Effective June 2023, the new tax scheme will see the country continue to be a major player on the international scene.

The announcement of the corporate tax introduction in the UAE has swiftly affected the country’s stock markets, not necessarily in the most positive way. While this could be a normal reaction to what some might think is an unexpected announcement, the long-term impact couldn’t be more positive. It is a move that we have been waiting for and the announcement comes as a natural extension of a journey in positioning the UAE as a strong economy and a world leader.

The UAE has recently, more than ever, been in the spotlight on the international scene, setting the trend for excellent governance, business friendliness and societal wellbeing: ranked first in handling the Covid-19 crisis, second safest country in the world (behind Iceland!), leader in digitalisation, outstanding infrastructure, and most of all, one of leading countries worldwide in terms of foreign direct investments, as recorded in 2021.

The UAE had also become a major tourist destination before Expo 2020, which was undoubtedly a key success notwithstanding the pandemic. A major oil producing jurisdiction, and the fourth largest sovereign wealth fund worldwide, the UAE is unequivocally celebrating its golden jubilee playing in the “Champions League” of world leaders.

International standards

Playing in the “Champions League” requires best practices and the highest standards. In fact, the introduction of the corporate tax (preceded by the VAT) goes hand in hand with the UAE’s commitments towards the international community.

The UAE is a member of the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS), undertaking to implement measures against tax avoidance, improving the coherence of international tax rules, ensuring transparency, and addressing tax challenges arising from the digitalisation of the economy.

As OECD Secretary-General Mathias Cormann clearly stated, the purpose of such actions is “not to eliminate tax competition, as it should not, but to set multilaterally agreed limitations on it.” In this context, with 9 percent corporate tax (the lowest worldwide), the UAE remains very attractive while respecting international standards and best practices in the field:  the best of both worlds.

It must be noted that the Two Pillar Solution discussed in the OECD/G20 Inclusive Framework on BEPS includes Pillar Two, introducing a global minimum effective tax rate of 15 percent, regardless of headquarter or operation jurisdictions, which leads us to understand that a UAE corporate tax would benefit the country in the context of implementing Pillar Two.

On an unrelated yet necessary note in the same context, the UAE has also enhanced and lately implemented many legal and regulatory reforms in compliance with ant-money laundering and terrorism-financing international best practices.

Indeed, “with the introduction of corporate tax, the UAE reaffirms its commitment to meeting international standards for tax transparency and preventing harmful tax practices,” as stated by Younis Haji Al Khoori, Undersecretary of the Ministry of Finance.

Positive cross-border taxation implications

The UAE has entered into 137 Avoidance of Double Taxation agreements. With the introduction of a corporate tax, the parties involved would benefit from a better treatment in the application of such agreements, with UAE companies consequently considered as “taxable entities” for tax treaties and tax agreement purposes, resulting in a better and smoother tax treatment for multinational groups and cross-border investments in and via the UAE. Many jurisdictions with corporate income tax impose a “comparable tax” for non-resident companies in an international setting in order to benefit from tax advantages and/or exemptions provided by treaties and/or local laws.

In addition to the above, we should mention that the introduced tax reform exempts businesses from taxation on capital gains and dividends received from their qualifying shareholdings, also ensuring an advantageous tax regime for investors and multinational groups and corporations, in addition to the treaty protection.

On a separate note, by introducing the corporate tax, the UAE will also avoid disadvantages of being considered as a zero-tax / no-tax jurisdiction, while many foreign legislations aim at preventing “double non-taxation” by applying withholding and non-deductibility measures on payments to, inter alia, no-tax/zero-tax jurisdictions.

The government’s income base

In a continued effort of non-oil income diversification, the corporate taxation would be a major new income for the government. The UAE’s excellent governance and wise public spending, leads us to be assured that such additional income would be invested and spent fairly, productively, and to the best benefit of both private and corporate residents.

Exemptions

As in most jurisdictions imposing corporate taxes, the UAE has preserved some attractive exemptions (under separate conditions for each), including, inter alia, freezones, personal income, domestic and cross-border payments, dividends and capital gains, in addition to double taxation avoidance measures.

Authored by: Bassem Daher, partner at Galadari Law Firm