Moody’s Says New UAE Tax is Credit Negative for Companies

(Bloomberg) -- The UAE's plan to introduce a corporate tax will broaden the government's income base but negatively affect the credit profiles of companies operating in the Middle East business hub, Moody's Investors Service said. 

The Gulf oil exporter announced Monday it would impose a 9% federal tax on corporate earnings from June 2023 as it seeks to shed its reputation as a tax haven and bring itself in line with changing global standards. The step is the most significant since 2018, when the country introduced value-added tax, the credit rating company said in a statement. 

“The introduction of the 9% federal corporate tax is broadly credit negative for domestic UAE corporates because it will reduce their operating cash flows,” according to Moody's. “However, the overall impact on the credit profile of large corporates will be muted because they have several offsetting levers, such as increasing product or service prices, optimizing their cost structure and reducing shareholder dividends.”

Stocks traded in Dubai and Abu Dhabi dropped after the announcement as investors said the move would hit net earnings. 

Among companies under Citi's coverage, Dubai Islamic Bank, Abu Dhabi Commercial Bank and Adnoc Distribution are the most likely to be affected by the new federal levy, the bank said.

Many international firms are based in the UAE's free zones, where they operate under special rules and will remain exempt from the new tax. Dubai, the UAE's business capital and one of its seven sheikhdoms, is home to the country's largest number of free zones, which include the airport and an international financial center. 

The UAE Is Set to Levy Corporate Tax: Here's What Analysts Say

“The new tax will broaden the revenue base for the federal government and, most likely, also for the individual emirates,” according to Moody's analysts, “nevertheless, the fiscal benefit will be constrained by the large role of free zones in the UAE's non-oil economy, where the new tax will not apply.”

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