Historically, the UAE has been renowned as a complete tax haven. However, this year brought about a landmark tax reform with the introduction of a 9% corporate tax.
Businesses subject to the new CT will need to undergo a major administrative upheaval. Companies must adapt their accounting and reporting processes to ensure compliance while absorbing the costs to minimise the impact on profitability.
But while some may bemoan the new tax regime, it’s important to look at the bigger picture. When it comes to best international practices and economic growth, the new CT is a necessary eventuality for the UAE.
So, what exactly are the benefits of CT, and what role will this new fiscal regime play in the growth of the UAE economy?
Why has the UAE introduced corporation tax?
By introducing corporation tax, the UAE plans to ‘cement its position as a leading global hub for business and investment’. The aim is to boost the country’s non-oil revenue and drive its medium and long-term economic growth objectives.
After a recent visit to the UAE, the International Monetary Fund reported that non-oil GDP growth is expected to exceed 4% in 2023 and 2024, and that CT tax revenue will support this growth.
The introduction of CT will also bring the UAE in line with international norms while helping to tackle tax avoidance. According to the Ministry of Finance, the new fiscal measure will help to ‘re-affirm its commitment to meeting international standards for tax transparency and preventing harmful tax practices’.
What are the benefits of corporate tax for the UAE?
To drive a sustainable economy, the UAE is working towards an oil-free future, focusing on innovation and technology. But to do this and remain competitive and credible as a leading global business hub, the country must also shrug off its ‘tax haven’ status.
Therefore, the introduction of VAT in 2018, followed by corporate tax in 2023, was not only inevitable but also necessary.
Some sceptics worry that these fiscal measures will discourage investors looking to maximise their profits to the full. However, the new tax model is actually helping the UAE ‘separate the wheat from the chaff’ by attracting credible and legitimate businesses with a serious approach to corporate responsibility.
Rather than consider the downsides of another tax to pay, we should look at the positives of CT and the role it will play in the UAE’s economic growth.
Economic diversification
In a bid to reduce its reliance on oil, the UAE is pushing towards economic diversification. The transformation to a sustainable, knowledge-based economy is being driven by the ‘We are the UAE 2031’ plan.
This plan aims to double the country’s GDP from AED 1.47 trillion to AED 3 trillion by 2031, focusing on non-oil exports, international trade and tourism. The revenue generated from CT will help support this radical change to the UAE’s global trading model and achieve these ambitious growth targets.
A step towards international tax compliance
Since 2018, the UAE has been involved in the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) to counter harmful tax practices and improve tax transparency.
As part of the framework, the OECD has proposed an international minimum CT rate to help create a fair and equal international tax standard. While the UAE’s 9% CT rate falls short of the 15% global tax rate proposed by OECD’s Pillar Two objectives, it shows the UAE’s willingness to align with OECD’s principles and international practices.
Compliance with international tax best practices is a bold move in the right direction for the UAE. Historically regarded as an attractive tax haven, the country has been criticised for its lack of tax transparency, leaving it vulnerable to money laundering operations and those looking to evade tax.
By applying the new CT regime, the UAE is more aligned with the tax policies of other countries while still offering one of the most competitive tax systems in the world.
Avoiding double taxation
Another measure to ensure transparency and protect the national economy is the implementation of a double tax agreement (DTA). Such an agreement enables a country to benefit from cross-border cooperation without violating the sovereignty of other states or the rights of taxpayers.
The UAE has more than 100 DTAs with other countries to avoid double taxation on overseas investments.
The benefit for companies that pay foreign taxes is that they can offset them against the UAE corporate tax, avoiding the risk of double taxation or fiscal evasion.
DTAs encourage the free flow of trade, investment and development, facilitating the growth of diverse revenues. DTAs, along with the new CT, will help strengthen the UAE’s growing reputation as a responsible and transparent business hub.
SME support
The 9% CT only applies to businesses with an annual taxable income over AED 375.000. SMEs with a taxable income lower than this are exempt and therefore pay 0% CT.
Furthermore, SMEs that don’t exceed an annual revenue of AED 3 million may qualify for the UAE’s Small Business Relief (SBR). This relief is available for financial years ending on or before 31 December 2026. SBR was introduced to minimise the burden of CT, thus reducing compliance admin and expenses for small businesses and start-ups in the UAE.
SBR means that qualifying SMEs can be treated as having ‘no taxable income in that period’. They won’t need to calculate their taxable income or pay any CT on income earned in that specific tax period.
The aim of SBR is to help foster a more favourable and attractive business environment for SMEs while giving them the opportunity to grow and contribute to the UAE economy.
The revenue generated from CT will also support SMEs by providing the means for funding infrastructure development, grants and subsidies.
Global business credibility
The UAE may be considered the undisputed economic leader of the Middle East, but its global credibility is still a work in progress.
Some will see the introduction of CT as a deterrent for foreign investors. However, it’s the opposite. The move towards a more globally acceptable fiscal regime positions the UAE as a legitimate, transparent and attractive location for genuine and serious businesses.
The UAE’s CT sends a strong message that it is open for business. But its long-standing ‘ease of doing business’ only applies to ‘legitimate corporations’. The future of a sustainable economy is transparency, and the UAE is committed to this concept. The country has no intention of being left behind to function in murky fiscal waters as a tax haven for fraudulent entities.
The introduction of CT will help strengthen the UAE’s commitment to global cooperation, trade partnerships and financial compliance. This measure will undoubtedly position the country as a credible and reliable business hub, committed to building a strong and sustainable economic future.
The key takeaway…
It’s important to understand that the UAE, while conforming to international standards, is still very much a low-tax environment. In fact, the new tax regime could make the UAE an even more attractive destination by offering the best of both worlds: aligning with international tax standards while providing a competitive and tax-friendly business environment.
