By Hadeel Al Sayegh and Moataz Mohamed

DUBAI (Reuters) -The United Arab Emirates (UAE) on Monday said it would introduce a federal corporate tax on business profits for the first time starting from June 1, 2023, although it kept the rate low, at 9 percent, to maintain its attractiveness for businesses.

The Gulf Arab oil exporter, a magnet for the globe’s ultra-rich, has long benefited from its tax-free status to carve out a role as an international commercial, energy and tourism hub.

Much of this tax-free regime, including no personal income tax, remains. But the Finance Ministry said it was launching corporate tax to align with international efforts to combat tax avoidance, as well as to address challenges arising from the digitalisation of the global economy.

The new tax will be levied on all corporations and commercial activities in the country, except for the “extraction of natural resources” which will remain subject to taxation at the emirate level.

A ministry statement said the new regime implies a standard statutory tax rate of 9%, as well as a 0% rate for taxable profits up to 375,000 dirhams ($102,107.50) in order to support small businesses and startups.

The ministry added that the move would pave the way for the introduction of a global minimum tax rate that would apply a different corporate tax rate to large multinationals that meet specific criteria.

It did not elaborate, but this appeared to be a reference to new rules agreed by the Organisation for Economic Cooperation and Development in October and 136 countries including the UAE to ensure big companies pay a minimum tax rate of 15%.

The move to a tax of 9% chimes with the country’s efforts to diversify budget revenues to reduce reliance on petroleum, for decades the mainstay of the economy.

“The UAE continues to make progress in diversifying its budget revenue away from oil, and a corporate tax fits into this strategy. The tax rate remains low by global standards,” said Khatija Haque, chief economist at Emirates NBD.

“With the international tax treaty signed at the end of last year, many corporates may still have to pay a top-up tax in their country of residence. It is positive for the UAE to earn the tax on the business conducted and income sourced domestically,” said Monica Malik, Chief Economist at Aby Dhabi Commercial Bank.

In 2018, the UAE introduced value added tax on most goods and services at a standard rate of 5%. The UAE imposes a 20% tax on branches of foreign banks operating in the country, and on companies with concession agreements in the oil and gas sector of up to 55% at the emirate level.

Businesses in the UAE are exempted from paying taxes on capital gains and dividends received from shareholdings, the ministry said.

The new programme left intact the exemption for individuals from income tax, capital gains tax on real estate and other investments, and other earnings that do not come from a business.

The UAE corporate tax regime will continue to honour the corporate tax incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE, the ministry said.

($1 = 3.6726 UAE dirham)

(Additional reporting by Saeed Azhar; editing by Mark Heinrich, William Maclean)

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