Smith