03/02/22

UNITED ARAB EMIRATES: Income Tax Could Affect Private Corporates and Some GREs, says Fitch Ratings.

As published on fitchratings.com, Thursday 3 February, 2022.

The UAE introduced a standard value-added tax of 5% in line with some GCC nations in 2018. Furthermore, the Emirates eased foreign ownership restrictions to 100% from 49% for certain sectors in the mainland, which continues to test the effectiveness of the free zone framework. We understand the new tax will not cover natural-resource companies.

The new regulation might impose an additional administrative burden on corporates due to the need to set up reporting processes, although we expect this to be largely one-off. New rules could also potentially reduce the competitiveness of the corporate tax environment in the country, as in other economies.

The recently announced mid-2023 introduction of the Federal Corporate Tax in the United Arab Emirates (UAE) could have uneven credit implications on rated corporates, with privately owned corporates and government-related entities (GREs) rated on a bottom-up basis most affected, Fitch Ratings says. Many details have not been made public yet and the potential impact on individual ratings will be assessed on a case-by-case basis and communicated to the market in due course.

Fitch differentiates the likely credit impact of the tax introduction depending on the type of corporate and splits Fitch-rated issuers into three broad groups: i) GREs rated on a top-down basis, ii) GREs rated on a bottom-up basis and onshore companies rated on a standalone basis, and iii) offshore entities in free zones.

For GREs rated on top-down basis, the corporate tax will not affect our expectations of state support and links with the government, and therefore we expect limited risk of pressure on those ratings.

UAE GREs rated on a bottom-up basis and onshore privately owned companies rated as standalone entities are likely to be most affected by the tax introduction. The impact on individual credit profiles will be determined by a number of factors, including issuers’ ability to pass on increased costs and to mitigate the impact of income tax on cash flows, an individual issuer’s rating headroom and their financial flexibility, as well as sector and business profile characteristics. Additionally, the proposed UEA tax rules do not differentiate tax rates for entities with local and foreign ownership, unlike rules in some other Gulf Cooperation Council (GCC) countries.

We expect offshore entities located in the UAE’s free zones to continue to benefit from tax incentives, potentially increasing the attraction and benefits of operating in such locations. However, further guidance for application of the new tax brackets for multinational corporations is yet to be announced in the UAE.

Nearly 85% of Fitch-rated UAE corporate issuers currently have Stable Outlooks. Many standalone rated issuers continue to recover from the volatile market conditions in 2021. We will assess any additional pressures from the corporate income tax introduction in conjunction with the impact of high input cost inflation and supply chain bottlenecks. Furthermore, UAE corporates continue to incur non-tax-related expenses, such as municipality and other government-related fees.

Most GCC countries have adopted income tax regimens for corporates. Saudi entities pay corporate tax rates ranging from 5% to 20% on net adjustable income, depending on the percentage of foreign ownership, in addition to a 2.5% zakat rate. Oman’s corporate tax rate is 15%, which does not differentiate between companies with local and foreign ownership.

The UAE introduced a standard value-added tax of 5% in line with some GCC nations in 2018. Furthermore, the Emirates eased foreign ownership restrictions to 100% from 49% for certain sectors in the mainland, which continues to test the effectiveness of the free zone framework. We understand the new tax will not cover natural-resource companies.

The new regulation might impose an additional administrative burden on corporates due to the need to set up reporting processes, although we expect this to be largely one-off. New rules could also potentially reduce the competitiveness of the corporate tax environment in the country, as in other economies.