In December 2024, the United Arab Emirates (UAE) announced a major new tax measure: the introduction of a
15% tax on large multinational companies operating in their territory. This change, which had been expected for some time, marks a turning point in the country's tax policy, traditionally known for its low-tax approach, particularly the absence of personal income tax. This reform could have significant repercussions not only for large multinationals but also for the local and international economies, changing the perception of the UAE as a tax haven.
A tax reform in response to international standards
Starting January 1, 2025, the United Arab Emirates will introduce a new tax as part of revisions to Federal Decree-Law No. 47 of 2022 on corporate taxation, including the introduction of a Domestic Minimum Top-up Tax (DMTT), which will apply to fiscal years beginning on that date.
The UAE made this decision to comply with new global tax standards, particularly those established by the Organisation for Economic Co-operation and Development (OECD), so that it would no longer be considered a tax haven. Indeed, under the influence of the international tax system, the OECD recommended a global minimum tax of 15% for multinational companies whose revenue exceeds a certain threshold. This reform aims to prevent tax avoidance practices, particularly in low-tax countries such as the UAE, which are often considered tax havens.
The UAE has always attracted international companies through its favorable tax policies, such as the absence of corporate tax for certain companies, but this could change with the new taxation. However, with growing pressure from international bodies, the country has chosen to align itself with these new standards while maintaining tax advantages in other areas to encourage foreign investment.
What types of companies are affected by this profit tax?
This new 15% tax will apply to multinationals generating profits exceeding AED 375 million (approximately $102 million) per year, starting in January 2025. It will mainly affect large companies operating in various sectors such as finance, technology, the oil and gas industry, as well as consumer companies that exceed this revenue threshold.
However, the UAE government has clarified that this tax will not apply to all companies, but only to those engaged in cross-border activities with substantial global revenues. Small and medium-sized enterprises (SMEs) that do not exceed this threshold will therefore be exempt from this new tax.
Impact on multinational companies and investors in Dubai
The introduction of this
tax in Dubai could lead to several adjustments for large companies operating in the UAE, particularly those whose profits exceed AED 750 million. On the one hand, this could reduce the UAE's appeal as a tax destination for certain companies, especially those seeking to maximize their profits by taking advantage of a low tax rate. On the other hand, it could also lead many companies to reconsider their location strategy to adapt to new global tax rules, taking both pillars of taxation into account.
However, the UAE continues to offer significant tax advantages to certain companies, such as businesses established in free zones, which may benefit from tax exemptions for several years. Multinationals will also need to consider new tax optimization opportunities that local authorities could offer through specific regimes for long-term investments.
For foreign investors, this reform could make the business environment less attractive, although greater transparency and compliance with OECD international standards could also strengthen the UAE's credibility as a regional and global financial center.
Why did the UAE decide to introduce this tax?
The introduction of the 15% tax is part of a broader strategy by the UAE Ministry of Finance, which is seeking to diversify its sources of revenue. Traditionally, the UAE economy has relied on oil and gas, but with falling oil prices and the need for a more sustainable economy, the UAE authorities have undertaken to diversify their revenues. This tax measure also enables the country to comply with international rules, thereby strengthening its position on the global stage and reducing its image as a tax haven.
The government also hopes that this reform will encourage more foreign investment by offering greater tax transparency. It could therefore attract companies concerned with complying with global tax standards while maintaining a business-friendly environment.
A tax turning point for the United Arab Emirates
The introduction of this 15% tax on large multinationals starting in January marks a turning point in the tax history of the United Arab Emirates. Although this reform may reshape the country's economic and tax landscape, it also offers new opportunities for companies seeking to comply with global tax standards. The UAE, which has always been a tax haven for companies, will continue to attract investors through its dynamic economic framework and numerous free zones, despite the new taxation.
However, large companies will now have to adjust their strategies to adapt to this change. Overall, this reform could strengthen the position of the United Arab Emirates as a major player in the global economy while addressing international tax challenges, particularly those related to the two pillars of taxation.
This change is an important step in the tax evolution of the United Arab Emirates and could serve as a model for other nations seeking to establish more transparent tax regimes that comply with international standards. If you would like to know whether this new tax applies to you, please do not hesitate to contact us at:
support@merritt.group.
