Author: Virtuzone
As 94% of companies in the UAE are small and medium-sized businesses, market analysts expect the milestone corporate tax law to bring a wave of changes that significantly impact start-ups, microbusinesses, and SMEs in the country.
The UAE introduced the corporate tax in June 2023 as part of its efforts to anchor its medium to long-term growth strategy on diversifying its non-oil revenue streams and reducing its dependence on oil and gas, with the ultimate goal of bolstering its position as a global business and financial center.
According to Marmore MENA Intelligence, a research firm fully owned by Kuwait Financial Centre “Markaz,” the UAE corporate tax scheme could bring in a revenue of up to AED 47.7 billion, roughly accounting for 15% of the country’s gross non-oil revenue.
Coupled with Value Added Tax (VAT), which has generated revenues amounting to more than AED 147 billion since its implementation in 2018, corporate tax is forecasted to substantially increase government funding and further strengthen the nation’s already robust fiscal framework.
In addition, industry experts expect the corporate tax reform to bring the UAE closer to its goals of fast-tracking national economic growth and raising its gross domestic product (GDP) to AED 3 billion by 2031, with AED 800 billion originating from non-oil exports.
Aside from creating new revenue sources, experts anticipate corporate tax, and the financial reporting ecosystem it brings, to facilitate transparency and promote accountability among companies operating out of the UAE, bringing them on par with international standards.
Taking a closer look at the UAE’s newly introduced corporate tax framework
Under the UAE’s corporate tax policy, businesses with annual net profits exceeding AED 375,000 will be subject to a 9% corporate tax rate, the lowest among the Gulf Cooperation Council countries. For entities generating annual net profits below AED 375,000, a 0% corporate tax rate will apply.
With a low corporate tax rate, the UAE continues to rank as one of the most competitive low-tax business destinations in the world, particularly in comparison with business hubs such as Montenegro, which charges up to 15% in corporate tax depending on profits; Hong Kong, which levies a 16.5% tax; and Singapore, which applies a 17% income tax on businesses.
Furthermore, to alleviate the tax obligations of SMEs, the UAE Government has initiated the Small Business Relief programme, which grants tax exemption to SMEs with a total revenue of below or equal to AED 3 million for the relevant tax period. This tax relief is available until the end of 2026.
For multinational conglomerates that generate profits exceeding AED 3.5 billion, a 15% tax rate will apply, in adherence to the Organisation for Economic Cooperation and Development (OECD) base erosion and profit shifting (BEPS) policy.
Barriers to tax compliance among new businesses and SMEs
Nearly a year after the introduction of corporate tax, many businesses have yet to achieve tax compliance, primarily due to a lack of awareness, misinformation, or uncertainty.
Although the UAE corporate tax legislation has made provisions for tax exemptions and a tax-free threshold, all companies incorporated and/or operating in the UAE must comply with three critical requirements: register for corporate tax, maintain proper accounting records according to International Financial Reporting Standards (IFRS), and submit an annual tax filing with the Federal Tax Authority (FTA).
All mainland and free zone companies are mandated to comply with these requirements, even companies with zero turnover, a single shareholder, or those that qualify for tax exemption. The rationale behind this is that businesses must record their financial transactions to determine their tax position and consequently prove that they should be exempt or are below the taxable threshold.
With the implementation of corporate tax, it has also become evident that corporate service providers play a critical role in the SME sector, as they educate and guide start-ups and small businesses in navigating the UAE’s corporate tax regulations, allowing them to reach full tax compliance and protect their entities from incurring fines ranging from AED 500 to AED 20,000 per violation.
How will UAE-based businesses benefit from corporate tax?
As corporate tax is expected to boost public funding, UAE-based businesses are expected to see accelerated growth in infrastructure development and massive projects designed to make the country an even more competitive and attractive economic and investment hub.
By cementing the UAE’s position as a premier business and financial center, corporate tax will essentially create new markets and opportunities for local companies, thus fostering a thriving business environment where they can easily scale their operations and expand their footprint internationally.
