Corporate profits

UAE set to start taxing corporate profits next year | Tax News

The move marks a significant shift as the UAE seeks to align with international standards and move towards a global minimum tax.

Through and Bloomberg

The UAE will impose a federal levy on corporate profits for the first time next year as it dismantles a tax exemption scheme that has made it a magnet for global corporations but has drew attention to transparency.

The measure comes as the UAE seeks to align with new international standards, in particular the move to a global minimum tax on multinational corporations approved by the Group of 20 major economies last year. The ambitious plan aims to eventually set 15% as the basic levy to stem international competition to offer more attractive rates.

The United Arab Emirates announced its support for global tax standards in July and said on Monday that its new 9% rate, which will come into effect in June 2023, would provide a basis for applying this support, although in the United Arab Emirates, many of these large companies operate inside free zones and will remain exempt provided they do not do business with the mainland.

“The introduction of a TRQ regime reaffirms the UAE’s commitment to upholding international tax transparency standards and preventing harmful tax practices,” it said in a statement posted on its website.

Global standards

The move comes as the global financial watchdog debates whether to add the United Arab Emirates, home to the Middle Eastern business hub of Dubai, to a ‘grey list’ of countries that do not are not doing enough to combat money laundering and terrorist financing, according to people with knowledge of the matter. The Paris-based Financial Action Task Force was due to discuss the issue as early as next month, and UAE officials are working to avoid the designation, which could hurt investment.

The UAE has already taken several steps to dilute its reputation as a tax haven for both businesses and individuals. It introduced a 5% value added tax in 2018 and then imposed a 5% tariff on imports. It already taxes banks and insurance companies operating outside the country’s vast network of free zones up to 20% on their profits. The oil and gas sector of OPEC’s third-largest producer is also taxed under a separate program.

“It was only a matter of time before the UAE imposed a corporate tax in line with some other Gulf Cooperation Council countries,” said Izzat Dajani, former senior banker at Goldman Sachs and Citigroup, which is now managing director of Dubai-based IMCapital Partners Ltd. “The advertised levels of 9% base are quite reasonable by international standards.”

Eyes on Arabia

The move comes despite growing competition from neighboring Saudi Arabia, which is offering new incentives and pressuring international companies to move their Middle East headquarters to the kingdom.

Even though the gradual introduction of taxes has made the UAE a more expensive place to live than before, the government has taken several important steps during the pandemic to encourage foreigners who make up the bulk of its population to stay on the long term. In 2020 the government abolished the requirement for companies to have Emirati shareholders – a major shake-up to foreign ownership laws – and last year unveiled plans to offer citizenship to a select group of people. strangers.

This month, the UAE moved to a Saturday-Sunday weekend to better sync with the global economy. It was not immediately clear whether the latest measures would encourage companies to relocate, although analysts and businesspeople said that while the new taxes would affect bottom line profits, they would remain regionally and internationally competitive.

“I don’t think it will affect the UAE’s ability to attract investment much. First, free zone companies will continue to benefit from their tax advantages, and are therefore shielded from the ruling,” said Mohamed Abu Basha, head of macroeconomic research at investment bank EFG Hermes in Cairo. “Secondly, most other Gulf countries already impose corporate tax on multinationals operating in the economy, including 20% ​​in Saudi, 15% in Oman and 10% in Qatar.”

Thousands of companies

However, the relatively low tax threshold of 375,000 dirhams ($102,100) will force thousands of companies to pay taxes for the first time, according to Tarek Fadlallah, head of the Middle East unit at Nomura Asset Management.

“The introduction of corporation tax will apply from June 2023, so there is an adjustment period for listed companies to prepare for,” he said. “But this will necessarily have an impact on the net profit forecast in the future.”

(Updates throughout with quotes, background.)
–With help from Lin Noueihed, Adveith Nair and Mirette Magdy.