The UAE has long been a favourite destination for foreign workers, attracted by the country’s tax-free salaries and lower cost of living.
Employees in the UAE will continue to enjoy paying no tax on their incomes, the Ministry of Finance confirmed on Monday when it announced plans to introduce a federal corporate tax from June 2023.
There will be no tax on personal incomes “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”, the ministry said.
The UAE will introduce a federal corporate tax rate of 9 per cent on the profit of businesses from the financial year beginning on or after June 1, 2023.
“The tax regime will be among the most competitive in the world,” the ministry said, and added that it will be in line with World Trade Organisation rules.
But what is the difference between corporate and income tax? Here, we explain everything you need to know.
What is corporate tax?
In short, corporate tax is a tax levied by a government on a business’s profits, which is the difference between a company’s revenue and costs, said Atik Munshi, managing partner at the Dubai-based audit and advisory company FinExpertiza.
A business that has a calendar financial year starting on January 1, 2023, and ending on December 31, 2023, will be subject to UAE corporate tax from January 1, 2024, said Chirag Agarwal, founder and managing director of Earningo Accounting & Tax Consultancy.
“This is the beginning of the first financial year that starts on or after June 1, 2023,” Mr Agarwal added.
“The introduction of corporate tax is not to hold back the spirit of business in the UAE but to reaffirm the Emirates’ commitment to meeting international standards for tax transparency and preventing harmful tax practices.”
What is income or salary tax?
In countries that have personal taxation, people pay income tax on their earned income, said Keren Bobker, an independent financial adviser and senior partner with Holborn Assets in Dubai.
“The UAE does not have salary tax, but earned income [in other countries] can be derived from the likes of employment or perhaps rental or some investment income,” Ms Bobker said.
Earned income can also include employment perks, said Anurag Chaturvedi, managing partner at Chartered House Tax Consultancy.
“Personal or individual tax is a tax on an individual’s earnings in salary, perks, investment income, dividends, house property income and capital gains,” he said.
Will the UAE’s corporate tax affect employees?
There should be no immediate effect on employees as their income will not be taxed, said Ms Bobker.
“A company cannot reduce any salary because they are paying tax on business profits,” she added.
“What may happen is that some businesses will pass on the cost to their customers, which may have a small knock-on effect to the prices of general goods and services. This could push up inflation and so the cost of living for individuals may increase, but only time will tell.”
Why did the UAE decide to implement a corporate tax rate?
The decision comes as the UAE complies with the initiative on a global minimum tax, Egyptian investment bank EFG Hermes said in a note on Tuesday.
The initiative reflects efforts by global economies to reduce worldwide tax evasion, especially by companies, it added.
“A no action by the UAE, which until this moment has zero corporate tax rate for most sectors, would mean profits generated in the country would be taxed somewhere else,” EFG Hermes said.
How will the corporate tax plan help the UAE’s economy?
The new tax will broaden the revenue base for the federal government and is also expected to benefit individual emirates, Moody’s Investors Service said on Tuesday.
“[This] is in line with the current approach to distributing VAT receipts — representing a new source of revenue in addition to license fees, services and volatile land sales,” it added.
The tax is “clearly beneficial” to the UAE’s already solid fiscal position, EFG Hermes said, adding that the funds will be collected at the federal level and are expected to be distributed to various emirates.
“The tax will, therefore, provide additional resources for the government to re-pump this money back into the economy.”
Do any other countries in the GCC levy a corporate tax on businesses?
Four GCC member countries have already introduced corporate taxes over the past few years. Qatar has a rate of 10 per cent, while Oman and Kuwait have set it at 15 per cent and Saudi Arabia, the Arab world’s biggest economy, has a 20 per cent levy.
However, the UAE’s introduction of the corporate income tax is the country’s most significant fiscal reform since 2018 as only Oman currently has a corporate profit tax that applies to businesses owned by both citizens and foreigners, Moody’s said.
“Most other GCC nations impose corporate taxes on foreign companies,” it added.
The move also aligns the UAE with the rest of the GCC region but the 9 per cent tax rate places the UAE in a “good competitive position”, EFG Hermes said.
“The 9 per cent is also the minimum rate for the subject to tax rule with the Organisation for Economic Cooperation and Development.”
Meanwhile, Gulf economies have kept their taxes low or non-existent to attract foreign investors and business owners, according to company formation specialist Pro Partner Group.
“With the huge attraction of international investments and the big size of entrepreneurs in the GCC countries, the UAE is now joining the corporate tax team.”
What are the corporate tax thresholds?
The UAE intends to operate a three-tier corporate tax framework, according to Habib Al Mulla & Partners.
The first Dh375,000 ($102,000) of taxable income is subject to 0 per cent tax, while a standard statutory tax rate of 9 per cent applies for companies.
“To the extent that an entity generates a tax loss, this should be carried forward to offset against taxable income arising in future taxable periods,” Habib Al Mulla & Partners said.
Meanwhile, foreign taxes paid will be credited against any payable UAE corporate tax, meaning there will be no double taxation.
However, the legislation has yet to be issued and the details for the corporate tax regime are subject to finalisation.
How is taxable income calculated?
Determining taxable income will start with accounting net profit in line with internationally acceptable accounting standards, Habib Al Mulla & Partners said.
“The specific corporate adjustments that can be made will be announced in due course, although the expectation is that ordinary and necessary business expenses incurred in the production of taxable income should be deductible,” the company added.
“Income from dividends, capital gains and qualifying intra-group transactions and reorganisations will not be included within taxable income, subject to satisfaction of certain conditions, which are likely to include an ownership threshold and a minimum holding period.”
How is the corporate tax plan expected to be administered?
The filing date for the tax return has not been confirmed, according to Habib Al Mulla & Partners. However only one corporate tax return is required per year and will be filed electronically.
“No detail has been provided regarding the due date for payment of any corporate tax, however it has been confirmed that there will not be an advanced payment regime,” it said.
Are there any other taxes in the UAE?
On January 1, 2018, the UAE introduced a value-added tax (VAT) of 5 per cent on a majority of goods and services as part of its plans to diversify the economy and reduce its dependence on oil.
In October 2017, the Emirates also enacted an excise tax, or so-called sin tax, on products that are considered harmful to citizens’ health, such as tobacco and sugary drinks.