United Arab Emirates: new corporate income taxation

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The United Arab Emirates have decided to introduce a corporate tax starting with the fiscal year beginning June 1, 2023. The aim is to comply with international tax standards and to protect small businesses and start-ups. Tax rates are 0% for taxable income up to AED 375,000 (about USD 100,000) and 9% for taxable income above that.

Multinational corporations subject to OECD regulations on base erosion and profit-sharing will be eligible for variable tax rates. Corporate tax will apply to all commercial, industrial, and professional activities in the UAE, with the exception of natural resource extraction, subject to taxes of up to 55 percent, and branches of foreign banks, subject to a 20 percent tax rate. However, Free Zones will be subject to all regulatory requirements, and companies located there will not be able to conduct business directly with entities based in or residing in the so-called Mainland.

The introduction of the corporate tax in the UAE represents a significant breakthrough for the country’s economy, which until now has always been characterized by the absence of corporate and personal income taxation. This decision, however, is not accidental but part of a series of efforts undertaken by the UAE government to align with international standards and achieve greater tax transparency.

In particular, the UAE is working to comply with the Organization for Economic Cooperation and Development (OECD) standards on base erosion and profit-sharing (BEPS). These standards aim to prevent multinational companies from evading taxes by shifting their profits to low-tax countries through tax avoidance mechanisms. The UAE, being a major trading hub, wants to ensure that all companies operating in its territory pay taxes fairly.

In addition, the introduction of the corporate tax aims to reduce the UAE economy’s dependence on oil by diversifying revenue sources and developing other economic sectors, such as technology and digital. This economic diversification strategy aims to make the UAE economy more resilient to oil price fluctuations and more sustainable in the long run.

Finally, the introduction of the corporate tax also aims to protect small businesses and start-ups in the UAE by easing the tax burden on them. This choice reflects the UAE government’s emphasis on local businesses and the creation of a favorable ecosystem for small and medium-sized enterprises.

As explain our Partner Fulvio Magni, specialized in start-up structuring, strategy and fund-raising, the introduction of the corporate tax in the UAE is a strategic choice by the government to comply with international standards, diversify the economy and protect local businesses. This decision is expected to have a significant impact on the UAE economy and businesses operating in the country, but it will be necessary to wait for the first tax years to assess the actual scope of this tax reform.

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