The Ministry of Finance has announced that the United Arab Emirates (UAE) will introduce a federal corporate tax on business profits for the first time. This marks a significant shift for a country that has traditionally attracted businesses from around the world due to its status as a tax-free commerce hub. Starting June 1, 2023, businesses will be subject to the tax. The country’s statutory tax rate will be 9% for taxable income exceeding 375,000 UAE dirhams ($102,000), and zero for taxable income up to that amount to support small businesses and startups. The UAE corporate tax regime is designed to incorporate global best practices and minimize the compliance burden on businesses. The tax will apply to all businesses and commercial activities alike, except for the extraction of natural resources, which will remain subject to Emirate level corporate taxation.

Individuals will continue to be exempt from tax on their incomes from employment, real estate, equity investments, or other personal income unrelated to a UAE trade or business. Foreign investors who do not conduct business in the country will also be exempt from the tax. Free zone businesses, which have traditionally enjoyed zero taxes and full foreign ownership, can continue to benefit from corporate tax incentives if they meet all necessary requirements.

While the announcement has generated significant attention, many in the UAE’s business scene believe that it was expected. As the UAE seeks to diversify its economy away from hydrocarbon revenue, the federal government aims to establish sources of income that are not reliant on corporate dividends and investment income. The announcement gives companies in the UAE approximately a year and a half to prepare for taxes.

Some have expressed concerns that the low threshold for taxation (just over $100,000 of profit per year) could negatively impact smaller enterprises with high set-up and business renewal costs. However, the proposed tax rate of 9% remains low compared to other low-tax hubs around the world. Ultimately, the move brings the UAE in line with other competitive economies and may help ensure that the UAE remains an attractive location for businesses to operate.