Is Corporate Tax in the UAE Progressive?

The UAE has long been known as a tax haven, particularly appealing to businesses with its absence of personal income tax and corporate tax for decades. However, in 2023, the UAE introduced corporate tax, reflecting the country's intent to diversify its economy away from oil dependency and align itself with global tax standards. But does this corporate tax operate as a progressive system? In this blog, we will delve into the structure of corporate tax in the UAE and explore whether it can be considered progressive, and what that means for businesses of all sizes.

Corporate Tax Structure in the UAE

On June 1, 2023, the UAE implemented a new corporate tax regime, marking a significant shift in its fiscal policies. The corporate tax rate is set at 9%, but only on profits exceeding AED 375,000 (approximately USD 102,000). Businesses earning below this threshold continue to enjoy a 0% tax rate.

This means that small and medium-sized enterprises (SMEs) or startups earning less than AED 375,000 annually are effectively exempt from corporate tax. On the other hand, companies with larger revenues exceeding this threshold must pay a flat 9% on their profits above the specified amount​.

Free Zones and Special Provisions

Companies operating within designated free zones in the UAE benefit from a 0% tax on qualifying income. Free zones like the Dubai International Financial Centre (DIFC) and Jebel Ali Free Zone (JAFZA) are established to encourage business development and foreign investment by providing tax holidays. This benefit is available as long as these companies meet specific criteria, including earning income primarily from qualifying activities.

Is the UAE Corporate Tax Progressive?

A progressive tax system typically levies higher tax rates on individuals or entities with higher incomes. In countries like the US or UK, for instance, individuals with larger incomes are taxed at higher percentages in incremental brackets. Does the UAE corporate tax follow this structure?

UAE's Flat Rate Structure

While the UAE’s tax system has different rates—0% for those earning less than AED 375,000 and 9% for those earning above—the tax is not progressive in the traditional sense. It operates more as a flat tax rate for businesses with revenues exceeding the threshold​.

Comparison with Global Standards

Many countries operate with more nuanced tax brackets. For example, in the United States, corporate tax rates escalate with the level of profit, offering a true progressive system where higher profits result in proportionally higher taxes. In contrast, the UAE applies a single 9% rate once the threshold is crossed, which may be considered regressive to some extent compared to global corporate tax norms, which often impose higher taxes on more significant profits.

However, in certain contexts—such as for large multinational corporations subject to international tax compliance regulations—additional tax obligations, including global minimum tax rates, might apply. For these companies, the tax system does begin to resemble a progressive structure when viewed in conjunction with other jurisdictions.

Economic and Social Implications

Impact on Small and Medium Enterprises (SMEs)

The UAE’s corporate tax system appears designed to nurture SMEs, an essential component of the country’s diversification plan. By setting a 0% tax rate on profits up to AED 375,000, the government ensures that most small businesses can continue to grow without the burden of immediate taxation. This is especially crucial as SMEs make up more than 90% of businesses in the UAE, contributing significantly to employment and GDP.

This structure promotes entrepreneurship by allowing small businesses to thrive in their early stages. As a result, it has the progressive effect of alleviating the tax burden on businesses struggling to establish themselves.

Impact on Larger Corporations

Larger corporations, particularly those earning well over the AED 375,000 threshold, are taxed at a flat rate of 9%. For them, the corporate tax regime might feel less progressive since the rate does not increase with higher profits. For such entities, tax liabilities can be minimized through corporate strategies like deductions, capital investments, and tax exemptions.

Government Revenue and Economic Goals

Diversifying Government Revenue

The introduction of corporate tax in the UAE is part of the country’s broader strategy to diversify revenue sources. Historically, the UAE has relied heavily on oil revenues, but as global markets shift, the government has recognized the need to build a more sustainable financial framework. Corporate tax revenue is expected to support infrastructure, healthcare, and education, helping the country maintain its global competitiveness.

Attracting Foreign Direct Investment (FDI)

Despite the introduction of corporate tax, the UAE remains an attractive destination for foreign investors. The relatively low 9% rate—coupled with the continued availability of tax-free zones—ensures that businesses still find the UAE a favorable base for operations. Many investors are drawn to the UAE’s pro-business environment, which is bolstered by simplified tax procedures, transparent governance, and strategic location​.

Challenges and Criticisms

Compliance and Administrative Burden

The introduction of corporate tax comes with its fair share of challenges. One of the key criticisms is the additional compliance burden that businesses must now face. Companies are required to register with the Federal Tax Authority (FTA), maintain accurate financial records, and file annual tax returns. For businesses accustomed to a tax-free environment, this represents a significant administrative shift​.

Avoiding Tax Evasion

As with any tax system, the UAE must remain vigilant in ensuring compliance and avoiding tax evasion. The new tax laws align the UAE with international tax standards, including anti-tax evasion measures, ensuring that companies cannot exploit loopholes to avoid paying their fair share​.

Future Prospects

Potential Adjustments to Corporate Tax

As the UAE’s corporate tax system matures, there is speculation about potential changes to make the system more progressive. One possibility could involve introducing additional tax brackets for larger corporations, or expanding the scope of taxable activities in free zones. However, such changes will need to be carefully balanced against the need to maintain the UAE’s attractiveness to foreign investors​.

Competitive Business Environment

With the global trend toward tax transparency and alignment, the UAE's corporate tax regime is expected to evolve in the coming years. However, as long as free zones offer substantial tax benefits, the country is likely to remain competitive, particularly for multinational corporations seeking favorable tax conditions in the region​.

Conclusion

The UAE's corporate tax regime is a significant shift in the country's economic policy, aimed at diversifying revenue streams and aligning with international norms. While the system offers elements of progressivity with its 0% rate for smaller businesses and higher rate for larger ones, it stops short of being a fully progressive system in the traditional sense. Nevertheless, it provides enough flexibility and low rates to remain an attractive destination for global businesses, while contributing to the UAE’s broader economic goals.