John Belsey, head of international tax practice for the Middle East branch of professional services firm Deloitte, outlines the UAE tax regime and discusses its future development
The UAE, along with other GCC countries, has long been regarded by outsiders to the region as having a benign tax environment. This reputation is partly due to the fact that there is no personal income tax imposed on residents. This has made the UAE particularly attractive in terms of encouraging non-nationals to build careers in the country, and there are no signs that this will change in the short or medium term. The past 12 months have seen many commercial sectors grow, including real estate, despite the difficulties of the previous few years. Against the backdrop of the Arab spring, which has caused socio-economic uncertainty, the UAE has been regionally cast as a safe haven within a politically tumultuous region.
In terms of corporate tax, most of the emirates do have corporate tax frameworks in place. Legislations were implemented decades ago to facilitate the introduction of corporate tax, although in nearly every industry, it is not imposed.
Additionally, companies set up in free zones enjoy exemption, often with a tax holiday for a number of years being granted upon company or branch registration in the free zone. This tax holiday is particularly well received by firms that set up in free zones to take advantage of the ability to incorporate a company with 100 per cent foreign ownership. Under current rules, UAE nationals (or companies wholly owned by UAE nationals) have to own at least 51 per cent of any company located in the UAE outside free zones.
It is expected that any proposed VAT system would be broad-based with a low rate
Ali Kazimi, Deloitte
It would be a mistake to imagine that all business activity is tax-free. Customs duties are applicable on many goods brought into the UAE and the wider GCC countries. The standard rate is 5 per cent, but there is also a zero rate for some products and the rate can be significantly higher for certain products.
Corporate tax is payable by branches of foreign banks that undertake certain activities in the country, at a rate agreed with the emirate in which they operate. Currently, these banks are subject to a flat rate of 20 per cent. Companies engaged in oil- and gas-related activities, such as extraction and production, also pay corporate tax based on the existing tax decrees and the contracts they have signed with the emirate they are based in. These tax rates can be significantly higher than those paid by banks.
With regards to the introduction of new taxes, there have been continued reports that the UAE will introduce value-added tax (VAT) as part of a wider GCC implementation. It is expected that any proposed VAT system would be broad-based with a low rate and would seek to follow international best practice where appropriate.
In relation to other taxes, such as a broader income tax, given the continued fiscal pressures that many governments are experiencing in the region as well as the global financial crisis, it is possible that a UAE business tax could be economically viable and offer a new source of revenue. However, any introduction of a broader corporate tax would represent a fundamental change in positioning by the UAE and require a number of technical issues to be resolved, such as the interaction of federal taxation with specific emirate-based taxation and in relation to guarantees given by free zones and existing double-tax treaties.
Both the undersecretary and the minister of finance have made statements acknowledging that studies have taken place, but have stated that no new taxes are needed at this time, and have given assurances that none will be introduced any time before 2014.
Deloitte in the Middle East
Deloitte is part of Deloitte & Touche (ME), a member firm of Deloitte Touche Tohmatsu, which was the first Arab professional services firm to be established in the region, with an uninterrupted presence of more than 85 years.
Deloitte is among the region’s leading professional services firms, providing audit, tax, consulting, and financial advisory services.
Tel: (+971) 4 331 3211
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.