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The UAE Joins World Leaders By Implementing Federal Corporate Tax


UAE Corporate Tax Graphic

The UAE positions itself as more than just a tax haven for global investors by announcing the introduction of a federal corporate tax by 2023 for the first time in its history. The move comes amid a call for more corporate taxation by international governments to establish fiscal regulation and increase security within an ever-shifting, digitized international marketplace.


Effective on or after 1 June 2023, the new corporate tax regime protects SME’s by taxing profits above 375,000 AED at a rate of 9% - making it among the most competitive in the world. Generally, corporate tax in the region sits between 10-15%. Compliance burdens have been minimized to safeguard the country’s attractiveness to international investors, a main priority for the tiny country with a population of 9.9 million and a forecast of 4.2% GDP growth in 2022 and a doubling of its economy by 2031.


The UAE corporate tax introduction seems to be a gesture of goodwill towards its main allies in the international community led by the US, who are working towards solving tax maneuvering by large corporations whose phantom investments - empty Foreign Direct Investment shells designed to lower tax bills - are distorting microeconomic data.


Bold Steps—A transformation.


The oil-exporter has been taking bold steps over the past two years with 33 initiatives designed to carry its resilient economy past a COVID recovery phase and into recorded GDP growth. The UAE has been heavily focused on implementing stimulus measures through economic support schemes to mitigate the impact of corona on its economy, and it has done so in light of its long-term vision to be a viable and legitimate hub for businesses and investors across the world. It has spent billions to bring relief since corona, having launched the Central Bank of the UAE’s 100 billion AED comprehensive Economic Support Scheme for retail and corporate customers affected by COVID-19. The country’s Minister of Economy Abdulla Bin Touq recently said the economy had passed recovery phase and is now registering growth in key indicators.


This growth has been hard won, and is paving the way for the UAE’s goal to have a seat the table with the world’s strongest and most legitimate policymakers. It plans to achieve economic transformation through furthered global integration, aiming to be the world’s safest, most sustainable and most favorable destination for residence and investment. It’s introduction of corporate tax plans to not only bolster its legal efficacy over economic activity, but also provide an alternative revenue stream which aids the economy’s diversification.


Challenges.


International corporate taxation has presented challenges for tax authorities across the world for sometime. While multinational corporations (MNC’s) have inverted their structures to shift profits to tax exempt countries as a tool for tax evasion, policymakers have been strongly considering a global minimum corporate tax to address the problem. The Organization for Economic Cooperation and Development (OECD) and the G20 are leading a base erosion initiative to stop MNC’s from stifling the policing of business activity by shifting jobs and profits overseas.

With MNCs investing offshore to escape tax, competition over international capital heightened between countries. The OECD’s efforts at tax legislations aim to resolve the tension.


Work In Progress.


The UAE plans to cooperate as it is currently working on finalizing the execution of the tax legislation in full. So far, key points of interest on the new corporate tax include the exemption of businesses in free trade zones who have no transactions on the UAE mainland, as well as the exemption of commercial activities based on natural resource extraction. This is welcoming news to start-ups and other regional corporates that have gravitated toward UAE free zones to establish and maintain tax exempt holding companies and other special purpose vehicles as part of their regional corporate structures. Individual income tax remains untouched along with income from capital gains, dividends and intergroup transactions, on the condition of meeting specific criteria that is yet to be finalized and published.


Privatus Counsel continues to monitor these developments on behalf of many its GCC-based clients’ who maintain corporate interests in the UAE.


About Privatus Counsel.


Privatus Counsel is a US based law firm with offices in the United States and abroad.


Our attorneys take an active approach in maintaining a close relationship with our clients; we listen, we understand, and then, we work closely to provide tailored solutions to their issues. Our aim is to reinvent the traditional lawyer-client relationship by assuming a more internal role with our clients. Our generalist approach, based on our broad experiences, places our boutique firm shoulder-to-shoulder with our clients around the world, helping them through every step of their journey. Our lawyers in all offices draw upon the knowledge of our global network.


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