The UAE began rolling out a 9pc business tax on Thursday, with relief for small firms and likely exemptions for export-focused free zone activities.
The business tax follows a 5pc value added tax (VAT) introduced in 2018, that helped it carve out a role as an international trade and tourism hub.
The government has said it introduced the tax to align with international efforts to combat tax avoidance, as well as to address challenges arising from the digitalisation of the global economy. The UAE does not levy personal income taxes.
"The tax will help diversify the UAE government's revenue away from the oil sector. However, the full impact is unclear because it has not yet been announced exactly how the tax will be distributed amongst the individual emirates," S&P's Trevor Cullinan said.
OECD TAX FORM
The UAE's 9pc rate on taxable income above 375,000 dirhams - around $100,000 - is the lowest in the GCC, apart from Bahrain which does not impose a general corporate tax.
Saudi Arabia levies 20pc, Qatar 10pc and Kuwait 15pc on foreign-owned firms, and Oman has a corporate rate of 15pc, according to consultancy PwC.
Muhammad Rasoul CEO of amana, a mid-sized UAE-based financial services company, said the corporate tax is a natural step to bring the UAE in line with best practices globally.
"The key will be to ensure the economy stays competitive, at both the regional and global level ... But let's be clear – the tax rate doesn't seem to be overly high, especially compared with what businesses must manage elsewhere in the world," he said.
Firms from Thursday will become liable for corporate tax when their financial years start, meaning tax returns will not fall due until 2025.
The UAE tax coincides with a new global minimum corporate tax from the Organisation for Economic Cooperation and Development (OECD), signed by 136 signatories including the UAE, to ensure big companies pay a minimum 15pc and make tax avoidance harder.
The UAE has not yet published regulation on the OECD tax, but without its own corporate tax system, another country could collect the 15pc, tax experts say.
The UAE legislation levies 0pc or 9pc, but with caveats for smaller earners and excluding personal income from employment, investment and real estate.
Individuals only have to register with revenues over 1 billion dirhams and a small business relief scheme means revenues under 3 million dirhams will have no taxable income.
"They wanted to make it as friendly as possible to small and medium enterprises and startups. And at the same time they don't want to encourage companies shifting from the UAE," said Wassim Chahine, head of corporate tax for KPMG Lower Gulf.
The UAE Federal Tax Authority and the Ministry of Finance declined to comment.
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