• The news represents a significant shift for a country that's long attracted businesses from around the world thanks to its status as a tax-free commerce hub.
• The country's statutory tax rate will be 9% for taxable income exceeding 375,000 UAE dirhams ($102,000).
• And zero for taxable income up to that amount "to support small businesses and startups."

DUBAI, United Arab Emirates — The United Arab Emirates will be introducing a federal corporate tax on business profits for the first time, the Ministry of Finance announced Monday.

The news represents a significant shift for a country that's long attracted businesses from around the world thanks to its status as a tax-free commerce hub. Businesses will be subject to the tax from June 1, 2023.

The country's statutory tax rate will be 9% for taxable income exceeding 375,000 UAE dirhams ($102,000), and zero for taxable income up to that amount "to support small businesses and startups," the ministry said, adding that "the UAE corporate tax regime will be amongst the most competitive in the world."

Individuals will still not be subject to tax on their incomes from employment, real estate, equity investments or other personal income unrelated to a UAE trade or business, the ministry said. The tax also won't be applied to foreign investors who don't conduct business in the country.

As for what constitutes profit, corporate tax will apply on "the adjusted accounting net profit" of the business.

Free zone business, meanwhile — thousands of which exist in the country — can "continue to benefit from corporate tax incentives" as long as they "meet all necessary requirements," the ministry said, without elaborating. Companies within the UAE's many free zones have long enjoyed zero taxes and full foreign ownership, among other benefits.

"The UAE corporate tax regime has been designed to incorporate best practices globally and minimise the compliance burden on businesses," state news agency WAM wrote.

"Corporate tax will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with internationally acceptable accounting standards, with minimal exceptions and adjustments. The corporate tax will apply to all businesses and commercial activities alike, except for the extraction of natural resources which will remain subject to Emirate level corporate taxation."

'Practical and sensible'

While the news made waves after its announcement on Monday, many in the UAE's business scene say the development shouldn't come as a shock.

"I don't think this announcement should come as a surprise; corporation tax in the UAE has been in discussion for several years. And there is already corporation tax in the GCC, in Saudi and Qatar for instance," Chris Payne, chief economist at Dubai-based Peninsula Real Estate, told CNBC.

As the UAE, like many of its oil-rich regional counterparts, pushes to diversify its economy away from hydrocarbon revenue, "it's important that the Federal government establishes sources of income that are not reliant on corporate dividends and investment income, both of which can be volatile," Payne added.

The announcement gives companies in the UAE roughly a year-and-a-half to prepare for taxes, but reactions are mixed on whether the move will allow the Gulf sheikhdom to retain its attractiveness to businesses.

Mark Hemmings, vice president of tax and treasury at Dubai-based specialty services firm Kent, views the decision as "practical and sensible."

"It will be very interesting to see the detail, but at first glance this looks like a practical and sensible approach to ensure companies in the UAE can comply with the anticipated new international tax rules, whilst ensuring the UAE remains an attractive location for businesses to operate," Hemmings said.

Headwinds for start-ups?

Still, the threshold for being subject to taxation — just over $100,000 of profit a year — is fairly low and could adversely affect smaller enterprises with high set-up and business renewal costs. Rupert Tait, co-founder of UAE-based construction tech start-up Procurified, sees potential headwinds for small businesses like his.

"I think that as a start-up founder we want to base ourselves in the most affordable environment to grow," he told CNBC. "While I understand the need for taxation to start, I also know we are indirectly taxed in free zones," he said, explaining that his company based in the Dubai Multi Commodities Centre free zone already pays 20,000 UAE dirhams (roughly $5,450) per year, which is paid regardless of profit.

"So the corporate tax may cause SMEs to reconsider where they plan to remain (long-term) due to heavy upfront fees and then tax once the business is profitable," Tait said.

Nonetheless, the proposed tax remains low compared to other low-tax hubs around the world.

Montenegro and Gibraltar have tax rates of 9% and 10% respectively, while Ireland and Lichtenstein both offer a 12.5% corporate tax rate. Hong Kong's taxes range from 8.5% to 16.5%, and Singapore and San Marino both have tax rates of 17%. Still, it's yet to be seen what goods and services will be provided in exchange for the new taxes.

Ultimately, the move "brings the UAE in line with other competitive economies," said Taufiq Rahim, a non-resident a research fellow at the Mohammed bin Rashid School of Government in Dubai.

"And the rate — while new for the private sector here — remains lower than other jurisdictions like Singapore and Hong Kong."