New UAE Taxation System—Nearly all of Dubai’s residents are expatriates attracted by the city’s year-round sunlight, economic opportunities, and, of course, lack of taxes.
Dubai is part of a group of countries called the United Arab Emirates (UAE), which recently announced the introduction of a company tax for the first time. For foreign businesses and expatriates in the country, what does this mean? What you need to know is provided here. A 9 percent federal corporate tax will be implemented on business profits starting June next year. When it comes to taxes, the United Arab Emirates maintains it is catching up with the rest of the world. According to an agreement signed by 136 countries last year, large multinational corporations must pay at least 15% in taxes in the countries where they conduct business.
It’s becoming increasingly tricky for oil-producing Gulf countries to rely solely on hydrocarbons for their economy.
The need to diversify is felt strongest when oil prices are low, but the UAE appears to have opted not to wait for a slump.
According to M.R. Raghu, CEO of Kuwait’s Marmore Mena Intelligence, the new tax could add as much as $13 billion to government revenue. PREVIOUSLY, the UAE has only imposed a corporate tax on oil businesses and banks operating outside free zones — economic areas where taxes aren’t paid. Taxes will now be levied on any firms and commercial activities (outside of free zones) that make more than 375,000 dirhams (approximately $102,000). A small firm or startup would not be affected by this, and companies that extract natural resources are also exempt from the tax.
Raghu believes that “bigger, local firms, especially family businesses,” will have to pay up. Unlikely. A corporation tax is in place in most Gulf governments, according to KPMG, and it will be the second-lowest in the Gulf behind Bahrain, which does not levy anything like it now.
The United States imposes a 27 percent corporate tax rate, while the European Union has an average of 20.7 percent. The competitive advantage of the UAE has not waned at all.
Because many international enterprises are headquartered in free zones, which are exempt from tax, their impact would be minimal.
In the United Arab Emirates, there are no personal income taxes, and they are unlikely to be imposed shortly.
“Personal taxation may not kick in so readily given the significant number of foreign population and UAE’s efforts to portray the country as a retirement destination,” Raghu adds.
What’s the New UAE Taxation System in Dubai All About?
United Arab Emirates’ Ministry of Finance stated Monday that the country is instituting a federal corporate tax on business profits for the very first time.
As a tax-free business hub, the United States will no longer entice companies from around the world. The tax will take effect on June 1, 2023, for businesses.
According to the UAE’s Ministry of Finance, the country’s statutory tax rate would be 9 percent for taxable income over 375,000 UAE dirhams ($102,000) and zero for taxable income up to that amount “to help small enterprises and startups.” According to the ministry, individuals would continue to be exempt from paying taxes on income derived from work, real estate, equity investments, and other sources unrelated to UAE trade or business. Foreign investors who do not conduct business in the country will also be exempt from the levy.
The “adjusted accounting net profit” will be subject to corporate taxation.
As long as they “meet all essential standards,” free zone businesses — of which there are hundreds in the country — can “continue to benefit from corporation tax incentives,” the ministry added. Zero taxes and full foreign ownership have long been the norm in the numerous free zones of the United Arab Emirates. According to state news agency WAM, “the UAE corporate tax regime has been designed to incorporate best practices globally and reduce the compliance burden on enterprises.”
Taxes on the profits of UAE enterprises will be levied on the profits they disclose on their financial accounts prepared according to international standards, with few exceptions and adjustments. Except for natural resource extraction, which will continue to be taxed at the Emirate level, the corporation tax will apply to all enterprises and commercial activities. Many in the UAE’s business community think the news shouldn’t come as a surprise, even though it created waves after it was announced on Monday.
Corporation tax in the UAE has been discussed for several years. Thus I don’t think this revelation should be shocking. According to Chris Payne, the chief economist at Dubai-based Peninsula Real Estate, there is already a company tax in the GCC countries, such as Saudi Arabia and Qatar.
“It’s important that the Federal government establish sources of income that are not reliant on corporate dividends and investment income, both of which can be volatile,” Payne added as the UAE, like many of its oil-rich regional counterparts, pushes to diversify its economy away from hydrocarbon revenue.
Mixed Feedback to the New UAE Taxation System
As a result of today’s news, businesses in the United Arab Emirates will have about a year and a half to prepare for taxes, but the reaction has been divided.
According to Mark Hemmings, the company’s vice president of tax and treasury, the decision is “realistic and sensible.”
At first appearance, “it looks like a practical and sensible solution,” Hemmings said, “to ensure that enterprises in the UAE can comply with the anticipated new international tax standards while maintaining the UAE’s attractiveness as a site for businesses to locate.”
Although the threshold for taxation—just over $100,000 in annual profit—is relatively modest, it could harm smaller businesses with expensive startup and renewal fees. When it comes to tiny firms like Procurified, Rupert Tait sees a lot of potential challenges.
“We want to base ourselves in an affordable environment to flourish as a startup founder,” he told CNBC. I understand that taxation is necessary, but I also know that companies in free zones already pay an indirect tax of 20,000 UAE dirhams (approximately $5,450) every year, regardless of profit. This, he added. His company is located in the Dubai Multi Commodities Centre free zone.
Small and medium-sized enterprises (SMEs) may reconsider where they expect to stay long-term because of the hefty upfront fees and then tax once the firm is profitable, Tait added.
It’s still a bargain compared to other tax havens around the globe.
Tax rates in Montenegro and Gibraltar are 9% and 10%, respectively, whereas the rate is 12.5% in Ireland and Lichtenstein. Singapore and San Marino have tax rates of 17 percent, while Hong Kong’s taxes range from 8.5% to 16%. To be sure, the increased taxes will be offset by some trade of goods and services.
According to Taufiq Rahim, a non-resident research fellow at the Mohammed bin Rashid School of Government in Dubai, “the decision brings the UAE in step with other competitive economies,” he added.
“And the rate is still lower than comparable jurisdictions like Singapore and Hong Kong, despite being new for the private sector here.”