In a first, UAE to lift tax-free status, brings new rules on corporate earning

Abu Dhabi: The United Arab Emirates plans to introduce a federal tax on corporate earnings for the first time next year, in its latest step toward dismantling a levy-free regime that helped make it a magnet for businesses from across the world.

The government's set to introduce a 9% federal corporate tax on business profits from June 2023, state-run WAM news agency said Monday. Corporate tax won't apply on personal income from employment, real estate and other investments, and incentives for free-zone companies that don't do business with the mainland will continue.

"Introducing a CT regime reaffirms the UAE's commitment to meeting international standards for tax transparency and preventing harmful tax practices," the UAE ministry of finance said on its website.

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The move comes despite rising competition from neighboring Saudi Arabia, which has been offering new incentives to encourage international firms to shift their Middle East headquarters to the kingdom. 

Amid a gradual introduction of taxes that's made the UAE a more expensive place to live than it once was, the government took several significant steps during the pandemic to encourage the foreigners who make up most of its population to stay for the long haul. In 2020, the government abolished the need for companies to have Emirati shareholders -- a major shake-up of foreign-ownership laws -- and last year it unveiled plans to offer citizenship to a select group of foreigners.

This month, the UAE switched to a Saturday-Sunday weekend to synchronize better with the global economy. It wasn't immediately clear how the latest measures fit into that broader trend or whether they might prompt some companies to relocate to Saudi Arabia or elsewhere. 

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Earlier measures had already dented the UAE's status as a tariff-free haven for both businesses and individuals. The Gulf oil exporter introduced a 5% value-added tax in 2018 and later imposed a 5% customs duty on imports. It already taxes banks and insurance companies operating outside of the country's vast network of free zones as much as 20% on their profits. The oil and gas sector of OPEC's third-biggest producer is also taxed under a separate scheme. 

"This was the logical next step although it came much earlier than many of us had expected," said David Daly, a partner at Gulf Tax Accounting Group. "There is quite a bit of detail that needs to come out still but for large companies operating in the UAE, corporate taxes were expected and now they know the rate."  

The new rules, and the relatively low tax threshold of 375,000 dirhams ($102,100) in annual profits, will require thousands of companies to pay tax for the first time and will likely hit net incomes, according to Tarek Fadlallah, head of Nomura Asset Management's Middle East unit. 

"The introduction of corporate tax will apply from June 2023 so there is an adjustment period for listed companies to prepare," he said. "But this will necessarily impact net profit forecasts going forward."