Although the UAE has a favorable tax climate for foreign companies and expats, the country's tax system has its own peculiarities and nuances. For example, there is no income tax here, but the excise tax on energy drinks and tobacco products constitutes 100%. In this article, you will learn about all the features of the tax system in the UAE and find detailed information about what taxes individuals and companies must pay in order to comply with the law. We will also look at the definition of a free economic zone, which products and services are exempt from VAT, and how to obtain a VAT refund, as well as much more.
The Tax System in The UAE
The UAE is a country with a minimum amount of taxes, as there are no taxes on personal income and inheritance and most companies registered in the state are not required to pay corporate tax. Tax is only charged from a very limited range of enterprises such as branches of foreign banks and foreign companies engaged in oil and gas production.
VAT was introduced in the UAE only in January 2018 by the Federal Tax Authority (FTA) and is at a relatively low - 5%. Specific products considered by the government to be harmful to human health and the environment are subject to an excise tax. Such products include carbonated, energy and sweetened drinks, tobacco and tobacco products, electronic smoking devices and liquids used in such tools.
Federal taxes are certain fees that are established by the government and are mandatory for payment on the entire territory of the state. Federal taxes make up a large share of all tax revenues to the state budget. For each type of federal fees, a certain circle of taxpayers is established, which can be both individuals and legal entities, as well as individual entrepreneurs.
The UAE does not levy individual income tax, therefore there is no need for an income tax return procedure within the country. This rule is equally applicable for freelancers and self-employed individuals, who must also be residents of the state.
Social security contributions to the General Directorate of Pensions and Social Security (GPSSA) are applicable only to UAE citizens and GCC nationals. UAE citizens must pay 5% of their salary as a social security contribution, while the employer has to pay 12.5%. If the employer is a state institution, the payment amount will increase to 15%. Social security contributions are also mandatory for employees of companies registered in a free trade zone. Citizens of GCC countries who work in the UAE are required to pay contributions in accordance with the social security rules of their home country.
Expatriates are not subject to social security in the UAE, so neither the expatriate nor their employer pay contributions to the GPSSA.
Note: According to UAE labour law, expats are entitled to an End of Service Allowance (EOSB or EOS (End of Service)), provided that they have worked for the employer for at least 1 year. This benefit is calculated as 21 days per year based on the basic salary for the first 5 years of employment. For each subsequent year thereafter, the EOSB will be 30 days/year of the employee's basic salary. However the maximum EOS payment should not exceed 2 years of compensation.
Corporate tax in the UAE is levied only on oil companies and branches of foreign banks. This tax does not apply to any other industry. In Dubai, oil companies are subject to the maximum corporate income tax, 55% of which is the income received in the UAE. Branches of foreign banks are required to pay income tax as well, amounting to 20% of their income.
Enterprises registered in one of the free zones in the UAE are exempt from paying taxes for a certain period, which can also be extended. There are currently 45 free trade zones in the UAE, which are business zones with special customs, tax and import regimes where companies and organizations in such areas are exempt from paying taxes, including corporate taxes.
Double taxation occurs when similar taxes are levied in two states or countries, on the same taxpayer and on the same tax base. This has a negative impact on the exchange of services, goods and capital between the two states. For this reason, a Double taxation treaty (DTA) is concluded between countries.
The UAE has concluded 135 DTA (Double Taxation Avoidance) agreements with other countries to eliminate double taxation and promote the exchange of goods and services, as well as the free movement of capital. You can see the full list of countries on the official website of the Ministry of Finance. The UAE also enters into Bilateral Investment Agreements (BIT) with other states in order to exempt or reduce taxes on investments and protect them from non-commercial risks. In total, the UAE has concluded 193 DTAs and BITs.
Tourist Facility Tax
Tourist tax in the UAE is charged by hotels, restaurants and resorts. These tourist sites may charge one or more of the following taxes:
Property Transfer Tax
Property transfer charges are levied on direct and indirect transfers of real property, which is located in the UAE. It also includes the transfer of shares of a company that owns real estate in the UAE. The rate of property transfer tax depends on the emirate and where the real property is located. For example, in Dubai, the tax rate constitutes 4%, whereas in Abu Dhabi it is 2%. The fee for the transfer of real property should be divided equally between the buyer and the seller. However, the commission can be paid exclusively by the buyer, depending on the agreement between the two parties.
Property transfer tax is usually paid in the following cases:
Mandatory notary fees in all emirates of the country are paid to a public notary for the certification of corporate documents for legal purposes. The rates of notary fees in Dubai and Abu Dhabi may vary from AED 100 (USD 27) to AED 500 (USD 136).
There is no inheritance tax in the country of the UAE. However, if there is no will, the inheritance is dealt with according to Islamic Sharia principles, regardless of the nationality of the deceased.
Regional or state taxes in the UAE include special tax regimes in free trade zones, tourism fees per Emirate and rental tax.
Free Trade Zones
There are about 45 free trade zones in the UAE. These areas have special tax, import and customs regimes in their territories. Within these special zones, companies are exempt from paying corporate tax for up to 50 years. Moreover, the organisations have 100% exceptions on import and export taxes.
The types of businesses that you can launch in free trade zones include a range of industry activity such as educational, retail, financial, hospitality and media. In free zones you can set up one of the two types of organisations:
The requirements for capital investment depends on the type of business and the free zone authority. For example, in Dubai Airport Free Zone, you can set up FZCo. with a minimum authorised capital of AED 1,000 (USD 272). The founder of a company in one of the free trade zones in the UAE must also obtain a business license.
Tourism Fees Per Emirate
In 2014, Dubai officially introduced the Tourism Dirham Fee, which is charged by hotels, resorts and holiday homes in the city. Depending on the rating of the hotel or resort the Tourism Dirham Fee constitutes from AED 7 to AED 20 per each night of occupancy (for up to 30 nights):
In May 2016, a new regulation was introduced, according to which the tourist facilities in Abu Dhabi charge an additional fee of 4% of the hotel staying cost and charge AED 15 (USD 4) per hotel room per night.
The amount of tax on rented real estate varies in different emirates in the UAE. For example, in Dubai, expats who are tenants of residential premises are required to pay 5% of the annual rent, whereas commercial tenants must pay 10%. In Abu Dhabi, municipal tax is not levied on UAE citizens, while expats are required to pay 3% of the annual rent. In Sharjah, tenants, regardless of whether they are a citizen or an expat, are required to pay a rental tax of 2%.
The total sum of rental tax in Dubai is divided into 12 months and is charged on utility bills by the Dubai Municipality. Dividing the tax monthly makes it a more convenient way to pay.
If you have overpaid on tax, it is possible to refund the rental tax in Dubai. To do this, you need to file an objection to the Dubai Electricity and Water Supply Authority (DEWA) and send your utility bills for re-calculation. If the checking of the information confirms an overpayment, you will be able to receive a refund of rental tax in Dubai.
Taxes On Goods and Services (VAT)
Taxes On Goods
and Services (VAT)
Taxes on goods and services in the UAE include two types: VAT and excise duty.
Value Added Tax is an indirect tax, which is levied at each stage of the supply chain of goods and services for consumption. End users pay VAT, while registered businesses most often collect and account for VAT on behalf of the Federal Tax Authority (FTA). The FTA is a government entity responsible for implementing VAT in the UAE. These registered businesses can then apply for refunds and rebates every quarter.
The VAT rate in the country is currently 5%. This tax applies to the supply of all goods and services in the UAE, including food, beverages, residential premises with public services, commercial buildings, hotels, electronic services, jewellery and so on.
The following goods and services are not subject to VAT or have a zero rating in the country:
In addition, in 2020, the UAE government exempted some personal protective equipment used during the COVID-19 pandemic from VAT. The equipment includes antiseptics, medical and textile masks, disposable gloves and chemical disinfectants.
Excise tax is an indirect tax in the UAE, which is levied on certain goods that are harmful to human health or the environment (according to the country's government).
This tax applies to the following goods:
The following goods are exempt from excise tax:
Refunds of VAT in The UAE
Tourists who come to Dubai for shopping can refund VAT on purchases using the Tax Free system. A refund is possible within 90 days from the date of purchase. To do this, the following conditions must be met:
The return is carried out in specialized terminals at airports, seaports, customs and border control points in the country. The foreign national must provide electronic invoices/checks for purchases from stores that have been registered in the tax refund programme, as well as providing a credit card and copies of your passport. Moreover, the purchase price must exceed AED 250 (USD 68).
UAE Tax System for Foreigners
UAE Tax System
There is no income tax in the UAE that is levied on residents or expats. However, non-residents must pay income tax in their home country in accordance with its tax legislation laws. If your income is earned in the UAE, but you are a tax resident in another state/country, your income will be taxed in this case. It is therefore necessary to check the legal system of your country regarding this issue to avoid any unfortunate consequences in the future.
It is worth noting that the International Pension Plans of UAE residents are not taxed. In addition, the country is a signatory to the Common Reporting Standard (CRS). The CRS is the global legal standard for the Automatic Exchange of Information (AEOI) system. This system allows different countries to exchange tax data between participants.
Tax On Property and Wealth
Tax On Property
Taxes on property and wealth in the UAE comprise only of transfer and rental taxes, because there is no capital gains tax and stamp duty in the country.
Capital Gains Tax
There is no capital gains tax in the country, except when the tax is derived from the sales of a company that is obliged to pay income tax or banking tax.
A transfer tax is levied on the direct and indirect transfers of real estate property in the UAE. Property transfer tax is paid in cases such as the sale or purchase of real estate, leasing of a property and a mortgage. A transfer charge depends on the emirate. For example, the tax rate in Dubai is 4%. In general, the fee for the property transfer should be divided equally between the buyer and the seller, but in most cases the commission can be paid exclusively by the buyer.
As mentioned earlier, the amount of tax on rented real estate varies in different emirates in the UAE. For example, expats in Dubai must pay 5% of the total annual rent if they rent the residential property. Municipal tax in Abu Dhabi is also levied only on expats and constitutes 3% of the annual rent. In Sharjah, tenants, regardless of whether they are a citizen or an expat, are required to pay a rental tax of 2%.
The total sum of municipality tax in Dubai is divided into 12 months and is charged on utility bills by the Dubai Municipality.
There is no stamp duty in the country. Companies registered in free economic zones may sometimes be charged administrative fees for the transfer of shares of other UAE companies.
As mentioned earlier, there is no inheritance tax in the country either. If there is no will, the inheritance is dealt with according to Islamic Sharia principles, regardless of the nationality of the deceased.
Company Taxes and VAT Rates
and VAT Rates
Corporate tax in the UAE is limited to certain industries, as most businesses in the country don’t pay corporation tax. The tax percentage is also different in each emirate. Oil companies and oil branches of foreign banks operating in the country are obliged to pay a corporate tax, which may be up to 55%.
Excise Tax for Businesses
According to the UAE Federal Decree Law No. 7 of 2017 on Excise Tax, the following types of businesses must register for excise tax:
The responsibility for ensuring the fulfillment of the obligations to register a company for excise tax payment lies with the company itself. The Federal Tax Authority (FTA) has the right to conduct inspections of taxable corporations at any time, and apply criminal penalties in case of non-compliance with the law.
Companies can register for excise tax on the official website of the FTA (through the e-services section). It is necessary for applicants to register on the site and create an account. To obtain general information about tax registration and/or filing an application, applicants must contact the FTA:
VAT for Businesses
The VAT rate in the UAE constitutes 5%. Businesses are required to register for VAT if their taxable imports and shipments exceed AED 375,000 (USD 102,000) per year. If the company's taxable imports and supplies are less than AED 375,000, but above AED 187,500 (USD 51,000) per annum, then they can voluntarily register for VAT if they want to. The liabilities of tax-registered companies include:
VAT applies to tax-registered companies in both the mainland and in free zones. But free trade zones, known as “designated zones” are considered as “outside the UAE” for VAT purposes, due to the fact that the transfer of goods between designated areas is exempt from this type of tax.
Import and Export Taxes (Customs Duty)
Import and Export
Taxes (Customs Duty)
Customs duties in the UAE for most items are calculated at 5% of the value of goods plus Cost, Insurance, and Freight (CIF). Alcohol has a 50% duty as well as carbonated and sweetened drinks, while tobacco products (cigarettes) and e-smoking devices, including tools and liquids used in them, have a 100% customs duty. The VAT rate applied to gasoline constitutes 5%.
Many individuals in the UAE do not need to hire an accountant, because there is no income tax form that needs to be filled out. However, the owners of large businesses are recommended to seek independent financial advice on the tax liabilities of their businesses.