Experts weigh in as UAE introduces federal corporate tax: report

In a move away from the levy-free regime, the United Arab Emirates (UAE) will introduce a federal corporate tax on business profits starting from June 1, 2023 for the first time.

The landmark development was announced by the UAE’s Finance Ministry on Monday, which maintained a low base to keep it attractive for businesses.

The UAE plans to introduce a 9% federal tax on corporate earnings for the first time next year on taxable income exceeding AED 375,000.

"With a standard statutory tax rate of 9% and a 0% tax rate for taxable profits up to AED 375,000 to support small businesses and startups, the UAE Corporate Tax regime will be amongst the most competitive in the world," the UAE’s Ministry of Finance had said in a statement on Monday.

The move comes as the oil producer continues to diversify sources of revenue away from oil revenue.

In a report carried by Bloomberg, Mohamed Abu Basha, head of macroeconomic research at investment bank EFG Hermes, said the measure will not affect UAE’s ability to attract investments.

“First, companies in free zones will continue to enjoy their tax benefits, hence are shielded from the decision," he was quoted as saying. "Second, most other Gulf countries already impose a corporate income tax on multinationals operating in the economy, including 20% in Saudi, 15% in Oman and 10% Qatar."

However, the upcoming tax is expected to hit some sectors of the economy more than others, said Mohammed Ali Yasin, chief strategy officer at Al Dhabi Capital Ltd, according to the report.

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“Telecoms and companies in the services industry already pay fees, some as high at 20% as in the case of hotels. For some firms, a 9% tax will take them from profitability to loss, reducing investor appetite and lowering the share price. Many will be looking to see whether the royalties or fees might get changed too.”

However, the implementation of the tax rate was an expected move, David Daly, a partner at Gulf Tax Accounting Groups said, especially for the corporate sector.

“The issue I see is implementation for SME. What’s to stop business owners from loading up the salaries to avoid paying the tax. Usually many of those businesses are controlled by few shareholders,” Daly was quoted as saying.

Meanwhile, others gauge the impact of the upcoming taxation.

“I’m glad to see that SMEs and small businesses will most likely be exempt from the corporate-tax burden,” said Izzat Dajani, chief executive at Dubai-based IMCapital Partners Ltd.

“Business and financial institutions will have to start accounting for a corporate tax that will touch their net earnings. Hence, a leaner workforce alongside more efficient operations may come into place to compensate for the tax impact on profitability,” said Dajani.

Whereas others expressed concern that the upcoming tax-regime might repel investors.

“The upcoming regulatory changes might cause concern for businesses operating here,” said Aafreen Shah, chief executive officer at Dubai-based corporate advisory. “Even so, with huge investment in infrastructure and changes in immigration policy, this is a natural progression for the growth of the country in line with best practices globally.”