Gulf countries have long been attractive to expats for levying zero taxes. But they are now trying to diversify their economy from the oil sector, and that requires getting revenues from taxes. All six GCC countries have slowly been implementing low taxes, starting with VAT, excise tax, real estate tax and corporate tax. They haven't introduced personal income tax, at least not yet.
Some taxes look necessary for the economic stability of Gulf countries
Since the 1970s, the six countries of the Gulf Cooperation Council (GCC) – Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Bahrain and Oman – have relied on their oil sector to drive their prosperity. The oil-driven prosperity has attracted numerous expats to their private sector, to the point that they rely 70-90% on an expat workforce even as they're trying to nationalize their workforce.
Gulf countries partly attracted that strong expat workforce by having an attractive tax regime. They still have no personal income tax, and they also used to have zero corporate, excise and value-added taxes. Blue-collar and white-collar expats found that the lack of personal income tax helps them save money to send back home to their families. Wealthier expats found a safe haven to protect their wealth from the heavy tax rates back in their home countries.
However, since 2017, some types of tax have slowly started being introduced. Why is it so? The American management consultancy firm Oliver Wyman analyzes that some taxation is now necessary to maintain the “fiscal stability” of Gulf countries. Global oil prices have been falling since 2015, and Gulf countries are experiencing rising government debt and high budget deficits. On top of that, they have started paying attention to the importance of an ecological energy transition. The economic blow of the Covid-19 pandemic also raised the alarm bell that it's unwise to rely exclusively on oil.
What types of taxes have Gulf countries been introducing?
Working expats can breathe freely: Gulf countries aren't focusing on personal income tax. Saudi Arabia does charge a flat 20% tax on the tax-adjusted profit made by individual expats, but that doesn't really apply to salaried workers. They've been focusing on taxing businesses owned by expats (i.e., corporate tax) as well as other forms of tax like VAT, excise tax and real estate transaction tax.
Excise tax
In 2017, Bahrain introduced excise tax ranging from 50% to 100% of some products' prices. Tobacco and energy drinks are taxed 100% upon purchase, which doubles their price, while soft drinks are taxed 50%. The UAE and Saudi Arabia implemented the same measure the same year at a similar 50-100% rate. The UAE's tax authorities expanded the list of products subject to excise tax in 2019. The tax is now levied on the sale of soft drinks, energy drinks, non-carbonated sweetened drinks, tobacco and electronic smoking devices.
Oman and Qatar were the last to enforce such a tax – they did so in 2019. Kuwait is the only country in the GCC with no excise tax yet, but the government is considering legislating one in the near future that would apply not only to tobacco and drinks but also to luxury goods.
VAT
In 2018, the UAE started levying 5% of VAT on most goods and services. Saudi Arabia did the same in 2018, but it subsequently increased that VAT rate to 15% in 2020 to combat the impact of the pandemic. Bahrain implemented a 5% VAT rate in 2019, but the pandemic also forced it to increase that to 10% in 2022. Oman was the last GCC country to implement VAT. It's only in 2021 that it legislated a 5% VAT rate. Kuwait and Qatar are still free of VAT right now, but that might change in the future.
Corporate tax
As of June 2023, businesses in the UAE are subject to a 9% corporate tax on their net profit. Four out of the five other GCC already have higher corporate tax rates. Saudi Arabia levies 20%, Kuwait 15%, Oman 15% and Qatar 10% on the profits of foreign-owned businesses.
Bahrain doesn't have corporate tax yet, but its Finance and National Economy Minister has indicated that it will adopt the global minimum effective corporate tax that the OECD is currently discussing. GCC countries have sometimes entered lists of non-cooperative tax jurisdictions because of their inexistent or low corporate taxes. They have been trying to improve their reputation for compliance with global tax standards.
Real estate transaction tax
In 2020, Saudi Arabia created the Real Estate Transaction Tax (RETT) for real estate transactions. This has a special rate of 5% instead of the usual 15% VAT rate. The other GCC countries don't have a special real estate tax (yet!).
Even if Gulf countries are no longer fully tax-free jurisdictions, taxes in the region remain lower than in other parts of the world. The states have been implementing these taxes gradually and cautiously to avoid scaring away expats and foreign investors. They have kept free economic zones where some foreign-owned businesses in key sectors still pay lower corporate taxes. Saudi Arabia, for instance, has just launched four new Special Economic Zones (SEZ) in 2023, where businesses only pay a 5% tax rate for their first 20 years.
