The New UAE Corporate Tax Law Is Now in Effect and That’s a Good Thing 

Following its formal issuance in December 2022, the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses, the UAE’s first corporate tax law, was rolled out on June 1, 2023, meaning that tax returns for companies liable for corporate tax will not be due until 2025.

With an economy estimated at $415 billion in 2022 – the second largest in the Middle East after Saudi Arabia – the government’s decision to introduce a corporate tax may have seemed surprising at first. Indeed, one of the country’s key selling points had been an absence of taxes particularly attractive to foreign investment and businesses. Yet, this move makes sense on several levels, particularly for SMEs.

An ecosystem-friendly corporate tax

To start with, the introduction of a corporate tax regime designed around international best practices and standards establishes the UAE as a  global business and investment hub aligned with the Organisation for Economic Cooperation and Development’s (OECD) new global minimum corporate tax, signed by 136 signatories, including the UAE. As a result, it further builds international confidence in the country’s governance and illustrates its determination to combat tax avoidance, especially since the UAE’s extensive network of double taxation treaties ensures transparency between member countries.

Importantly, the law establishes a 9% fixed rate on taxable profits applied to all business activities except the extraction of natural resources (which were already subject to a different type of taxation) and large multinationals (which are now subject to a different rate). Compared to the 23.37% worldwide average statutory corporate income tax rate, and even more so to the 25.43% global average when weighted by GDP, 9% is highly competitive, according to research by the Tax Foundation. For reference, in the GCC, only Bahrain does not impose a general corporate tax; Saudi Arabia levies 20%, Qatar 10%, and Kuwait 15% on foreign-owned firms, while Oman has set a corporate rate of 15%, according to consultancy PwC. In fact, the UAE is now the country with the third lowest general corporate income tax rate in the world – and the first two are the small island nations of Vanuatu and Wallis and Futuna!

What’s more, the law carved out several exemptions, not only for entities operating in more than 30 free zones that largely contribute to powering its economy, but also for small and micro-businesses, start-ups, and freelancers: in April, the Ministerial Decision on Small Business Relief raised the minimum taxable profits threshold to AED3 million – a much higher ceiling than the AED375,000 originally announced – to support these small earners by reducing their corporate tax burden.

In a 2022 report, the S&P ratings agency estimated that, from 2025, the new corporate tax could add 1.5%-1.8% of gross domestic product (GDP) to the UAE’s annual revenues without overburdening companies. This has very practical implications for businesses. First, it potentially allows the government to put this new revenue stream to good use, for example increasing its spending on large-scale infrastructure projects, such as transportation networks and telecommunications, that support the growth of other sectors; or providing more funds to develop programmes and resources for SMEs and start-ups.

Also in the spirit of clear communication and support to the business community, the Federal Tax Authority (FTA) launched in early June a dedicated Corporate Tax Virtual Workshops awareness platform to facilitate the implementation of the new corporate tax. It provides taxpayers with knowledge and support in both Arabic and English. It is indeed critical for business owners to be in compliance, which means understanding their tax obligations, deadlines for filing returns and making payments, and any tax incentives or exemptions they may be eligible for.

In fine, in this global context of instability, the UAE’s new tax legislation helps promote a fair, stable, transparent, and sustainable business ecosystem, friendly to SMEs and start-ups, ultimately incentivising companies of all sizes to keep growing in the country.