How will the New Corporate Tax affect the UAE?
The UAE home to Abu Dhabi, Dubai, and five other emirates has been steadily introducing new taxes as it seeks to diversify revenue from its mainstay of oil. While businesses across various sectors in the UAE are still reeling from the effects of the coronavirus pandemic. Untold numbers of foreigners, who comprise around 90% of the UAE's population, lost their jobs amid the pandemic, and salaries were slashed in key industries such as tourism, real estate, and the construction sector.
The UAE has recently taken steps to try and retain foreign investors, including loosening restrictions on business ownership rules and granting longer-term visas for some. It has also liberalized some of its Islamic laws around alcohol and unmarried couples and moved to a Monday-Friday workweek. Still, the UAE faces steep competition from neighboring Saudi Arabia, which is working overtime to attract businesses and families to relocate to the kingdom.
This time the gulf nation since has been in the limelight, kicking in a series of reforms aligning itself with the global community, one being the 9% federal corporate tax thus complying with the international tax standards template set by the Organization for Economic Cooperation and Development (OECD).
Industry experts and financial analysts hail the introduction of corporate tax, and they argue that the move would further add impetus to the UAE – the undisputed economic engine of the Middle East and North Africa (MENA) region which has been gradually reducing its dependence on the traditional revenue earned from fossil fuel.?
Scope of Corporate tax:
The proposed corporate income tax regime is expected to apply to all business (ie, commercial, industrial, and professional) activities in the UAE, except for the extraction of natural resources, which is already (and will remain) subject to taxation at an Emirate-level.
The Corporate income tax regime will also apply to individuals to the extent they hold (or are legally required to hold) a business license or permit to carry out commercial, industrial, and/or professional activities in the UAE. This includes income earned by freelance professionals for activities carried out under a freelance license or permit.
The UAE Ministry of Finance (MOF) has stated that the proposed federal Corporate income tax regime will also apply to banking operations in the UAE (although branches of foreign banks are already subject to a corporate income tax regime at an Emirate level).
It was also announced that corporate tax incentives currently offered to free zone businesses will continue to be honored, to the extent, that the free zone business complies with all applicable regulatory requirements and does not conduct business in mainland UAE. This may affect many businesses currently operating in both mainland UAE and in free zones under a dual licensing scheme.
Free zone businesses will nevertheless have to comply with certain obligations under the CIT regime, including the requirement to register and file a Corporate Income Tax return.
The effective date of application of corporate tax:
The UAE's Ministry of Finance said the new federal tax of 9% on profits would be effective starting June 1, 2023.?
Proposed rates:
Three different rates of corporate income tax are proposed to apply, as follows:
Income exempted from corporate income tax:
The MOF has announced that the following types of income will be exempted from the Corporate income tax regime:
Impact of UAE corporate income tax regime:
The UAE has long positioned itself as a place where foreign investors are welcome and where incomes are tax-free. Low taxes and a friendly business environment helped to transform the 50-year-old nation over the years.
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Increase in tax planning, compliance costs, and working capital requirements:
Now that every registered business would be liable to register for corporate tax and annually, they would be required to pay nine percent of their adjusted taxable profits over and above the exemption threshold of Dh 375,000 so, the corporate tax would be the short-term liability of the businesses, which would adversely affect their working capital. Businesses would be required to assess the gap in the working capital, and they would bridge the gap. While preparing the budget for the respective period, companies would consider the impact of corporate tax on the business, and they would plan their actions accordingly.
The introduction of corporate tax would involve implementation, training, and bureaucratic compliance cost which would not be too high as the tax system is very simple in the UAE. This is certain that businesses would focus on tax planning to minimize the impact of corporate tax on their profits which would increase the demand for tax professionals.
An increase in product prices leads to straining the purchasing power:
It is highly likely that shareholders would try to maintain their share of profits, and they would pass on the impact of corporate tax to the end-users in the form of increasing sales prices which would make things a little expensive for the end-users and have an adverse impact on their purchasing power. A reduction in the purchasing power would have an impact on the demand for goods and services and its trickle-down effect would be on the production and sales of the businesses which would affect the growth of the economy in the short run.
As mentioned above, it is highly likely that businesses would pass on the impacts of corporate tax to individuals by increasing their prices, which would impact the purchasing power of the consumers. Employees would demand an increase in salaries to maintain their purchasing power. On an overall basis, goods and services would become slightly expensive for the end-users.
Acceptable & balanced effects on foreign direct investments:
Corporate tax affects the decisions related to Foreign Direct Investment (‘FDI’), and it creates a wedge between the pretax and post-tax returns on Foreign Direct Investment. Investors are always keen to know the direct taxes in the country in which they wanted to invest and taxes on the repatriation of profits.?
Since the rate announced by the government is highly competitive as compared to other countries, and double tax treaties are in place by the UAE government so, the introduction of corporate tax would not have any major impact on Foreign Direct Investment. Moreover, Free Zones would keep providing invectives to the businesses for a specific period as per their respective laws, so businesses will keep enjoying the benefits of the tax. Dividends and capital gains would not be subject to corporate tax, so it would create an attraction for the investor to invest in the UAE market.
Increase in the source of income for the UAE government:
Globally, taxes are the major source of revenue for governments. Governments across the globe spend these taxes on the welfare of the public. In the same way, like VAT, the corporate tax would become another source of income for the Government of UAE and the UAE Government would spend this income for the welfare of the public by developing world-class infrastructure, hospitals, roads, medical facilities, etc.
Moreover, it would reduce reliance on oil-generated money and lead to diversified sources of income for the Government which would be a sign of a healthy and matured economy.
Enabling the prospects of commercial excellence in the economy:
Having a look at how the UAE has handled the transition to new legislation and business practices, it is clear that international best practices in entrepreneurship support and nurturing will be used to mitigate the impact of corporate tax on this segment, which means we can expect to see more detail on tax exemption, relief applications, and subsidies as more information is released ahead of June 2023.?
The new regime will thus require high-quality entrepreneurs to double down on competitive edge development, which will only be successful if small businesses and startups adopt commercial excellence practices ranging from innovative pricing and packaging models to a new revolutionary take on marketing, sales, partnerships, and other levers, which will be the sole criteria for achieving commercial success once the corporate tax is implemented.
Conclusion:
If the current corporate tax layout suits your business needs and goals then UAE might be the best way to go with. Before taking such important decisions it is always advisable to enlist professional advice.
Tetra Consultants offer end-to-end services for offshore company formation in the UAE, and administration thereof. These services include company registration in Dubai with the Dubai Department of Economic Development (DED), corporate and business documentation, the opening of corporate bank accounts, and the provision of directors, company secretary, and nominee shareholders as required. Working on your behalf, we will also liaise with all concerned authorities.
Tetra Consultants’ dedicated tax professionals are round the clock ready to take the business tax code on your behalf. If you contact us then, we will evaluate both your individual and commercial needs. We design a financial plan and strategy that will be perfect for your business. Our associates are equipped with the tools and training necessary to understand the tax code. Moreover, we use up-to-date information, tools, and methods to prepare the work for our clients.?
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