UAE introduces corporate tax: A shift in the fiscal policy to drive economic growth

 

The United Arab Emirate (UAE), has long been renowned for its zero tax policies, attracting businesses and workers from across the globe. However, the UAE recently embarked on a significant shift in its fiscal policy. The UAE Cabinet of Ministers issued Cabinet Decision No. (49) of 2023, on May 8, levying a 9% corporate tax for certain businesses. This decision has been viewed as a strategic move to diversify the UAE’s income sources beyond oil while allowing the country to maintain its status as a regional commercial hub.

The introduction of the new tax regime has raised questions among Indian businesses and start-ups with regard to growth, expansion, and adjustments in strategies. Shivam Thakral, CEO of BuyUcoin, India’s second longest-running digital asset exchange, spoke to Economictimes.com on the matter, and stated that startups in the UAE need to have some tax rebate. “I feel there should be some tax rebate for startups registered in UAE as it will help them maintain liquidity during the early stages and enable them to utilise the surplus funds for research and development.” 

Understanding the new corporate tax regime 

The ministry stated that the Cabinet Decision No. (49) of 2023 aims to clarify the application of the corporate tax regime and ensure that only businesses and business-related activities are taxed. Younis Al Khouri, undersecretary at the Ministry of Finance said, “the new Cabinet Decision demonstrates the UAE's commitment to maintaining a clear and competitive tax framework for both local and foreign individual investors.”

Raju Kumar, Tax Partner, EY also spoke to Economictimes.com on the new corporate tax in the UAE. According to him, the new tax regime reaffirms UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices. He states “as mentioned by UAE authorities, introducing a CT regime reaffirms UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices. 

The new decision will apply to both residents and non-resident natural persons conducting business activities in the UAE. However, this law is only subject to businesses with a turnover or gross income which exceeds AED 1 million per year, which is equivalent to about 270 thousand USD. 

“The new Cabinet Decision demonstrates the UAE's commitment to maintaining a clear and competitive tax framework for both local and foreign individual investors'' said the ministry. By creating a simplified corporate tax system, the UAE will continue to foster an attractive business environment that supports the growth of small businesses, startups, and the overall economy. 

Defining business and business activity

The law defines a ‘business’ as any activity conducted regularly, on an ongoing and independent basis in any location; including industrial, commercial, agricultural, vocational, professional, service or excavation activities, or any activity related to the use of tangible or intangible properties.  A ‘business activity’ is further defined as any transaction or activity, or series of transactions or activities conducted by a person in the course of its business. 

Income from the following activities is not considered income from a business or business activity: wages or salaries paid to employees, personal investment income, and income from real estate investments However, this exclusion applies only to real estate activities not conducted through a licence or requiring a licence from a licensing authority in the UAE. This means that personal income tax in the UAE is still subject to zero tax.  “There is no corporate tax on salaries which still makes UAE a hot destination for global talent”, Thakral states, signalling that the UAE will still remain an attractive market for businesses to move into.  

Exemptions and Free Zone Benefits

While businesses across the UAE are now preparing for the new tax laws, it is important to note that several exemptions are being made for businesses that operate in strategic sectors. Those exempt from corporate tax include government entities, government-controlled entities, natural resource businesses, qualifying public benefit entities and qualifying investment funds, social security funds or private pensions.  

Companies that operate in free zones can also pay zero tax on income if they fall under certain qualifying activities and transactions. These activities include but are not limited to funds, wealth and investment management services, manufacture and processing of goods or materials, reinsurance services, holding of shares and other securities and the ownership, management, and operation of ships.

Companies should check with their freezones to make sure that the free zones, as well as their (company) activities are exempt from the tax. 

Comparison with Global Corporate Tax Rates:

While the introduction of 9% corporate tax rate marks a significant shift in the UAE’s tax policy, it still is significantly lower than the global average. According to data, as of 2022, the worldwide average corporate tax rate stood at around 23%. This sentiment was also expressed by Thakral, who stated “corporate tax is still low as compared to a lot of other jurisdictions, this step was important from the perspective of FATF and misuse of UAE as jurisdiction from the bad actors."

In the EU the average corporate tax rate is 21.3%, in the OECD it stood at 23.04% and the average tax rate in the G7 (which India is a part of) stood at 26.7%.  A 9% corporate tax rate continues to ensure that the UAE remains a global business hub and an attractive market for businesses looking to expand their operation, set up new headquarters and attract foreign investment. 

Impact on Indian Businesses in the UAE

The introduction of corporate tax in the UAE may influence the decision of Indian businesses' looking to establish or expand their presence in Dubai. However, the 9% corporate tax rate in the UAE is lower than India's corporate tax rate, continuing to make the UAE and Dubai an attractive destination for Indian businesses. But the exemption threshold of AED 1,000,000 and the specifics of what qualifies as non-taxable activity will play a crucial role in these decisions.

Kumar states “most Indian businesses have set up presence in free zones in UAE which have historically been tax free. Even the new corporate tax law provides for a preferential 0% corporate tax rate on income from qualifying activities and transactions by a free zone entity…businesses operating in mainland UAE may be more impacted (by a 9% tax rate), however, even in mainland UAE, small businesses (with taxable income up to and including AED 375,000) are not liable to any tax. Also, considering no withholding tax is applicable on cross border payments, tax burden may not increase on repairs made to Indian parent / HQ entities.”

Dr Sahitya Chaturvedi, a Chartered Accountant and Convener of Retail Focus group of Indian Business and Professional Council, said: "Taxation is an initiative for globalisation of the business from Gulf countries and the UAE has introduced the lowest corporate income tax rate within the GCC region at a standard rate of 9%." Dr Chaturvedi further adds, "The UAE CT regime has been designed to incorporate best practices globally and minimise the compliance burden on businesses.”

Adjustments for Indian Businesses               

Indian businesses operating in the UAE will now need to comply with transfer pricing rules and documentation requirements. They would also need to assess the adequacy of their existing tax function, operating model, and governance to meet the requirements of the new tax regime. Kumar states that there are 4 things that these business should keep in mind when making adjustments to their business operations due to the new tax laws

a. Tax residency rule (POEM): A foreign company may be treated as a resident person for UAE CT purposes if it is effectively ‘managed and controlled’ in the UAE. 

b. Transfer pricing provisions: Transfer pricing rules apply to UAE businesses that have transactions with related parties, irrespective of whether the related parties are located in the UAE mainland, a Free Zone or in a foreign jurisdiction

c. Substance requirements in Free Zones: A qualifying Free Zone person must have and be able to demonstrate adequate substance in a Free Zone relative to the nature and level of its activities and the qualifying income it earns. This means that such a person must have adequate staff and assets and incur adequate operating expenditure in the Free Zone for the purposes of undertaking its core income-generating activities.

d. Administrative / compliance requirements: Introduction of corporate tax will bring compliance obligations on companies in the form of tax returns, transfer pricing documentation and maintenance of records.

Conclusion 

The introduction of a 9% corporate tax in the UAE marks a major policy shift and a step towards international tax transparency standards. Despite potential implications for businesses, the UAE maintains a competitive environment for local and foreign investors with tax exemptions for key sectors and reduced rates for free zone entities. The UAE remains a viable business destination, even with the new tax, offering a favourable climate, especially for Indian businesses which can leverage the business-friendly ecosystem while adhering to the new rules.

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