The UAE is set to introduce a corporate profit tax as it juggles the need to remain attractive to international businesses and its agreement to support global tax transparency.
The Gulf state, which includes Dubai and Abu Dhabi, has grown from a desert backwater to the region’s second-largest economy, in part due to its status as a global tax haven for individuals and businesses. A new tax rate of 9% will apply from June 1, 2023 and will help the UAE meet “international standards of tax transparency”, the country’s finance ministry said.
Individuals will remain exempt from income tax, tax on capital gains and other investments, and other income, the ministry said. The state will only tax profits above 375,000 UAE dirhams, or about $102,000, to help support small businesses and startups. Additionally, the new rate will not apply to companies involved in resource extraction, such as state-owned oil companies.
Some 136 countries, including the United Arab Emirates, agreed in October to overhaul the global tax system, pledging to eventually implement a minimum tax rate of 15% in a bid to prevent companies from exploiting low tax jurisdictions.
The new UAE corporate tax will not apply to companies based in parts of the country known as free zones which offer their own tax incentives and regulatory environment, the country’s ministry said.
The new regime will alter the “social contract” between the government and some of the UAE’s biggest companies, said Hasnain Malik, head of equity strategy at Tellimer in Dubai, but will have less impact on global companies with offices in the country, as many are based in free zones and target other markets.
This will be positive for the government’s finances, added Mr. Malik. The International Monetary Fund projects a budget deficit of 0.1% of economic growth in 2023 and a gross public debt to gross domestic product ratio of 39%.
Since the start of the pandemic, the UAE has implemented a series of policies designed to align its business environment with the rest of the world and make it more attractive for expatriates to live and set up businesses. About 90% of the population is foreign.
In early 2022, the United Arab Emirates moved its working week to match much of the rest of the world. The country, which largely follows a Sharia-based legal system, has decriminalized cohabitation for unmarried couples and allowed the consumption of alcohol without a license. It also abolished the requirement for companies to have Emirati shareholders or partners and began offering citizenship to some foreigners.
Part of the liberalization push is fending off an attempt by Saudi Arabia to open up its economy to tourists, businesses and international capital. The kingdom already levies corporate taxes on Saudi and international businesses and introduced a 5% sales tax in 2018, which was later raised to 15%.
The UAE has been slower to introduce taxes. In 2018, the state began levying a sales tax, or value added tax, on most goods and services at a rate of 5%. Foreign companies working in the oil and gas production sector are subject to separate levies.
Write to Rory Jones at rory.jones@wsj.com
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