From grey to white: UAE Introduces New Corporate Taxes to Foster Transparency and Compliance

From grey to white: UAE Introduces New Corporate Taxes to Foster Transparency and Compliance

By Dr. Raphael Nagel & Dr. Frank Musmr

In a bid to further strengthen its position as a global business and investment destination(A recent UNCTAD report recognized the UAE as the world’s second-largest recipient of greenfield FDI in 2023 (second only behind the United States), showcasing an impressive FDI inflow increase of 28% to a record $22.73 billion in 2022, and score a growth rate of 4.2% in 2023, according to the International Monetary Fund.), the United Arab Emirates (UAE) has recently implemented new corporate tax regulations. This step comes six years after the UAE introduced value-added tax (VAT). These reforms, aimed at promoting transparency and compliance, underscore the UAE’s commitment to international best practices in the context of the broader tax changes being made across the world under pressure led by the G7 and G20 to propose a global minimum tax regime and for countries to move away from low- or no tax systems. With one of the lowest corporate tax rates worldwide, the UAE continues to attract foreign investments while ensuring a fair and sustainable business environment.

Implications on businesses or startups: Startups will evaluate their structures, start restructurings, and consolidate their operations to meet the new Tax regulations (for which lender consent may be needed) are likely. Accordingly, building new financial models is required.

Implications for lenders to UAE groups: The good news is that there is no proposal to introduce withholding tax on financing returns, and they can, therefore, continue to receive gross payments. However, they will need to consider whether it is appropriate to introduce covenants into documentation concerning tax liabilities and risks and will also want to consider what tax assumptions are critical in deciding whether to advance funds.


Under the UAE’s new corporate tax regime, businesses will benefit from a low tax rate of 9% on taxable income exceeding AED 375,000. The first AED 375,000 net profit remains tax-exempt, encouraging companies to reinvest their earnings and stimulate economic growth. For instance,
income derived by companies in Singapore is taxed at a flat rate of 17%. The startup tax exemption scheme provides newly incorporated companies some exemption on their taxable profits in their first three years of operation.

The implementation of corporate taxes began with fiscal years commencing on June 1, 2023. Companies must adhere to strict filing deadlines, with tax declarations due within nine months from the end of the tax period. The UAE government emphasizes the importance of proper financial statements and record-keeping, ensuring transparency and accountability. Historically, distrust in the state is a deeply ingrained cultural trait of any population, clearly observable in its negative attitude toward taxation. Moreover, Poor tax compliance is a common problem in low and middle-income economies. However, the government of UAE has built an exceptional trust system within the country in the last two decades, which will keep businesses trusting the taxation system and the authorities and comply with the new regulations.

According to the Ministry of Economy, The ministry recognizes the vital role of small businesses in the economy; they represent more than 94% of the total number of companies operating in the country and provide jobs for more than 86% of the private sector’s workforce. In Dubai alone, SMEs comprise nearly 95% of all companies, employing 42% of the workforce and contributing around 40% to Dubai’s GDP. Accordingly, the UAE has introduced the Small Business Tax Relief Program. Eligible companies with annual income below AED 3 million can benefit from a 0% tax rate until December 2026. Simplified accounting procedures and expedited tax declaration processes are also available, supporting small enterprises.

To uphold fiscal integrity, the UAE has implemented penalties for noncompliance (The penalties for non-compliance with the annual UAE tax audit are expected to be in the range of Dh1 000-Dh2, 000 (US$270-500) for each offense. An audit failure could result in multiple issues and fines running into thousands of dollars), emphasizing the significance of accurate record-keeping and submission of required information. By maintaining meticulous records, businesses can avoid penalties and contribute to a transparent business landscape.

The UAE’s commitment to international transparency and fiscal responsibility standards is expected to enhance economic stability and promote fair business practices. The ideal tax system should raise essential revenue without excessive government borrowing and should do so without discouraging economic activity and without deviating too much from tax systems in other countries. The combination of low tax rates, tax exemptions, and support for small businesses creates an attractive environment for investors and entrepreneurs.

As the UAE introduces these tax reforms, it aims to fortify investor confidence, stimulate economic growth, and solidify its position as a global business hub. The UAE is committed to fostering transparency, compliance, and sustainable economic development by adhering to global best practices. To understand why the lower corporate tax rate drives growth in capital stock, wages, jobs, and the overall size of the economy, it is crucial to know how the corporate income tax rate affects economic decisions. When firms think about investing in a new capital good, like a piece of equipment, they add up all the costs, including taxes, and weigh those costs against the expected revenue the capital will generate. The higher the tax, the higher the cost of capital, the less capital can be created and employed. So, a higher corporate income tax rate reduces the long-run capital stock and the economy’s long-run size. Conversely, lowering the corporate income tax incentivizes new investment, increasing the capital stock.

 

Dr. Raphael Nagel

Dr. Raphael Nagel

Chairman at Tactical Management, focusing on carve-outs and companies in special situations. M&A and Corporate Law Consultant at Nagel & Partners. Chairman at The Abrahamic Business Circle.

Dr. Frank Musmr

Dr. Frank Musmr

Faculty| Academic Researcher | Middle East Politics Expert | Best Selling Writer | Advisory Board President | Dissertation and Proofreading specialist | Journalist ( Member of the International Federation of Journalists)