Zawya - Experts weigh in on what UAE's new corporate tax means for businesses and finance

The UAE plans to introduce a 9 percent tax on corporate profits from June 2023 as part of its plan to diversify the economy from oil and gas revenues.

While the country's tax-free status has long attracted global business, the finance ministry said new tax regime will be "amongst the most competitive in the world."

Among the key points of the new tax regime are:

Zero tax rate for taxable profits up to 375,000 dirhams ($102,000)

No corporate tax will apply on personal income from employment, real estate and other investments

No corporate tax on free zones

No capital gains and dividends tax

What does the new tax mean for businesses and the government in GCC's second biggest economy? Zawya asked experts for their opinions. Their responses have been edited for length.

The tax comes as part of a series of measures--including the introduction of a value added tax in 2018--by the UAE to reduce the dependence on hydrocarbon revenues and ease fiscal pressures.

“We are seeing new taxes across the GCC as part of a diversification effort intensify. There is a revenue to spending gap that higher oil prices isn't help for now, but the trajectory is unsustainable. So taxes will come,” said Karen Young, director at the Middle East Institutes' Economics and Energy Programme.

“For the UAE, the implementation of a federal tax helps Abu Dhabi balance the fiscal budget and pay for services across the federation. But Dubai will probably be the greatest source of corporate tax revenue. The generation of government tax revenue will be uneven, just as oil receipts are uneven and acrue to Abu Dhabi as an emirate and are then used to partially fund the federal government budget.

According to Moody’s the introduction of the corporate income tax is the most significant fiscal reform since 2018. “Only Oman in the GCC currently has a corporate profit tax that applies to businesses owned by citizens and foreigners alike—most other GCC nations imposing corporate taxes on foreign companies (and only Bahrain not taxing any foreign companies).”

The new tax will broaden the revenue base for the federal government and, most likely, also for the individual emirates, in line with the current approach to distributing VAT receipts—representing a new source of revenue in additional to license fees, service fees and volatile land sales. “Nevertheless, the fiscal benefit will be constrained by the large role of free zones in the UAE’s non-oil economy, where the new tax will not apply,” it added.

The new tax would bring many additional benefits for smaller companies in the UAE, as in some ways the UAE has alleviated this issue though the reduction of fees and charges, said Stuart Cioccarelli, Partner and Head of Tax, and Shabana Begum Partner, Head of Transfer Pricing, KPMG Lower Gulf. “It is better to pay a CIT on profits rather than a loss-making company still having to pay fees and charges,” they said.

Moody’s said tax is broadly credit negative for domestic UAE corporates because it will reduce their operating cash flows. “However, the overall impact on the credit profile of large corporates will be muted because they have several offsetting levers, such as increasing product or service prices, optimising their cost structure and reducing shareholder dividends.”

Rima Mrad, Corporate Partner, BSA Ahmad Bin Hezeem & Associates LLP said the tax is not expected to directly affect start-ups and small companies as there is minimum threshold announced. “This will give space for start-ups and companies making limited profits below this threshold to build their businesses and operations before they are captured by the terms of this new law.”

Ayman Youssef, Vice President, Coldwell Banker, UAE, told Zawya the new corporate tax regime will not affect the competitiveness of doing business in the country. “Moreover, the corporate tax rate of 9 percent is an attractive rate on a global scale and there will be no taxes levied on personal real estate investment.”

Young said that for Dubai, this reinforces the free zone model, which had been diminishing in importance as rights of investors to hold property and own firms has been expanding. “Now companies and investors may want to retreat back to free zones. Retail operations will carry the heaviest tax burden and their cost of operations is already taxed by the VAT,” she said.

The new regime will meet international standards for transparent tax structure and transparency and prevent “harmful tax practices” according to the statement from Younis Haji Al Khoori, under-secretary at the ministry of finance.

According to KMPG’s Cioccarelli and Begum, this will help businesses attract talent and expand into new sectors, “as they are operating in a country whose laws are in line with the international tax transparency and governance agenda, which should result in stability and ease of doing business internationally.”

This will be an incentive, especially for globally taxed groups or investors coming from jurisdictions that do tax income generated outside of their territories, said Mrad.

“I do believe today with the growing concerns over tax havens and the restrictions that are increasingly being imposed on non-taxable businesses in certain jurisdictions, private sector companies will benefit from this,” she said.

Soham Chokshi, Chief Executive Officer and Co-Founder, Shipsy said that while the corporate tax regime may initially ruffle the business environment and investors may also consider looking at other prospects for a brief period, this “will eventually settle down.”

He said the tax is designed to support the strategic ambitions of the government which will drive growth for businesses in the longer run. “It is possible that this is part of a series of strategic announcements that helps UAE be positioned as an integral part of the global system but still a relative tax haven,” he added.

Bal Krishen, Chairman and CEO, Century Financial said that in addition to the UAE's extensive network of double tax treaties, the new regime will strengthen its status as a world-leading hub for business and investment.

“As a result of the regime, the UAE will be able to address the challenges connected to the digitalization of the global economy. As a result of the new corporate tax, the UAE has reaffirmed its commitment to complying with international standards for tax transparency and preventing harmful tax practices.”