Explainer: Understanding UAE’s first-ever corporate tax

Starting on Thursday, corporations and businesses in the United Arab Emirates will be subject to a new tax on corporate profits.

Background: The UAE announced its first-ever corporate tax in January of last year. There were previously no taxes on business profits, which made Dubai and Abu Dhabi attractive destinations for international companies. Instead, the UAE had relied on a value-added tax on most goods and services as well as business fees paid by companies.

An Emirati official told Al-Monitor last year that the UAE would reduce business fees in light of the new tax. In January, the UAE’s Ministry of Industry and Advanced Technology announced a reduction in government service fees. Abu Dhabi also reduced business fees in 2021.

The tax is coming as the UAE, like other Gulf states, is seeking to reduce its dependence on oil and gas.

What it means: Corporations and businesses in the UAE will be subject to the new tax during their fiscal years that begin on or after June 1. According to the UAE Federal Tax Authority, the rates are:

• 0% on taxable income up to 375,000 Emirati dirhams (around $100,000)
• 9% on taxable income above 375,000 dirhams

A separate tax rate will apply to “large multinationals” that meet criteria set by the Organization for Economic Cooperation and Development (OECD), though this has yet to be specified. The UAE introduced the corporate tax in consultation with the OECD, and the project seeks to reduce tax avoidance.

The tax will apply to all businesses with a commercial license in the UAE, as well as banking operations, foreign entities and individuals that do business in the UAE “in a regular manner,” and businesses in the UAE’s “free zones” — designated areas where foreigners can fully own companies.

Exemptions to the tax include the following, per the Federal Tax Authority:

• individuals’ salaries
• businesses engaged in the extraction of natural resources, such as oil and gas
• interest on bank deposits and saving schemes
• foreign investors’ capital gains and other investment returns
• individuals’ capital gains and other returns from personal investments
• individuals’ real estate investments

The Emirati Finance Ministry also announced in April that government entities, public pensions and certain entities that benefit the public would be exempt.

Why it matters: The tax is coming into effect as the UAE seeks to improve its reputation on financial transparency, following several money laundering and sanctions evasions scandals recently.

Emirati authorities have been working to strengthen the relevant institutions in order to ensure compliance. In April of 2022, the Federal Tax Authority announced a whistleblower program for potential tax evasion.

Know more: The UAE’s new corporate tax is part of a series of tax increases across the Gulf, Sebastian Castelier wrote in a memo for Al-Monitor PRO in February.