UAE May Become More Attractive From a Tax Perspective

Against the current global geopolitical backdrop, multinational enterprises could well consider that it might be better to pay a reasonable share of taxes in the jurisdictions where they operate, rather than pay nothing at all.

Aside from fundamental considerations as to what constitutes a “fair share” of taxes or the right level of contribution and attention to the countries and communities where MNEs operate—most of which nowadays see taxes as a matter of corporate social responsibility and reputation management—paying taxes in each jurisdiction where an MNE operates can also be seen as a question of efficient tax planning. This is in the positive meaning of the term “tax planning"—paying taxes in the right places, and not overpaying due to misallocation of taxable income—rather than its past negative meaning of devising structures to reduce or avoid taxation.

In this sense, a jurisdiction with nil or very low taxation might not be very attractive at the end of the day—at least not for EU MNEs. In fact, it could create tax issues and administrative burdens, and even lead to taxation under the rules, and usually quite high tax rates, in the parent company’s jurisdiction—for example, when the profits of a subsidiary resident in a low-tax jurisdiction are subject to taxation in the parent company’s jurisdiction under controlled foreign company rules.

Federal Corporate Income Tax

Given the above, the announcement by the United Arab Emirates Ministry of Finance at the beginning of 2022 that a federal corporate income tax, CIT, at a general rate of 9% (0% for taxable income up to 375,000 UAE dirham ($102,000)), will apply as of June 2023, and the recent publication of the legislative basis for the introduction of such a federal CIT (Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses, on Dec. 9, 2022) came as little surprise.

Over the last decade or so, the UAE has laid out and followed a path towards alignment with the generally accepted international tax standards in terms of both transparency and taxation rules. In the same time span, it has also developed an extensive double tax agreement network; to date, the UAE has 137 DTAs.

As part of this path towards alignment, the UAE has had a strategic partnership with the Organization for Economic Cooperation and Development as a non-member, and has been part of the organization’s Global Forum on Transparency and Exchange of Information for Tax Purposes since 2010. In May 2018, the UAE signed the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS), which has recently been pushing for the introduction of the two-pillar solution to address the tax challenges arising from the digitalization of the economy, Pillar One—reallocation of taxing rights, and Pillar Two—global anti-base erosion, “GloBE.”

It is easy to see from Pillar Two’s proposed GloBE solution, published in December 2021, that it was only a matter of time before the UAE introduced a general CIT. Indeed, according to the GloBE model rules, a 15% global minimum tax will be levied (as of 2024, at least in the EU according to the latest announcement) on MNEs with consolidated revenues of 750 million euros ($797 million) or more.

In a nutshell, under the GloBE rules, MNEs will have to determine their jurisdictional effective tax rate, ETR, in each jurisdiction they operate in—ETR is covered taxes divided by the amount of income as determined under the GloBE rules on a jurisdictional basis. If their ETR is lower than the minimum rate, a top-up tax—at a rate corresponding to the difference between the minimum rate and the jurisdictional ETR—will be due by the ultimate parent company (or another holding company further down the corporate chain) and/or by the subsidiaries resident in the jurisdiction (in case the low-tax jurisdiction introduces a domestic top-up tax).

All jurisdictions that are members of the OECD’s Inclusive Framework on BEPS (almost 140 countries) are expected to implement the new rules, thereby sending low-tax jurisdictions a clear message: either collect your own taxes (i.e., taxes on income sourced and taxable in your jurisdiction) or someone else will. It follows that once the global minimum tax rate is introduced, it will make little sense for low-tax jurisdictions—with no minimum level of taxation—to see their taxes paid elsewhere.

Additionally, the choice to opt for a 9% CIT rate (rather than the 15% global minimum rate) has a clear rationale: it is the minimum tax rate that will not trigger the application of the subject to tax rule. This rule is intended to complement global minimum taxation by allowing source jurisdictions to impose source taxation on certain related-party payments taxed at a rate of less than 9%. This rule (to be included in all DTAs) will be applied mostly by developing countries with the aim of maintaining taxing rights at source as much as possible.

In other words, the 9% CIT rate will suffice to keep the vast network of DTAs signed by the UAE active and effective, while also ensuring it remains a fairly low (or minimum) tax jurisdiction. Only companies or branches of foreign MNEs in the UAE that are part of a group subject to the GloBE rules (i.e., they have revenues of 750 million euros or more) will in practice have their tax rate raised to the 15% minimum. This at least is what we can glean from the limited information available in this regard, as the UAE is set to opt to to introduce in its tax law the domestic top-up tax (i.e., the UAE will directly collect the top-up tax).

All the above will most likely be true also for UAE entities established in the free zones. Indeed, although free zones— subject to certain requirements—will continue to honor the current corporate tax incentives, and thus continue to apply 0% CIT, (in any case, free zone businesses will be subject to UAE CIT and thus required to register and file tax returns) it is unclear whether this will be true also for MNEs subject to the GloBE rules. As mentioned, in those cases, either the UAE will tax profits generated in the UAE through the domestic top-up tax or other entities of the MNE group in other jurisdictions will tax the profits under the GloBe rules. From this context we can probably understand the possibility granted to free zone businesses to elect (irrevocably) to be subject to the regular CIT rate.

The introduction of a CIT will render the UAE more appealing, as the CIT will be aligned with the most recent international tax standards and administered by the Federal Tax Authority. As to taxation rules, besides the tax rate discussed above, the UAE’s CIT scheme will be quite neutral in terms of economic double taxation (with no taxation of dividends or capital gains) and juridical double taxation (with 0% withholding taxes on cross-border outbound payments of dividends, interest or royalties). This will make it an attractive jurisdiction for holding and sub-holding companies, for which the concerns related to the introduction of the GloBe rules are less significant, because also those rules exclude qualifying dividends and capital gains from the calculation of the top-up tax/domestic top-up tax.

The extensive network of DTAs will also make the UAE an attractive destination as a hub/sub-hub for and gateway to Africa, thereby reducing or eliminating double taxation concerns. The introduction of a general CIT will thus in certain instances make the DTAs applicable (or useful), in contrast to their current limited application in some countries because of the absence of taxation in the UAE.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Marco De Leo is managing partner of the Dubai Office, and Francesco Parlatore is tax managing associate, with BonelliErede.

The authors may be contacted at: marco.deleo@belex.com; francesco.parlatore@belex.com.