UAE Corporate Tax Hike To Fuel Influx Of Multinational Companies Flocking To Freezones

The country, however, could expect to emerge as a research and development hub, besides witnessing a fresh round of top talent influx, as companies are expected to tap tax refund provisions in the new corporate tax proposal to the optimum potential.

The UAE announced hiking of corporate tax – Domestic Minimum Top-up Tax (DMTT) – to 15 per cent from the existing 9 per cent for multinational companies earning EUR 750 million or AED 3 billion and above in global revenues from January 1, 2025.

There are, however, provisions for refundable tax credits for R&D activities (30-50 per cent) and high-value employment roles such as C-suite executives and senior business leaders in the proposal to provide opportunities to offset tax burdens.

Besides, companies operating in the country’s free zones will continue to enjoy their tax-exempt status.

The corporate tax hike move is part of UAE’s effort to align with the OECD’s ‘Two Pillar’ system for a fair and transparent tax system.

“Initially, it [the 15 per cent tax] will inevitably impact profitability for businesses that were used to enjoying relatively lower taxes, making a teething period for many companies.

“Companies are more likely to shift their operations to free zones to minimise tax exposure, while continuing to benefit from the UAE’s strategic location, strong infrastructure, pro-business policies and favourable regulations,” Bal Krishen, Chairman of Century Group, a Dubai-based leading financial services firm, told Arabian Business.

Krishen said additionally, revenue tapering measures will enable entities operating near the entry-level revenue threshold to remain exempt from the DMTT.

UAE businesses to prioritise R&D and efficiency

Management and policy experts said businesses operating in the UAE may increasingly allocate more capital to research and development in order to benefit from tax refunds.

Besides, they will also initiate several measures to enhance competitiveness and profitability to offset the additional tax burden.

Despite a 15 per cent tax rate, the UAE would still be an attractive business destination, relative to countries like the UK and Saudi Arabia, which have a 25 per cent and 20 per cent corporate tax rate, respectively, experts pointed out.

Krishen said the higher tax regime also creates an opportunity for businesses to enhance their structures by improving cost efficiencies, diversifying operations, and focusing on non-core revenue streams.

“Over time, businesses are expected to strike a balance between maintaining margins and complying with the new tax framework,” he said.

The Century Group chairman said firms would also prioritise adding skilled talent to value-adding business functions to reap the benefits of refundable tax credit for C-suite executives and senior roles.

Industry analysts said 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 per cent refundable tax credit – along with tax credits for high-value employment activities.

They also said corporations will likely focus on enhancing operational efficiencies and leveraging government incentives to mitigate the impact of higher taxes without hurting profitability.

UAE tax hike won’t cripple growth

Senior company executives privately admitted that though a higher tax regime may create short-term challenges for businesses in the UAE’s non-oil sector, it is unlikely to hamper growth in the long run.

Businesses are expected to revise their financial strategies and adapt effectively over time, as they did in the aftermath of the introduction of a 9 per cent corporate tax earlier, they said, while seeking anonymity as their company policies restrict them from commenting on public policy issues.

The fact that companies operating in the UAE’s free zones will maintain their tax-exempt status is likely to further bolster the UAE’s appeal, they said.

Krishen said as the UAE has transitioned from a tax haven to a low-tax jurisdiction since the introduction of a 9 per cent corporate tax rate in 2023, businesses are expected to get adjusted to the new rate over a period.

“Ultimately, the 15 per cent tax hike is unlikely to impede the UAE’s non-oil sector growth significantly in the long run. Instead, it would encourage businesses to adapt strategically by leveraging free zones, government incentives, and R&D investments,” he said.

The Century Group chairman said while profitability for some multinationals may face pressure in the short term, the UAE’s relative tax competitiveness and strategic advantages will ensure it remains one of the leading destinations for global and regional businesses.