The United Arab Emirates (UAE) has long been known as a tax-free country, but with the recent announcement of the implementation of a corporate tax regime, businesses operating in the UAE are facing new challenges. The introduction of corporate tax will have a significant impact on companies, requiring compliance with new tax laws, payment of corporate taxes, and adjustments to business strategies. This article aims to explore the implications of the corporate tax on businesses in the UAE and discuss the benefits it brings to the economy.
I. Understanding the Corporate Tax in the UAE
A. Applicability of Corporate Tax for Companies The new corporate tax regime will apply to domestic companies in the UAE mainland, free zone entities, foreign companies with a permanent establishment in the UAE, or earning income from sources within the UAE.
B. Classification of Residential Status Resident companies, including domestic and foreign companies effectively managed and controlled in the UAE, will be subject to corporate tax on worldwide income. Non-resident companies will only be taxed on UAE-sourced income and income attributable to a permanent establishment.
C. Progressive Corporate Tax Rates The corporate tax rates in the UAE are progressive, with a 0% rate for annual taxable income up to AED 375,000 and a 9% rate for income exceeding that threshold. Multinational corporations with consolidated global revenue over EUR 750 million may have different tax rates.
D. Allowable and Disallowable Expenses While generally, revenue expenditures incurred for business purposes are allowed as deductions, there are specific expenses that will not be allowed, such as entertainment expenses, administrative penalties, unrealized gains and losses, and interest exceeding 30% of EBITDA.
II. Impact on Businesses in the UAE
A. Audit Requirement Companies subject to the corporate tax regime must have their financial statements audited in accordance with internationally accepted accounting standards. Accurate financial reporting, including the separation of personal and business expenses, proper valuation of assets, and adherence to accounting principles, will be crucial for determining taxable profits.
B. Review of Systems and Processes Businesses need to assess their existing processes and systems related to income and expenditure accounting, inter-company transactions, capital assets, and inventory management. Updating and reconfiguring these processes will ensure compliance with reporting and compliance requirements under the corporate tax regime.
C. Review of Existing Contracts The introduction of corporate tax may impact profit margins for businesses. Companies might consider adjusting their selling prices to maintain profitability, while suppliers and service providers may increase costs to account for tax outflows. Existing contracts with customers and suppliers should be reviewed to assess the possibility of price adjustments.
D. Risk of Place of Effective Management (POEM) Foreign companies headquartered in the UAE with subsidiaries abroad need to evaluate the risks associated with the POEM concept. The location where key management and commercial decisions are made will determine tax exposure. Regular assessment of POEM and residence status on a year-on-year basis will be necessary.
E. Permanent Establishment (PE) Risk Foreign companies conducting business in the UAE through any form of presence should evaluate their business models, agreements, intragroup and cross-border transactions to assess the potential PE risks. Restructuring at group or transaction levels may be necessary to mitigate PE exposure.
F. Compliance Requirements Businesses within the scope of the corporate tax regime must register with the Federal Tax Authority, compute and pay tax liabilities, file tax returns, and maintain accurate financial records. Transfer pricing provisions should be followed, and related-party transactions should be at arm’s length.
III. Benefits of Corporate Taxes in the UAE
A. Competitive Tax Policy The UAE’s corporate tax rate is relatively low compared to other Gulf countries, making it an attractive destination for business and investment. The implementation of corporate taxes aligns the UAE with global tax standards, enhancing its reputation as a reliable and transparent business hub. This can lead to increased foreign direct investment and stimulate economic growth.
B. Diversification of Revenue Streams The introduction of corporate taxes helps the UAE diversify its revenue streams away from its heavy reliance on oil. By implementing a tax system, the government can generate additional income to support public services, infrastructure development, and social welfare programs. This diversification strengthens the overall resilience of the UAE economy and reduces its vulnerability to fluctuations in oil prices.
C. Enhanced Public Services and Infrastructure The revenue generated from corporate taxes can be used to improve public services and infrastructure in the UAE. Investments in education, healthcare, transportation, and other essential sectors can lead to better quality of life for residents and contribute to the overall development of the country. This, in turn, can attract more businesses and skilled professionals to the UAE.
D. Leveling the Playing Field The introduction of corporate taxes promotes fairness and equity among businesses operating in the UAE. Previously, some companies enjoyed a tax advantage due to the absence of corporate taxes, while others in different jurisdictions faced tax obligations. By implementing a corporate tax regime, the UAE ensures that all businesses operate under similar tax obligations, creating a level playing field and fostering healthy competition.
E. Development of Local Talent and Expertise The implementation of corporate taxes necessitates the establishment of tax departments within companies and the hiring of tax professionals. This creates opportunities for Emirati citizens and residents to develop expertise in taxation, accounting, and finance. It also encourages the growth of local consulting and advisory firms specialized in tax services, contributing to the development of a knowledge-based economy.
F. International Cooperation and Alignment The introduction of corporate taxes in the UAE demonstrates the country’s commitment to international standards and cooperation in tax matters. This enhances the UAE’s reputation as a responsible global player and strengthens its relationships with other countries. It can lead to increased collaboration on tax-related matters, including information exchange, double taxation avoidance, and the prevention of tax evasion.
IV. UAE corporate tax and its effect on foreign investment
In light of the introduction of corporate tax in the UAE, there may be concerns about its impact on the country’s appeal to foreign investors. However, it is crucial to consider the broader implications to gain a comprehensive understanding of its effects.
The UAE has always prioritized policies that foster economic growth, diversification, and entrepreneurship. This approach has allowed the country to move away from its traditional dependence on oil and gas revenues and successfully diversify into sectors such as tourism, real estate, construction, finance, and technology. As a result, the UAE now stands as the second-largest economy in the Middle East, with an estimated value of $415 billion.
Historically, one of the key attractions for foreign investors in the UAE has been the absence of a federal corporate income tax (CIT). Therefore, the implementation of a corporate tax regime, effective from 1 June 2023, has raised questions about its implications and influence on the UAE economy.
To assess the impact of corporate tax on the country’s appeal to foreign investors, it is essential to consider the global context. The worldwide average statutory corporate income tax rate, across 180 jurisdictions, stands at 23.37 percent, rising to 25.43 percent when weighted by gross domestic product (GDP).
In this context, the UAE’s corporate tax rate of 9 percent positions it as having one of the world’s lowest corporate tax rates, ranking jointly third with other countries. Additionally, the UAE is one of only three Organisation for Economic Co-operation and Development (OECD) member states among the 20 countries with the lowest corporate tax rates.
This demonstrates the UAE’s success in striking a balance between its obligations and commitment to the OECD and its objective of maintaining its status as an attractive investment destination. By adhering to the global minimum effective tax rate established by the OECD, the UAE showcases its commitment to long-term economic stability and growth, which enhances its appeal to investors seeking a stable and predictable business environment.
Furthermore, the introduction of corporate tax can be viewed as a signal of the UAE’s dedication to economic stability and growth, making it more appealing to investors looking for such attributes. Businesses entering the UAE market will gain greater confidence in making investments and establish stronger trust with their customers and stakeholders.
The implementation of corporate tax in the UAE represents a significant step towards achieving the country’s diversification goals. This move enables the establishment of a new revenue stream that reduces reliance on oil revenues and allows for funding of projects beyond the energy industry.
Increased spending on infrastructure projects, such as transportation networks, water and electricity supply systems, and telecommunications networks, will support the growth of various sectors and generate fresh demand and investment opportunities. Moreover, corporate tax revenues will contribute to the development of initiatives aimed at supporting small and medium-sized enterprises (SMEs). The allocation of funds to accelerator programs like Dubai’s Future Accelerators and Abu Dhabi’s Hub 71 will provide critical resources and support for startups and early-stage companies, enabling their success.
These measures will play a vital role in fostering the growth of the UAE’s startup ecosystem, facilitating the access of SMEs to capital, mentorship, networking opportunities, and essential resources. Ultimately, these actions will fuel the country’s economic growth and incentivize businesses to choose the UAE as a base for their operations.
The support available to new businesses in the UAE positions the country competitively among its global counterparts. Coupled with its strategic location between major markets in the East and West, the UAE offers an excellent opportunity for businesses to explore international expansion and gain access to lucrative growth markets.
V. Contact Us
If you have any tax-related queries or concerns, we encourage you to reach out to Expand Tax and Businessmen Services. Our dedicated team of experts is here to assist you every step of the way, providing comprehensive support and guidance. Whether you require assistance with registration, tax compliance, documentation, or filing, our team is well-equipped to handle all your needs. We understand that navigating the complexities of taxation can be overwhelming, which is why we are committed to offering you the highest level of professional service. Rest assured that with Expand Tax and Businessmen Services, your tax matters are in safe hands. Contact us today, and let us help you achieve your tax goals. Phone: +971 56 412 7768, Email: [email protected]