ABU DHABI, UAE – Mixed reactions are being witnessed in the UAE as the Gulf country has implemented a 9 percent federal tax on corporations and business profits today, June 1, 2023.
Residents are of differing views, with some deeming the tax rate reasonable in the global context, while others express concerns about the challenges the new tax regime could pose for family-owned businesses.
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Under the new scheme, family enterprises are not exempt and are likely to face significant changes, Mazen Sallhab, Chief Market Strategist at BDD Swiss, told TRENDS. “Such entities will be included in the new tax scheme if they meet the definition or / and requirements of taxable person and / or entity,” he said.
There will be additional challenges for family-owned businesses, and they may split large entities in an attempt to minimize taxes payable as much as possible by using different jurisdictions, Sallhab added.
Prateem Sengupta, Associate Director, Direct Tax at Andersen Financial Advisory, echoed this sentiment, citing the need for family-owned businesses to streamline their operations and reduce their involvement in multiple entities.
While this will incur an initial cost, in the long run, they will reap the benefits, particularly if they wish to diversify or attract external investors. This is because accuracy will be improved, and external investors will become more interested once a corporate tax regime and a level of certainty are established in this region, he said.
“The UAE issued this law for several reasons, but the most important one is that it wants to keep up with the global taxation landscape and measures to avoid falling behind. This ensures a level of transparency and some standardization of rules, which is what they aim for. They also want to ensure a taxation regime is ultimately built in,” Sengupta pointed out.
Additionally, corporate taxation provides benefits to the government and multinational corporations, such as enhanced corporate transparency, because it requires a higher level of reporting. Therefore, the corporate tax regime will only attract more investments, Sengupta added, while ensuring transparency and structure.
According to Sallhab, being a tax-free country was the ideal scenario for many investors and corporations. However, it’s not just the tax that matters to investors and corporations. The UAE — boasting political stability, transparent regulations, financial competence, a unique location, and visionary leadership — has potential for even more growth in the future. Thus, while a new tax scheme presents challenges, the trend of investing remains unchanged. The tax revenue will accelerate development and transformation, benefitting investors in the long run.
Sengupta and Salhab said that the 9 percent tax rate is reasonable when compared to other G20 economies that impose higher rates, such as Germany’s 30 percent, KSA’s 20 percent, Russia’s 20 percent, Turkey’s 23 percent, the UK’s 19 percent, Switzerland’s 15 percent, China’s 25 percent, and the US’s 21 percent. Iraq accounts for 15 percent of the Arab States, Kuwait 15 percent, and Qatar 10 percent. So, it’s one of the lowest, and they set it at 9 percent to remain a highly attractive destination for foreign investment.
Companies with annual revenues exceeding US $102,110 (AED 375,000) will be taxed. Profits below this amount remain tax-free.
However, corporate taxation carries certain conditions, and businesses must assess whether they meet them. The new corporate tax applies to all businesses and individuals conducting business activities under a commercial license in the UAE, including companies engaged in real estate, construction, foreign entities in the UAE, and free zone businesses with corporate tax incentives.
On the other hand, the new tax scheme doesn’t apply to individuals earning a salary, employment income from the public or private sector, earnings from dividends, capital gains, and other investment returns. Certain government entities, including the government itself, are also exempt from taxation. However, they will most likely be taxed if they engage in commercial business, such as if a government entity runs a company that sells or manufactures dates.
Additionally, businesses involved in the extraction of natural resources are exempt from corporate tax. However, they will continue to be taxed separately under their respective tax systems. Simultaneously, dividends and capital gains earned by a UAE business from its qualifying shareholders will also be exempt from corporate tax.
Furthermore, entities like public benefit entities, charitable institutions, or educational institutes are exempt from paying taxes.
While there’s no specific number projected for the UAE government’s expected revenue, it’s likely to see a considerable increase after implementing the tax on June 1, 2023.
The new tax scheme will help diversify government revenue away from the oil sector and strengthen the financial base. The taxes generated will support the economies of smaller emirates, aiding the UAE in achieving a holistic development structure.
According to Sengupta, the government is initially looking to generate half of its VAT revenue. “There are no official estimates for the expected revenues, but statistics show that VAT revenues were around $26 billion, so I believe the government is looking at half that, $13 billion or $14 billion initially. But it will only increase over time as more investments and businesses come under the tax bracket. So, including VAT, the UAE’s overall tax revenues could reach $40 billion,” he said.