UAE Corporate Tax and its Effect on Foreign Investment

The UAE’s business policies have always centred around promoting economic growth, diversification and entrepreneurship. This blueprint has enabled the country to move away from its traditional reliance on oil and gas revenues and successfully diversify into areas such as tourism, real estate, construction, finance and technology. The country now boasts the second-largest economy in the Middle East, with an estimated value of USD 415 billion.

The absence of a federal corporate income tax (CIT, or CT) in the UAE has historically been one of the country’s key selling points for foreign investors, so the introduction of a corporate tax regime, effective from 1 June 2023, has prompted many to ask what its effects will be and how it will influence the UAE economy.

How will the introduction of corporate tax affect the country’s appeal to foreign investors?

While the introduction of corporate tax in the UAE may be seen as a dilution of the country’s appeal to foreign investors, it’s important to look at the broader picture to get a full understanding of its effects.

The worldwide average statutory corporate income tax rate, measured across 180 jurisdictions, is 23.37%, and 25.43% when weighted by gross domestic product (GDP).

In this context, the UAE’s 9% rate makes it the country with the joint third lowest corporate tax rate in the world and one of only three Organisation for Economic Co-operation and Development (OECD) member states among the 20 countries with the world’s lowest corporate tax rates.

This demonstrates the UAE’s success in reconciling its obligations and commitment to the OECD with its desire to continue to make the country an attractive investment destination. It has succeeded in finding the delicate balance between honouring its commitment to the global minimum effective tax rate established by the OECD and maintaining investor interest and confidence.

This is particularly pertinent at a time when countries are coming under increasing pressure to reform their tax systems and align themselves with changing global norms and regulations.

The introduction of corporate tax can be seen as a sign of the UAE’s commitment to long-term economic stability and growth, making it more attractive to investors looking for a stable and predictable business environment.

Businesses entering the UAE market will now be able to make investments with greater confidence and build greater trust with their customers and stakeholders.

Impact on the UAE economy and a stronger model to support Foreign Direct Investment (FDI)

The introduction of corporate tax in the UAE is a major step towards the country’s diversification goals. Establishing this new revenue stream will allow it to further reduce its reliance on oil revenues and fund other projects beyond the energy industry.

Increased spending on infrastructure projects, such as transportation networks, water and electricity supply systems, and telecommunications networks, will enable the government to help support the growth of other sectors of the economy and create new demand and opportunities for overseas investment.

Corporate tax revenues will also provide the necessary funds to further develop initiatives to support small and medium-sized enterprises (SMEs). Increased spending on accelerator programmes such as Dubai’s Future Accelerators and Abu Dhabi’s Hub 71 will provide the critical resources and support startups and early-stage companies need to help them succeed. The opportunity for these SMEs to access capital, mentorship and networking opportunities and other important resources will play a vital role in supporting the growth of the UAE’s startup ecosystem and helping entrepreneurs succeed in their ventures.

These moves will ultimately fuel the country’s economic growth and incentivise businesses to choose the UAE as a base for their operations. The support available to new businesses in the UAE makes the country very competitive amongst its global competitors, and when coupled with the country’s strategic location between major markets in the East and West, it provides a great opportunity for businesses to explore international expansion and access lucrative growth markets.

Implications of corporate tax for cross-border trade

The UAE’s 9% CT rate on taxable profits above AED 375,000 makes it one of the world’s most competitive corporate tax rates. Its introduction ensures that the UAE remains aligned with international standards and requirements while retaining a competitive advantage over other global markets. It also ensures that businesses in the UAE continue to benefit from the country’s extensive network of double taxation treaties.

The UAE has over 100 agreements in place with trade partners around the world. These treaties guard against the possibility of being taxed twice on the same source of income and provide transparency between member countries on taxation related to cross-border trade and investment.

For prospective investors in the UAE, these agreements help to optimise their revenue generation by providing tax relief. For businesses with a multinational presence, they provide much needed clarity on where their tax obligations lie while providing the security they are fully compliant with current international regulations.

It’s also important to note that while the application of the corporate tax is nationwide, the UAE government will continue to honour the corporate tax incentives being extended to all businesses registered in free zones across the country.

These businesses can maintain their 0% corporate tax position provided they comply with all regulatory requirements and do not conduct business on the mainland.

Concluding Thoughts

In the current climate of global instability and the scrutiny of tax evasion, the UAE’s introduction of corporate tax and involvement in the OECD’s base erosion and profit shifting (BEPS) project is a clear sign of the country’s efforts to promote economic growth, trade and investment.

The new corporate tax regime will bring increased transparency in terms of tax compliance and accountability and provide investors with greater confidence in the UAE’s regulatory framework.

The country’s membership of the OECD will facilitate the exchange of information and best practices on issues such as taxation, anti-corruption, anti-money laundering, and investment policies, all of which will enable access to a wider network of countries and international organisations and help expand trade and investment opportunities.

The new corporate tax will also provide the government with increased funds for large-scale investment in public services. The recently approved UAE federal general budget suggests that significant spending will be directed towards infrastructure, social welfare, education and healthcare, generating lucrative new investment opportunities and creating a much more robust and stable economic environment for the future.

Overall, the UAE’s economic outlook looks much brighter as a result of this move. It will generate new and exciting opportunities for investment and underlines the strategic advantages the country provides.