Weighing the Impact of the UAE Corporate Tax Law

With small and medium-sized enterprises making up 94% of UAE companies, industry experts anticipate the landmark corporate tax law to cause a significant, large-scale impact on the country’s start-up, micro, and SME sectors.

As the UAE heavily underpins its medium to long-term growth strategy on reducing its dependence on oil and gas by diversifying the nation’s non-oil revenue streams, the legislative shift will be pivotal in further cementing its position as a global business and financial hub.

The UAE corporate tax regime, which was officially rolled out in June 2023, holds the potential to generate revenue up to AED 47.7 billion (USD 13 billion), or approximately 15% of the country’s gross non-oil revenue, according to Marmore MENA Intelligence, a research subsidiary fully-owned by Kuwait Financial Centre “Markaz.”

Along with Value Added Tax (VAT), which yielded AED 9 billion (USD 2.5 billion) in 2022, the corporate tax reform is expected to boost public funds and stabilise its fiscal framework, while accelerating national economic growth and increasing its gross domestic product (GDP) to AED 3 trillion by 2031.

Deep diving into the UAE’s corporate tax framework

With a corporate tax rate pegged at just 9%, the UAE has the lowest corporate tax rate among Gulf Cooperation Council (GCC) countries.

Globally, the UAE remains an extremely competitive low-tax business destination, especially in comparison with other low corporate tax countries, such as Montenegro, which levies a corporate tax rate ranging from 9% to 15% depending on profits; Ireland, which has a 12.5% corporate tax; and Hong Kong and Singapore, which charge 16.5% and 17% corporate tax rates, respectively.

Furthermore, the UAE’s 9% corporate tax rate will only apply to companies that generate annual net profits higher than AED 375,000 (USD 102,000), while a 0% corporate tax rate will apply to companies generating annual net profits equal to or less than that amount.

On the other hand, multinational conglomerates that earn profits over AED 3.5 billion (USD 952.9 million) will be subject to a higher tax rate based on the Organisation for Economic Cooperation and Development (OECD) base erosion and profit shifting (BEPS) policy.

The UAE Government has also introduced the Small Business Relief programme for small businesses. Available until the end of 2026, this tax relief grants exemption to SMEs whose total revenues are below or equal to AED 3 million for the relevant tax period.

How is corporate tax reshaping the UAE’s business ecosystem?

In addition to opening up new revenue sources and enhancing the UAE’s attractiveness as a global economic hub, corporate tax is also expected to promote transparency and drive accountability among companies incorporated and operating in the country, thus solidifying its international reputation and bringing the reporting standards of UAE-based businesses in line with global benchmarks.

These factors – and a favourable corporate tax scheme – will aid the UAE in maintaining a business-friendly environment and achieving its goal of having one million SMEs by 2030.

As of 2022, it is already home to 557,000 SMEs, around 46% of which are based in Dubai.

Lack of awareness and misinformation pose challenges to tax compliance among SMEs

More than a year after the announcement of corporate tax, however, numerous businesses are still uncertain if the law applies to them, or unaware of the steps they must take to achieve tax compliance.

While the new corporate tax legislation has outlined tax exemptions and a tax-free threshold, all companies based in the UAE must still register for corporate tax, keep correct accounting records and complete their annual corporate tax filings with the Federal Tax Authority (FTA).

These mandatory steps apply to both mainland and free zone companies, as well as to companies with a single shareholder, businesses with zero revenues and even those that qualify for exemptions.

Essentially, businesses are required to record their transactions and prove their tax position, even if they are exempt or under the taxable threshold.

The launch of corporate tax law in the UAE has also highlighted the critical role of corporate service providers in guiding entrepreneurs and small business owners into tax compliance and helping them navigate the new rules and requirements, enabling them to avoid penalties that range from AED 500 to AED 20,000, depending on the case of non-compliance.

While adapting to the new tax reform may be challenging for some start-ups and SMEs, the initiative is ultimately designed to further enhance the UAE’s standing as a premier business and trade destination, making it an even more attractive hub for foreign direct investment (FDI) and venture capital.

The latest statistics show the UAE ranks first in the Middle East and North Africa region in terms of FDI inflows, and was the top FDI destination in the GCC economic bloc in 2022. During the same year, the UAE was also the only MENA country to cross the USD 1 billion mark in venture capital funding, reinforcing its lead in the region.

Fuelling exponential and sustainable growth in the future

Though the full effects of corporate tax are yet to be seen, market analysts are optimistic that corporate tax will help boost local infrastructure development and spur investment in megaprojects that will drastically elevate the country’s competitive edge, thereby benefitting UAE-based businesses in the long run.

Additionally, it can create new markets and business opportunities that can further promote long-term and sustainable economic growth, while advancing and refining local business practices to meet international standards for quality, excellence and transparency.