Fidinam Group Blog

UAE announce the introduction of a 9% corporate tax rate

Written by Fidinam News | 1/02/22

Is it true? Yes.
Is it all bad news? Let's have a look at the details.


The Ministry of Finance has announced that the UAE will introduce a federal corporate tax on business profits that will be effective for financial years starting on or after 1st June 2023.

This, of course, is quite shocking news for a jurisdiction where corporate tax was unknown so far, but is all bad news?

Indeed, the introduction of new taxation is never a moment to celebrate, but let’s look at the other statements announced by the Ministry of finance in the same press release. It might not all be bad news.

Rate

The corporate tax rate will be 9%, with an exemption on taxable income up to AED 375.000 (USD 102.110). Of course, zero percent would be better, but this will still be the lowest corporate rate in non-offshore jurisdictions.

When

The corporate will be effective for financial years starting on or after 1st June 2023. For all companies with a financial year corresponding to the calendar year, corporate tax will be applicable on profit from 1st January 2024 onward. This will give enough time for restructuring if eventually helpful.

Free Zone

Companies established in Free Zones are usually granted a 50 years exemption from taxes. Ministry of Finance confirmed that the new UAE corporate tax regime would continue to honor the corporate tax incentives currently being offered to free zone businesses that comply with all regulatory requirements and do not conduct business with mainland UAE.

Therefore, our understanding is that Free Zone company will enjoy a zero corporate tax regime and shall be subject to 9% corporate tax only on profit originating from UAE mainland territory.

Withholding tax/Dividend/Capital gains

It has been confirmed that UAE will not impose withholding taxes on domestic and cross-border payments and will grant exemption to dividend and capital gain.

Personal Income Tax

As per the statement released by the Ministry of Finance, “No corporate tax will apply on personal income from employment, real estate and other investments, or on any other income earned by individuals that does not arise from a business or other form of commercial activity licensed or otherwise permitted to be undertaken in the UAE”.

This is a significant announcement that will enable the UAE to keep a tax-friendly environment. Moreover, the absence of taxation on employment incomes can also provide room for optimizing the corporate tax burden.

Conclusion

The introduction of a 9% corporate tax is likely to result from international pressure on the UAE government rather than the fundamental need to increase the federal budget.

However, in a globalized world, UAE private companies also have international ties with foreign authorities that already affect their operations (E.g., foreign blacklists, foreign CFC regulations, etc.).

Shifting UAE from a jurisdiction perceived as an offshore tax haven to a jurisdiction perceived as an entirely onshore (friendly) tax regime may finally ease the conduct of cross-border businesses from the UAE.