For decades, the Middle East, particularly the oil-rich Gulf states, held a mythical allure as a tax-free paradise. Corporations and wealthy individuals alike flocked to the region, drawn by the prospect of zero income and corporate taxes.

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This tax-free income has aso been very important to the scores of blue-collar workers, who make up a large proportion of expats, as their salaries support their families back home.

However, the once-untouched haven is now gradually embracing taxation, leaving many to ask: what happened? Well, the world's been pushing for fairer taxes, and even desert giants like the UAE, Bahrain, and Saudi Arabia are listening. Over the last few years, many of the Gulf Cooperation Council (GCC) member states have implemented various taxes, such as corporate and Value Added Tax (VAT) to diversify their revenues. The GCC member states include the UAE, Qatar, Saudi Arabia, Kuwait, Bahrain, and Oman. In January 2018, the GCC member states introduced a 5% Value Added Tax (VAT). These countries see tax as an additional source of income as their dependence on oil and associated byproducts dwindles.

Tax reforms in Saudi Arabia for economic diversification

Saudi Arabia has shifted its focus from depending solely on their oil-producing revenue to attracting foreign investment and encouraging domestic economic growth. The country is introducing these new fiscal tariffs to align the country with international best practices. The new tax regulations will facilitate tax compliance and transparency and be compatible with global tax organizations, ensuring smooth collaboration among them.  

The Kingdom of Saudi Arabia has recently introduced amendments, including a new Income Tax Law, to its rapidly growing number of tax regulations. The Zakat, Tax and Customs Authority (ZATCA) is the authority implementing the new tax system, which launched on the 25th of October last year. ZATCA’s aim is to modernize the country’s current tax laws to adjust to the global best practices of the G20 countries, amongst others.

Corporate tax, VAT, and free zones in the United Arab Emirates

As of June last year, the United Arab Emirates introduced a 9% business tax, for companies with financial years starting on or after that date and on profits exceeding AED 375,000. Smaller businesses whose total revenues (not just profits) do not exceed AED 3 million in a tax period can opt for Small Business Relief. This scheme allows them to be treated as having no taxable income for that period, effectively exempting them from corporate tax calculations and filing complexities. This simplified approach reduces administrative costs and compliance burdens for eligible small businesses while helping to keep existing and attract new investors to grow the economy.

The new corporate law is projected to increase the country’s GDP by about 1.5%-1.8% of the gross domestic product (GDP) by 2025.
30% of the funds generated will go to the federal government while the majority will go to the specific emirate.

The Free Zones

They made certain some exemptions in the free zones. Guidelines for qualifying as a Qualifying Free Zone Person (QFZP) to benefit from the 0% corporate tax rate in free zones were clarified in late 2023. In a nutshell, being a QFZP means running a real business within the free zone, focusing on approved activities, playing fair with taxes, and keeping things transparent.

Businesses that qualify for tax exemptions in the free zones are primarily export entities that deal with activities like manufacturing, goods processing and logistics services, whether within the UAE or with neighbouring countries. The aim is to ensure the UAE continues to be seen as an attractive destination for investors.

The zones form a robust economic hub that fuels the UAE economy which has become increasingly dependent on non-oil income. They are specially demarcated areas that provide customs duty benefits and certain tax privileges for investors. Specific rules and regulations control each of these zones.

The OECD Tax Agreement

The UAE is one of the 136 signatories of the new global minimum corporate tax agreement from the Organisation for Economic Cooperation and Development (OECD). This agreement guarantees large companies will pay a minimum tax of 15%, making tax avoidance more difficult.

A new VAT but still no personal income tax

The newly introduced business tax comes close on the heels of the 5% VAT, which was introduced in 2018, leading many to wonder at the UAE’s previous popularity as a tax-free destination, which catapulted it as a centre of international trade and tourism. The new charge was imposed to adjust to international standards to avoid tax evasion and meet the demands of the digitalisation of the global economy.

There is no personal income tax in the UAE as yet.

Experts believe a balance needs to be struck that ensures the economy is still competitive enough to keep attracting global investors.

Tax and Economic Evolution in Bahrain

Bahrain has been popular with expatriates for many years due to its easy-going lifestyle and tax-free environment. Expats have consistently ranked it as one of the best places in the GCC to live and work. It is also one of the region’s leaders in the financial sector.

However, since 2017, a growing number of new tax regulations have been introduced and enforced. As in other GCC countries, Bahrain is diversifying its income sources away from the oil and gas industry. The country actively encourages foreign investment by promoting technology, manufacturing and logistics. Another attractive prospect is that foreign companies may have 100% ownership in some limited sectors.

VAT since 2019

Value-added tax was introduced in 2019 and increased from 5% to 10% in 2022.

The government agency that manages VAT in the country is known as the National Bureau for Revenue (NBR). Certain goods and services are exempt such as some staple food products, a few medical services and international air tickets. The latter is very welcomed by the very large numbers of expatriates who live and work in Bahrain. 

Excise Tax System

Bahrain’s introduction to taxes began in 2017 with the Excise Tax System. This tax is imposed on those items that are harmful to health and the environment. Specifically, they are imposed on tobacco products, soft drinks and energy drinks. The goal of this tax is to discourage people from consuming these harmful products. 

There is currently no personal income tax in Bahrain.

Other types of taxes imposed are municipal tax that expats are required to pay. This is equal to 10% of their monthly rent.  A tourism tax is imposed on the hospitality sector where owners of hotels and restaurants pay a 5% levy charge on the business’s income every quarter. Social Insurance Organization (SIO) contributions are payable by employees in Bahrain if they are employed by a natural person, legal entity or company. Citizens pay 7% of their income and expats pay 1%. 

Corporate Tax

There is currently no corporate tax at the moment except the 46% tax which is payable by the oil and gas industry only.

Discussions are currently underway between the Bahraini government and the Financial and Economic Affairs Committee of the Council of Representatives of the Bahraini parliament to introduce a corporate tax system. The draft proposal discusses a 5% rate on medium to large companies while foreign companies are looking at a possible 30% corporate tax rate.

However, critics are wary of damaging Bahrain’s reputation as a competitive market in the GCC. The new proposed corporate tax rates may discourage investors and expats leading to an unstable economy; the government is examining new options that would be more balanced and mitigate any negative effects on the country’s economy. The draft proposal is expected to be finalised by March 2024.

So, is the Middle East still an economic oasis? Maybe not the tax-free mirage it once was, but not a complete transformation. Instead, the region is undergoing a strategic evolution, one that balances the need for revenue generation with maintaining its competitive edge. While corporations and individuals may need to adjust their financial strategies, the Middle East, with its lower overall tax burden and unique advantages, is likely to remain a significant player in the global economic landscape.

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