UAE rolls out 9 pct business tax to boost non-oil revenue

The UAE began rolling out a 9 percent business tax on Thursday, with relief for small firms and likely exemptions for export-focused free zone activities, as the formerly tax-free oil producer seeks to boost non-oil revenue and remain a regional commercial hub.

The business tax follows a 5 percent value added tax (VAT) introduced in 2018, gradually eroding the United Arab Emirates’ tax-free status that helped it carve out a role as an international trade and tourism hub and magnet for the ultra-rich.

Some tax regulations have not yet been published, including details on how income earned by entities in the UAE’s more than 30 free zones – which export tens of billions of dollars of goods to neighboring states – will be taxed.

The government has said it introduced the tax to align with international efforts to combat tax avoidance, as well as to address challenges arising from the digitalization of the global economy. The UAE does not levy personal income taxes.

Tax reform is gradually appearing across the Gulf Cooperation Council (GCC) which has historically funded budgets from hydrocarbon revenues. In 2017 GCC states agreed to introduce VAT.

S&P ratings agency estimates the tax could add 1.5 percent-1.8 percent of gross domestic product from 2025 to the annual revenues of the UAE’s seven emirates based on the VAT model, which gives 70 percent of receipts to the collecting emirate and the rest to the federal government.

“The tax will help diversify the UAE government’s revenue away from the oil sector. However, the full impact is unclear because it has not yet been announced exactly how the tax will be distributed amongst the individual emirates,” S&P’s Trevor Cullinan said.

OECD Tax Form

The UAE’s 9 percent rate on taxable income above 375,000 dirhams – around $100,000 – is the lowest in the GCC, apart from Bahrain which does not impose a general corporate tax.

Saudi Arabia levies 20 percent, Qatar 10 percent and Kuwait 15 percent on foreign-owned firms, and Oman has a corporate rate of 15 percent, according to consultancy PwC.

Muhammad Rasoul CEO of amana, a mid-sized UAE-based financial services company, said the corporate tax is a natural step to bring the UAE in line with best practices globally.

“The key will be to ensure the economy stays competitive, at both the regional and global level … But let’s be clear – the tax rate doesn’t seem to be overly high, especially compared with what businesses must manage elsewhere in the world,” he said.

Firms from Thursday will become liable for corporate tax when their financial years start, meaning tax returns will not fall due until 2025.

The UAE tax coincides with a new global minimum corporate tax from the Organisation for Economic Cooperation and Development (OECD), signed by 136 signatories including the UAE, to ensure big companies pay a minimum 15 percent and make tax avoidance harder.

The UAE has not yet published regulation on the OECD tax, but without its own corporate tax system, another country could collect the 15 percent, tax experts say.

The UAE legislation levies 0 percent or 9 percent, but with caveats for smaller earners and excluding personal income from employment, investment, and real estate.

Individuals only must register with revenues over 1 billion dirhams and a small business relief scheme means revenues under 3 million dirhams will have no taxable income.

“They wanted to make it as friendly as possible to small and medium enterprises and startups. And at the same time, they don’t want to encourage companies shifting from the UAE” said Wassim Chahine, head of corporate tax for KPMG Lower Gulf.

The UAE Federal Tax Authority and the Ministry of Finance declined to comment.