The UAE has long been known for being an economic haven free from income and corporate taxes — a unique selling point that has allowed for economic diversification beyond the oil and gas industry. However, the recent announcement for a new corporate tax to be enacted by June 2023 shows that the UAE is aligning with the global push towards taxing big companies. The tax rate will be nine percent for corporate income that exceeds 375,000 AED and zero percent for income smaller than the aforementioned amount.

The reason for the cutoff at 375,000 AED is to support small businesses and startups, according to the Ministry of Finance. The tax will allow the UAE to rely on sources of revenue apart from hydrocarbons, where profits are a relatively more volatile source of income as they are dependent on corporate dividends.

Corporate taxes are a form of direct tax levied on the companies; while companies can recover the amount lost through indirect taxes like VAT by transferring the burden onto the consumer, the same cannot be said for corporate taxes.

The corporate tax does not apply to an individual’s salary, but may be applied if the income is earned through business activity conducted under a freelance license or permit. Under the new policy, you are not liable to taxation on income earned through personal real estate, equity investment, or personal income.

The tax will not be applied to firms based in areas known as “free zones” in the UAE, as these areas have their own tax incentives and regulations. Around 8 percent of all UAE-registered companies are based in these free zones, so many existing companies will not be impacted by the new tax. The tax will also not hinder the country’s ability to attract new investments in the region, as many other Gulf countries already levy a corporate tax that is higher than the one being levied in the UAE, including a 20 percent tax in Saudi and 15 percent in Oman.

The move to enact this tax is widely seen as keeping in line with a global deal for charging big companies a minimum tax rate of 15 percent, signed by a total of 136 countries. This global pact allows countries to tax the world’s 100 biggest companies on the basis of where their sales are located. It also encourages multinational companies to repatriate capital to their country of headquarters to prevent exploitation of low tax localities. The proposed tax is low compared to other low tax hubs across the world; Hong Kong’s taxes range from 8.5 percent to 16.5 percent, while Singapore has a tax rate of 17 percent.

According to Alexandra Aikman, corporate law expert at Pinsent Masons, the tax is a [historic step](https://www.pinsentmasons.com/out-law/news/uae-set-to-impose-corporation-tax-in-2023#:~:text=The%20United%20Arab%20Emirates%20(UAE,tax%20from%201%20June%202023.) that will allow the UAE to be in line with “international standards and expectations for tax transparency.” The tax could add up to $13 billion to the government’s income.