Tax system in UAE

The UAE tax system is one of the most attractive in the world for investors, entrepreneurs and expatriates. This is why the country is known as one of the biggest financial and commercial centers, not only of the Middle East, but also the rest of the world. But is everything as it seems?

Many people mistakenly believe that the UAE has absolutely no taxes, although this is no longer true. There are no income taxes, no capital gains taxes, and many other common taxes are nowhere in sight, compared to other cities around the world. But there are still minimal indirect taxes or excise tax VAT (5%). In this article, we have put together a detailed guide on the current tax system of the UAE, where we have tried to answer, in detail, all the questions concerning taxes in the UAE and how an investor/entrepreneur or an individual can take advantage of the tax system in the Emirates.

Perhaps the most attractive factor in the Emirates' tax system is that the country does not levy an income tax (in the UK it is 45% over a certain threshold) on employees. Oil companies and foreign banks are the only industries subject to corporate tax. There is also no inheritance tax either. Excise tax is levied only on products that are harmful to the environment or human health, such as alcohol, tobacco or energy drinks. In 2016 the Federal Tax Authority (FTA) was created to maintain the tax system in UAE. In addition, there is no thin capitalization rule or general anti-avoidance rule in the UAE, which means UAE residents are not taxed on international pension plans.

Note: It is also worth noting that one of the last taxes adopted in the UAE was as early as 2018 and has since been applied at all stages of the supply chain.

Taxes levied at state level in the Emirates are at a very low rate of 5% or even 0%. Foreign nationals are exempt from paying personal taxes, capital gains tax. As mentioned earlier, the individual income tax in the UAE is 0%. Therefore, there is no tax registration and no various obligations. This also applies to freelancers and self-employed workers living in the UAE.

The UAE applies a social security regime for workers of UAE nationality and other GCC countries. Workers from other countries are not subject to social security in the UAE and any contributions that are made, are determined by the social security rules of their home country. In most emirate regions, the contribution is 17.5% of the employee's gross pay. Of this percentage, 5% is paid by the employee and the remaining 12.5% is paid by the employer. In Abu Dhabi, the rate is higher at 20%, and 15% is paid by the employer.

Under UAE labour law, non-Gulf foreign nationals are only entitled to an end of employment benefit (EOSB or EOS (End of Service)), but this is subject to a minimum of 1 year of employment with a company in the Emirates. This benefit is paid by the employer and is calculated as 21 days per year of basic pay for the first 5 years of employment. Then, for each year thereafter, the EOSB is increased to 30 days per year of the employee's basic salary and cannot exceed the amount of more than two years' remuneration.

In the UAE, only oil and gas companies are subject to a corporate tax of 55%. In this case the following scheme applies:

• 0% - on income less than AED 1M (USD 272K)
• 10% - up to AED 2M (USD 545K)
• 20% - up to AED 3M (USD 817K)
• 30% - up to AED 4M (USD 1.09M)
• 40% - up to AED 5M (USD 1.3M)
• 55% - if income is over AED 5M (USD 1.3M)

Non-resident investors who wish to establish a firm in the UAE must have a permanent establishment in the Emirates, such as an office branch. Such companies are formally subject to taxation and due to the fact that taxation in the United Arab Emirates is based on the concept of territoriality, the tax percentage will depend on the Emirate itself. Once a branch of a foreign bank is registered in the UAE, the company will normally be charged a 20% tax rate.

However, there are free trade zones in various Emirates. All of these zones have their own rules and regulations and sometimes they offer so-called tax exemptions for businesses located in those free trade zones for a period of 15 to 50 years. This type of tax alleviation can also be extended.

Double taxation is defined by imposing the same tax on the same taxpayer in two countries. Therefore, the UAE has so-called Double Taxation Agreements, which have been concluded with more than 130 countries including the United Kingdom. However, US citizens are subject to paying taxes to the US government, in which they must file a tax return every year. By 15 June all taxes must be paid, or by 15 October if you have received an extension. Additionally, if you have assets in a foreign bank you will have to complete a FinCEN Form 114 (FBAR) and file by 30 June.

In May 2021, the UAE signed a double taxation treaty (DTT) with Israel, which is the first treaty of its kind with a GCC country. Double Taxation aims at improving the exchange of goods, services and capital to remove obstacles within the free flow of trade and investment and to promote development objectives. The agreement will help in promoting the development goals of the UAE along with diversifying the country's sources of income.

In general, many investment/private/public companies, as well as air transport companies and others, are able to take advantage of double taxation avoidance agreements. The essence of this agreement is to facilitate the exchange of goods/services from other countries and eliminate additional taxes and promote the diversification of the national income of the UAE.

A foreign national may obtain a Tax Residency Certificate on behalf of a company from the Ministry of Finance, only if the company is registered in the UAE and is managed directly from there. In addition, the company must meet all the requirements of the UAE Ministry of Finance, as well as the relevant tax treaty (e.g. on avoidance of double taxation list).

You can apply for corporate tax residency online at tax.gov.ae. In order to obtain a UAE tax residency certificate, the following documents must be submitted and guidelines followed:

• The company must exist for more than 1 year.
• A valid commercial license.
• The constituent document is certified by the authorities (not for IE).
• Valid lease agreement.
• Copies of the passport of the Director of the company together with their residence visa in the UAE and Emirates ID.
• Letter of application from the company.
• Bank statements of the company's bank account from the last 6 months.
• Audited financial statements on the financial condition of the company (certified copy).
• The organizational structure of the company (not for sole proprietorships).
• Tax returns (if any) of the country where documents will be filed.
• The fee is AED 10K (USD 2,7K) and an additional AED 3K (USD 817) for the E-payment card (E-dirham).
• It takes 1-3 weeks to issue the certificate.

Important: Offshore companies are not eligible to apply for this certificate as they are not specified in the Double Tax Treaty.

For individuals wanting to obtain a certificate, you will need to provide the following documents:

• Copies of passports and pages of valid UAE residence visa and Emirates ID.
• Certified copy of a valid rental contract with the address of residence in the UAE or certificate of ownership, if you have your own property.
• Letter of application from the individual.
• Personal bank account statement for the last 6 months, as proof of income coming from the UAE.
• Certified certificate confirming the source of income.
• Certificate from the sponsor stating the individual’s details and the source of their income.
• A certificate from the Directorate General of Foreign Affairs and Residency stating the number of days the resident has spent in the UAE.
• If available, tax declarations of the country where the documents are to be filed.
• The state fee is AED 2K (USD 545) and the E-payment card fee (E-dirham) of AED 3K (USD 817).
• Processing time takes 1-3 weeks.

Note! To use the certificate outside the UAE, you will need to have it certified. For this you need to apply to the Ministry of Foreign Affairs (MFA) of the UAE, where the cost of the procedure is about USD 50. Then you will also need to go to the embassy of your own country. Here, the cost of the process may be strictly individual, depending on the country.

In addition, the expat is required to reside in the UAE for at least 180 days per year.

One of the advantages of the UAE's tax system is the so-called Free Trade Zones. The UAE has more than 40 zones located in each of the 7 Emirates. These zones have special tax, customs and import regimes whereby companies have a 100% exemption on import and export taxes.

It is worth noting that the transfer of shares of a company located in the Jebel Ali Free Zone and owning real estate in Dubai, will be removed from the property transfer tax, even though Jebel Ali Free Zone enjoys all the previously listed benefits.

In the UAE, various tourist facilities may charge the following taxes:

• 10% tax on the room rate
• 10% service charge
• 10% municipality fees
• City tax - from 6 to 10%
• 6% tourism fee

The Tourism Dirham Fee was introduced in 2014 in Dubai. Hotels, hotel apartments, guest houses and holiday homes will charge from AED 7 to AED 20 per room per night depending on the type of accomodation. One-star hotels charge AED 7 (USD 1.91), two and three-star hotels - AED 10 (USD 2.72), four-star hotels - AED 15 (USD 4.10) and AED 20 (USD 5.45) for five-star hotels. Since 2016, Abu Dhabi hotels have started to charge 4% of hotel stay bills and AED 15 per night per room.

From November 2018, tourists and visitors to the UAE can benefit from a VAT refund on purchases they have made in the country. This can be done through the FTA's electronic system, but there are certain conditions for carrying out this activity:

• Goods must be purchased from a retailer who participates in the 'Tax Refund for Tourists Scheme'.
• Goods must be part of the Refund Scheme of the Federal Tax Authority.
• The buyer must have the express intention of leaving the UAE with the goods purchased within 90 days from the date of supply.

In the UAE, there are two types of goods and services tax - VAT and Excise Duty. While one tax is at a relatively low rate of 5%, the other levies between 50% and 100% of the value of the product or service. However, you need to understand whether your company is suitable for either type of tax.

Value Added Tax or VAT is a tax that is levied on the consumption of goods and services and exists in over 180 countries worldwide. In the UAE this type of tax was introduced only on 1 January 2018. The registration of a company in the UAE obliges companies to pay VAT at the rate of 5%. To register your company for VAT, you need to go to the FTA website. However, in order to receive e-services, you must first create an account or log in to an existing one. And then you will be able to complete the VAT application form and fill in your personal information.

Companies whose supplies and imports for taxes of goods exceed AED 375K (USD 102K) a year are required to register for VAT in the UAE. However, if the figure only reaches the value of AED 188K (USD 51.1K) a year - then registration for VAT is optional. VAT applies equally to all businesses registered with the tax authorities and which are located on the mainland of the UAE and in free zones. However, the UAE Cabinet may designate a particular free zone as a "designated zone". As such, the zone must be treated as being outside the UAE for tax purposes.

Businesses that are registered in the country charge VAT on behalf of the state. Consumers pay 5% VAT on the value of goods and services they purchase in the UAE. The state also imposes 5% tax on businesses registered for VAT on the supply of goods and services at each stage of the supply chain. However, there are special types of goods that are not subject to VAT. For example, in 2020 the state exempted some personal protective equipment used during the COVID-19 pandemic, such as medical and textile masks, chemical disinfectants and antiseptics.

0% VAT applies to:

• Exports of goods and services outside the GCC.
• Transportation and supply of certain sea, air and land, such as ships and aircrafts.
• New-build residential properties that are being supplied for the first time in the three years since they were built. 
• International transportation.
• Investment-grade precious metals such as gold and silver.
• Supply of certain education and healthcare services.

Within 28 days after the end of the tax period, businesses that have registered for VAT have to file a "VAT return" with the Federal Tax Administration (FTA). The declaration summarises the value of purchases and supplies made by the company during the tax period. A tax period is a period for which the tax is due and payable. There is a separate period for each type of business, but a standard tax period is considered to be:

• Quarterly - for businesses with an annual turnover of less than AED 150M (USD 40.84M).
• Monthly - for businesses of AED 150M or more in annual turnover.

The VAT return also indicates the taxable person's VAT liability - the difference between the VAT charged on supplies of goods and services for a given tax period and the VAT incurred on purchases. If the amount of output tax exceeds the amount of input tax incurred on purchases, the difference must be paid to the FTA. And if the amount of tax on purchases exceeds the amount of tax on deliveries, the output tax is refunded to the taxable person. The difference may also be included in the next payment. The VAT return must be submitted online via the FTA website.

Excise tax is a type of tax that is imposed on products that are harmful to human health and the environment. In the UAE, this type of tax was introduced in 2017 and applies to the following products:

• 50% - for carbonated beverages and any products with added sugar or other sweeteners (does not apply to classic soda without additives).
• 100% - for energy drinks, tobacco products, alcohol, electronic smoking devices and liquids.

To register excise tax on businesses, you must use the e-services of the FTA website. Before you can apply for the tax, you must register or log in to an existing account on the website. Businesses that have to apply for excise tax registration fall into the following categories:

• Import of excise goods into the UAE.
• Production of excise goods when they are produced for consumption in the UAE.
• the storage of excise goods in the UAE. 
• The person responsible for the supervision of the excise warehouse or designated area, i.e. the warehouse keeper.

If when you file your excise tax return, the amount of tax deducted exceeds the amount of excise tax you are left with a refundable excess tax will be initiated In such cases, you can apply for a refund of the excess refundable tax via the FTA website.

The UAE government does not levy income tax on anyone, whether it is UAE national or expatriate. The country has signed double tax treaties with a large number of countries, thus avoiding taxes for nationals of these countries on both sides. However, citizens of some countries still have to pay debts according to the laws of their own country, such as US citizens. UAE residents do not have to pay taxes on international pension plans, as they are not levied in the country.

In the UAE, there is a tax on the purchase or sale of real estate - residential or commercial. This fee is charged only once per property registration. VAT for both types of property is 4%. The tax is calculated from the contract price of the property and is payable to the land department on the day of the transfer of the ownership of the property by an individual or a company.

Municipal tax is a tax that is levied on the rental of property. In the UAE this tax is mainly levied at 5% on tenants, although there are exceptions. In Dubai, the tax is 5% on residential properties and 10% on commercial ones. In Abu Dhabi, municipal tax is not deducted for UAE nationals but expats pay 3%. In Sharjah, all tenants pay 2% tax.

There is no stamp duty or inheritance tax in the UAE. A will is usually notarized by a Sharia court and registered in the names of the selected beneficiaries at the Land Registration office. In cases where the deceased has not left a will, inheritance is carried out in accordance with the principles of Islamic Shariah, regardless of the nationality of the deceased.

In general, the UAE customs duty on imports of goods is 5% on most products, which is calculated from the CIF (Cost, Insurance, and Freight). Customs duties are in line with the GCC common tariff. However, there are goods that are subject to duties of 50% or even 100%, these are the goods that are subject to excise tax.

There are also goods that are subject to 0% duty such as pharmaceuticals, agricultural goods and precious metals. It should be noted that this does not mean that there is no tax on such goods. It does exist, but it is at 0%. They still have to be registered. Goods imported into Free Trade Zones are also exempt from customs duties.

Note: All customs-related activities in the UAE are regulated by the Federal Customs Authority. There are no duties levied on goods for export. The rate is 0% but they must be registered for VAT.

As there is no unified taxation system as such in the UAE, there are various details to be aware of. For example, you do not need to hire an accountant because there is no income tax in the UAE. However, it is advisable to acquire independent financial advice for large businesses. Residents from non-GCC countries have to take into account that there are no social security contributions in the UAE. It is also important to take into consideration the fact that most of the tax activities can be executed and completed within the Federal Tax Authority.