The latest developments come as the UAE moves to tighten regulations following criticism that it is a hub for illicit financial activity.
The United Arab Emirates (UAE) will levy a 9% federal corporation tax on company profits, as the Gulf’s second-largest economy moves to align its policies with international norms. Analysts say the move may intensify competition with its neighbor Saudi Arabia, which currently imposes 20% on foreign firms. Bahrain remains the only GCC country not to tax foreign companies.
According to the UAE Ministry of Finance, a 9% tax will be levied on domestic and foreign firms from mid-2023 if their profits exceed 375,000 Emirati dirhams (about $102,000). To encourage small and midsize enterprises, a 0% rate will apply below the 375,000 dirham threshold. Policymakers in the UAE have indicated the development is the first step toward meeting the minimum 15% corporation tax agreed to by 136 member nations of the Organization for Economic Cooperation and Development last year.
As the tax is federal in nature, the revenue will accrue to the UAE government, which may provide a backstop for debt-ridden Dubai if the new tax regime mirrors existing policy. Currently 70% of the UAE’s sales tax, a value-added tax (5%), is returned to the emirate in which it was collected.
“Insofar as the new tax boosts the revenues of Dubai’s government, this would leave it in a better position to step in if government-related entities run into fresh debt problems,” James Swanston, Middle East and North Africa economist at Capital Economics, said in a note. Dubai has established itself as a trading hub for a large number of foreign companies.
Businesses registered in UAE free zones will be subject to the new tax regime only if they conduct business within the UAE. “Entities operating in UAE free zones will continue to benefit from tax incentives currently offered to them if they comply with all regulatory requirements and do not conduct business with the mainland UAE,” Nazar Musa, CEO of business-support provider PRO Partner group, tells Global Finance.
The latest developments come as the UAE moves to tighten regulations following criticism that it is a hub for illicit financial activity. The Paris-based Financial Action Task Force, which began February 21st and runs through March 4th, will announce whether the UAE should be placed on its “gray list” of countries subject to increased monitoring.