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Corporate tax will make UAE ‘more open for investors’

Businesses will now have to pay corporate tax in the UAE Reuters/Satish Kumar
Businesses will now have to pay corporate tax in the UAE
  • Standard rate of levy is 9 percent
  • Tax makes country compliant with international rules
  • Companies told to prepare early

The UAE’s decision to introduce a corporate tax will make the business environment more transparent and attractive for investors, according to experts.

The tax, announced in January this year, will levy a standard rate of 9 percent on taxable profits of more than AED375,000 ($102,110). Profits up to that threshold will not be taxed in an effort to support the country’s small businesses and startups.

The tax is being introduced as the UAE seeks to align itself with international standards, particularly the global minimum tax on multinational corporations endorsed by the G20 major economies.

Farhat Ali Khan, managing partner at Century Maxim International FZ in Dubai, said the mandate would serve as “an opportunity for businesses to set in place robust legal frameworks that demonstrate transparency and accountability to both internal and external stakeholders”. 

Khan added that the introduction of “appropriate fiscal policies” could indirectly support the UAE’s global targets under the United Nations Sustainable Development Goals – namely, Goal 16 to promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels.

This sentiment was echoed by Vijay Valecha, chief investment officer at Century Financial, who said: “Legally, the new plan will make UAE compliant with international rules and also reduce fears that the companies based here have an unfair advantage since they don’t pay taxes, enabling them to retain all their earnings.

“Ironically, this will benefit the companies operating here as they will not be viewed with suspicion.”

According to the World Competitiveness Yearbook from the International Institute for Management Development, which ranks countries on their policies and structures to aid long-term value creation, the UAE came 12th this year with a score of 88.67 out of 100.

The Emirates’ move comes as neighbouring Saudi Arabia, which already levies corporate tax, pushes to attract more overseas investment.

A total of 70 international companies have so far been issued licences to relocate their regional headquarters to the capital Riyadh. The updated figure, revealed in a report from Saudi Arabia’s Ministry of Investment, represents a significant increase on a year ago.

The ministry added that it had partnered with 25 public agencies to help attract firms to Riyadh through its Regional Headquarters Programme.

Steve Kitching
Steve Kitching of Grant Thornton UAE

In the UAE, the government’s ability to attract inward investment will not be dented by its introduction of corporate tax, according to Steve Kitching, partner and head of tax at Grant Thornton UAE.

“The UAE still is a great country to conduct business given the incentives with the free zones, plus the VAT rate of 5 percent and corporate tax rate at 9 percent are still much lower than KSA, who have a standard rate of 20 percent for corporate tax and 15 percent VAT rate,” Kitching said.

“The UAE, with its central location and close transport links internationally, adds to the advantages of a lower tax rate.”

Scott Cairns, managing director of Creation Business Consultants in Dubai, added that the absence of a Zakat-style tax in the UAE should result in more straightforward implementation and compliance.

“If the UAE corporate tax remains at 9 percent, it will continue to dominate the region as a favourable hot spot for business,” he said.

The UAE tax will come into force from the beginning of a company’s next financial year, which starts on or after June 1. However, companies operating in the country have been warned to start preparations immediately.

Tyne Hugo, senior associate at international law firm BSA, said when VAT was introduced in the UAE, back in 2018, there was “a significant lack of preparation”, leading to complications for businesses. “Corporate tax is more complex than VAT, though, so requires even more preparation,” he said.

“Failure to register for corporate tax when someone is obliged to will result in severe penalties being imposed, as it was with VAT.”

This could include imprisonment and/or a fine not less than the due tax that should have been paid and not more than three times the due tax.

“Corporate tax is inevitable, and businesses must understand it requires preparation and failing to [prepare] will be a very poor decision,” Hugo added.

Saudi Arabia, Kuwait and the UAE have consistently denied that they have any plans to introduce an income tax, although international media reported in late 2020 that Oman was preparing to tax high earners from 2022. A draft law was passed last month by the sultanate’s Shura Council. The tax is understood to be part of measures to tackle the sultanate’s budget deficit.

Kitching said the UAE was not likely to follow suit. “We do not expect an extension to other forms of taxation such as personal income tax or increase to VAT rates here in the UAE – more of an evolution in tax and VAT compliance such as e-invoicing,” he said.

On Tuesday, the UAE’s Federal Tax Authority launched its strategy to explore the future of the tax sector.

According to its director general, Khalid Ali Al Bustani, the strategy aims to “identify the basic motives, scenarios and proactive measures required for sustainably upgrading tax procedures in the UAE, and promoting a culture of future-mapping within, paving the way for it to become a world leader in the field”.