The latest domestic minimum top-up corporate tax announced by the UAE’s Ministry of Finance will have minimum impact on the country’s attractiveness for businesses, experts said.
In fact, the OECD-aligned tax will add to the country’s transparency and serve as sustained government revenue in the long run.
“Corporations in the country’s free zones will maintain their tax-exempt status, and despite a 15 percent tax rate, the UAE would still be an attractive business destination, relative to countries like the UK and Saudi Arabia, which have a 25 percent and 20 percent corporate tax rate, respectively,” said Bal Krishen, chairman, Century Group.
“The UAE is trying to bolster business and entrepreneurship with the new act by suggesting the introduction of tax incentives for R&D expenditure, with a potential of 30-50 percent refundable tax credit, along with tax credits for high-value employment activities,” he added.
No impact on SMEs
Meanwhile, Maged Fahmy, vice-president at Ellucian Middle East, said the new tax will not affect SMEs and early-stage entrepreneurs.
“I don’t believe it will negatively impact the attractiveness of the UAE for large multinational businesses. The UAE, and Dubai in particular, showed excellent resilience in the last five years to volatile oil prices and a global pandemic. Post-COVID, the UAE has experienced consecutive year record inbound migration of millionaires and significant growth in net population which isn’t subsiding,” he said.
What is the new tax announcement?
The UAE Ministry of Finance has announced updates in relation to certain provisions of Federal Decree-Law No. 47 of 2022 on the taxation of corporations and businesses.
These amendments include introduction of a domestic minimum top-up tax (DMTT), and tax incentives to support growth and innovation.
Following the issuance of Federal Decree Law No. 60 of 2023, a domestic minimum top-up tax will be effective in the UAE for financial years starting on or after January 1, 2025.
This step reflects the UAE’s commitment to implementing the Organization for Economic Co-operation and Development’s (OECD) two-pillar solution, aimed at establishing a fair and transparent tax system aligned with global standards. The two-pillar rules require large multinational enterprises (MNEs) to pay a minimum effective tax rate of 15 percent on profits in every country where they operate.
The DMTT will apply to multinational enterprises operating in the UAE with consolidated global revenues of 750 million euros or more in at least two out of the four financial years immediately preceding the financial year in which the DMTT applies. The UAE’s implementation of the DMTT will closely align with the OECD’s GloBE Model Rules.
New incentives
To promote sustainable growth, innovation, and investment, the Ministry of Finance also is considering the introduction of corporate tax incentives under Federal Decree-Law No. 47 of 2022.
To encourage R&D activities, foster innovation and economic growth within the UAE, a research and development (R&D) tax incentive is being considered. Based on feedback received during public consultations conducted in April 2024, the proposed incentive is expected to take effect for tax periods starting on or after January 1, 2026.
The R&D tax incentive will be expenditure-based, offering a potential 30-50 percent tax credit and will be refundable depending on the revenue and number of employees of the business in the UAE.
The scope of qualifying R&D activities will be aligned to the OECD’s Frascati Manual guidelines and will be required to be conducted within the UAE.
Another incentive being considered is a refundable tax credit for high-value employment activities. This aims to encourage businesses to engage in activities that deliver significant economic benefits, stimulate innovation, and enhance the UAE’s global competitiveness.
This incentive is proposed to take effect on January 1, 2025 and will be granted as a percentage of eligible salary costs for employees engaged in high-value employment activities. This includes C-suite executives and other senior personnel performing core business functions that add substantial value to the UAE economy.
Read | UAE corporate tax amendments: 9 things to know
Impact on profitability?
Century Group’s Krishen cautioned that, in the short term, a higher tax regime will inevitably impact profitability for businesses that were used to enjoying relatively lower taxes.
“Initially, after the 9 percent corporate tax was introduced, it was a major deal as the country saw a rate increase from a tax-free status. Nonetheless, corporations abided and revised their financial strategies in order to comply with the new regulations. This time, an increase in the tax rate is witnessed at a time when the UAE is actively trying to grow its major non-oil economy,” he said.
Ellucian Middle East’s Fahmy added that the UAE’s allure for skilled migrants and direct investment opportunities continues to remain strong.
“These factors are likely more important to large businesses than an increase in the tax rate. I strongly feel this is a logical evolution to the UAE’s broader economic and strategic advantages and its uniquely resilient economy,” he said.
