How Corporate Tax Works in the Gulf: A Practical Guide for Businesses

Introduction

For many years, the Gulf was known for its tax-friendly environment, with most countries imposing little or no corporate income tax. That picture is changing as governments diversify their economies and seek new revenue streams. Today, businesses operating in the region must navigate a patchwork of corporate tax rules that vary significantly from country to country.

Which Gulf countries have corporate tax?

The six members of the Gulf Cooperation Council (GCC) approach corporate taxation differently. Bahrain has no general corporate income tax, except for companies engaged in oil and gas extraction. Kuwait imposes a 15% tax on the profits of foreign companies, while GCC-owned businesses are exempt. Oman applies a 15% corporate income tax to most companies, with certain exemptions for small businesses. Qatar levies a 10% tax on the profits of foreign-owned entities, leaving locally-owned companies untaxed. Saudi Arabia taxes foreign-owned businesses at 20% and applies a zakat levy of 2.5% on the net worth of Saudi and GCC nationals' businesses. The United Arab Emirates introduced a federal corporate tax of 9% for financial years starting on or after 1 June 2023, with a 0% rate for taxable profits up to AED 375,000 to support small and medium enterprises.

Understanding the tax base

Corporate tax is generally levied on a company's net profit, but the definition of taxable income can vary. Some countries adopt a territorial system, taxing only income generated within their borders, while others tax worldwide income for resident companies. For example, the UAE taxes the worldwide income of resident entities, but provides exemptions for dividends and capital gains from qualifying shareholdings. Free zones in the UAE and other GCC countries often offer tax holidays or reduced rates for businesses that meet certain criteria, such as operating within the zone and not doing business with the mainland.

Key exemptions and reliefs

Most GCC tax regimes include exemptions for specific sectors or activities. For instance, income from qualifying investments, such as dividends and capital gains from shareholdings of 5% or more, may be exempt from corporate tax in the UAE. Small business relief is also common: the UAE's 0% rate for profits up to AED 375,000, Oman's exemption for businesses with annual revenue below OMR 100,000, and Saudi Arabia's reduced 4% rate for small enterprises are examples. In addition, many countries allow deductions for legitimate business expenses, depreciation, and charitable contributions, subject to conditions.

Compliance and filing

Businesses must register for corporate tax where applicable and file annual returns. Deadlines and administrative requirements differ by country. In the UAE, companies file a single corporate tax return with the Federal Tax Authority within nine months of the end of their financial year. Saudi Arabia requires foreign-owned entities to file income tax returns and zakat declarations with the Zakat, Tax and Customs Authority. Qatar, Kuwait, and Oman have similar filing obligations, often requiring audited financial statements for larger companies. Penalties for non-compliance can include fines and interest on unpaid tax, so it is essential to maintain accurate records and meet deadlines.

Key takeaways for businesses

• Corporate tax regimes in the Gulf are evolving; stay informed about changes in each country where you operate.
• Consider the tax implications when choosing a business location, especially between mainland and free zone entities.
• Seek professional advice to ensure compliance and optimise your tax position within the law.
• Plan for tax costs in your pricing and financial projections, especially in countries like the UAE where corporate tax is new.