Innovation and competitiveness have always been the cornerstones of the UAE’s social and economic vision, and this is reinforced by the recently stated government objectives.
One of the most discussed objectives is the Corporate Income Tax law effective June 1, marking the UAE’s corporate tax as one of the lowest in the world. This will have several implications for foreign investors such as a more defined tax relief programme as well as a strengthened private sector.
Among the changing tax landscape, foreign investors will see a rapidly changing UAE that becomes more business-friendly by the day. As a critical part of the country’s vision is to increase the country’s non-oil exports and raise the value of foreign trade to AED4 trillion, attracting investors and stimulating the private sector will be key pillars of the country’s future.
This means that investors and businesses will have a critical role to play in the bigger picture, which could potentially lead to higher returns in investment for both smaller businesses as well as multinational companies.
The UAE’s corporate tax regime on international trade
The UAE’s corporate tax regime, with a headline rate of 9 percent on taxable profits of more than AED375,000, will be amongst the most competitive in the world, making it one of the countries with the lowest corporate income tax rates globally. It brings the Emirates in line with international standards while continuing to support small businesses and startups, and promotes the much-needed transparency and accountability for companies.
For foreign investors, the low corporate income tax rate means that they will have a higher return on their investments in the country compared to other markets, which could lead to higher relative revenue. A higher return could also mean that companies can increase their investment in their capital, which could potentially lead to enhanced quality products and output and improved talent in the country.
To help understand these nuances, our tax team at Grant Thornton has already been helping finance teams in the UAE to prepare for the upcoming changes and ensure that they maximise their revenue while remaining compliant.
However, a critical point to understand is that the development of the UAE’s corporate tax regime also means that businesses are also getting the right tax relief. The UAE currently has an extensive network of tax treaties with other countries, with more than 100 agreements with economies around the world.
One of the key purposes of these treaties is to make it easier for international trade, such as providing relief for situations where businesses are taxed on the same income in more than one country, making it simpler for investor flows and cross-border trade.
The continued development of the UAE’s corporate tax regime is important for ensuring that businesses in the UAE have full access to the benefits available under the tax treaties. For premium foreign investors and businesses with the multinational footprints, this should provide comfort in investing in the UAE as it defines how they can benefit and optimise their operations.
We’ve observed that tax relief is a knowledge gap for foreign investors looking into the UAE market, which is why we are diligent in ensuring that our partners receive the right counsel about their relief qualifications.
The investor-friendly environment in the UAE
The UAE has always been a popular destination for foreign direct investment given its high quality of life, stable economy, business-friendly regulations, state-of-the-art infrastructure and global trading links. The UNCTAD World Investment Report 2022 puts UAE at the top in the Arab world and the 19th country globally for its ability to attract foreign direct investment.
We can expect this momentum to be strengthened by the various government initiatives to attract more foreign investment. The Dubai Economic Agenda D33, which was announced earlier last month, also includes 100 transformational projects that will bolster trade and investment.
Our team at Grant Thornton has seen the ripple effect of these welcoming corporate laws and initiatives among our client’s decision to invest to the UAE. The key drivers for their decision include a more business-friendly regime offered, the ability to have 100 percent foreign ownership of certain onshore companies and diverse visa structures.
In addition to this, there are about 44 free zones that cater to a range of sectors and provide focused support and opportunities for companies set up within them. These businesses can also continue to maintain a zero percent tax position if they meet certain criteria. The UAE’s central geographical location and excellent infrastructure are other important factor for investors, especially for those who want a central hub for their global business operations.
Corporate tax in an evolving UAE
When we look at the bigger picture, the new corporate tax is a crucial step in the UAE’s goal to diversify the country’s economy away from the oil sector. New streams of government revenue mean that they will be able to sustain economic growth through other projects beyond the energy industry. In other words, there will be a higher demand in other sectors.
The knock-on effect of this is more innovation from the private sector as it continues to flourish in its pursuit to meet the higher demand, reinforcing the country’s economic trajectory and its status as a lucrative and competitive investment destination.
Likewise, the government has also stated several objectives to enhance the UAE’s social wellbeing. While it has not been specifically stated how the additional tax revenue will be spent by the UAE government, we saw from the recently approved UAE federal general budget that providing high levels of social welfare, healthcare and education in the UAE were key priorities. Similarly, the country also announced its goal to enhance its economic environment.
The UAE government may look to increase their public spending as a way of stimulating economic expansion, establishing a stronger UAE economy that complements overseas investment.
With several ambitious goals in the horizon, changes such as the corporate tax regime mark concrete paths to realise the UAE’s vision. With strategic tax advisors such as Grant Thornton, foreign investors and the overall private sector will have unique opportunities to build the country’s economic landscape and sustain long-term presence and returns.
Given global instability, the country’s boldness symbolises its confidence and commitment, and one of its top priorities is to be a strong partner to businesses around the world.