The UAE is always considered as an attractive destination to work, live, or set up a business. One of the primary reasons for this is the well-known statement that the UAE is ‘tax free’ country.
The question that most often follows is, is that true? The answer is both yes…and no! The UAE is mostly tax free, but there are some areas where taxes are applied.
In this monthly insight, we break down the taxes that are applicable in the UAE, as well as which aspects of life in the UAE really are tax free, and how to take advantage of them as an individual or business owner.
Contrary to widespread belief, there are some taxes that exist in the UAE. For the starters, the profits of international banks and energy firms operating in the UAE are taxed at the federal level. Further, there are several municipal taxes applicable in the UAE: you may notice a 10% tax added to the bill on hotel and restaurant visits, and there is also a form of council tax applied to utility bills. Alcohol is also heavily taxed upon import and purchase, and lastly, VAT was implemented in the UAE in 2018, at a common rate of 5% in line with Common VAT Agreement of the states of Gulf Cooperation Council.
Whilst the above looks like a lengthy list, there is one key aspect that remains tax free in the UAE, and that is personal income tax (both for individuals and corporate). Moreveor, reporting on a broadcast last year, H.H. Sheikh Mohammed bin Rashid Al Maktoum, the Vice President and Prime Minister of the UAE and the Ruler of Dubai stated that: “his country would never adopt income tax as a way to relieve debt.”
This means that it is unlikely that tax will ever be levied on income in the UAE. We discuss both corporate and personal income tax in the UAE in further detail below.
Corporate Income Tax in UAE
Each Emirate has its own laws on corporate taxes for companies operating within them, but, and as mentioned above, taxes are imposed only on foreign gas or oil producing companies and branches of international banks operating in UAE.
Therefore, all other companies established in the UAE are not subject to corporate taxes. This is applicable across all UAE jurisdictions (Onshore, Free Zone and Offshore). Furthermore, there are no withholding taxes levied on companies who remit income outwards whether it be dividends, royalties, or interest. Therefore, repatriation of profits is 100% tax free and there are no limitations on the amounts repatriated.
The only form of taxation that may be encountered is VAT (Value Added Tax). However, this is only applicable to UAE businesses providing goods or services to customers based in the UAE or GCC region. VAT being an indirect tax is borne by the end consumer but the reponsibility of payment it to the authorities is on the goods or services provider. Goods and services however, provided internationally are zero-rated for VAT purposes.
Personal Income Tax
The UAE Federal Government does not impose any form of tax on income earned by individuals in the UAE. Therefore, if you are a resident living and working in the UAE, this means that your UAE earnings are free from tax.
However, in this instance it is important to differentiate between physical or civil residency and tax or fiscal residency. Civil Residence is a casual term often used to define the country which you are currently living in, and/or the country which you have the strongest affiliation with. A Fiscal Residency is the country which you claim as your “fiscal home” and therefore are called to pay taxes to, according to that country’s tax laws.
Having your “fiscal home” in a favourable tax jurisdiction is where the benefit of the UAE residence comes in. By first obtaining residence status, and then ultimately fiscal residence status in the UAE, you can take full advantage of the tax-free environment.
UAE residency is obtained either by being employed, setting up your own company or investing in property in the UAE. Once you are resident, you then need to demonstrate adequate substance in the UAE to become a fiscal resident.
Substance is the collection of sufficient evidence required by both the tax authorities, as well as financial institutions to demonstrate that the country you are claiming as your “fiscal home” (and thus your fiscal residency) is indeed where you have substantial interests. A proper employment (a double benefit if at your own UAE company), maintaining a personal current account (on which salary payments are made and from which local expenses are deducted), a local phone number, a local mailing address and of course a place of accommodation, would build a compelling case of substance and legitimacy.
Finally, having the above in place gives you eligibility to apply for a UAE Personal Tax Certificate. The tax certificate is proof that you have met the UAE’s criteria for fiscal residency and declares that you are a resident in the UAE for tax purposes.
In my opinion the right thing to say is that ‘the UAE is free of personal and corporate taxes’. And whilst there are some forms of tax that may be encountered, the UAE remains an exceedingly tax efficient state. This, coupled with the recent relaxations surrounding company ownership, longer term residence visas and inheritance laws, have cemented the region’s status as an attractive base for the global citizens of today.
At Protax, we help businsesses from across the world to successfully establish a presence in the UAE, both professionally or personally.