The UAE federal government has exclusive jurisdiction to legislate in relation to UAE taxes. However, no federal tax laws have been established to date. Instead, most of the emirates enacted their own general income “tax decrees” in the late 1960s.
In practice, however, the tax decrees have not been enforced to date and, consequently, tax is generally not levied under the decrees on companies operating in the UAE, except for following industries and activities:
• Companies operating in the upstream oil and gas industry are subject to tax at rates specifically negotiated in the relevant concession agreements (up to 55%).
• Specific banking tax regulations have been enacted by certain emirates including Dubai, Sharjah, Abu Dhabi and Fujairah, which apply to UAE branches of foreign banks. Under these banking tax decrees, the income of branches of foreign banks is subject to income tax at the rate of 20%. The tax decrees share common characteristics in the way they have been drafted. The decrees limit the scope of taxation to “bodies corporate” (i.e. companies, branches or similar business registrations) carrying out a trade or business activity in the respective emirate and there is not a provision for the taxation of individuals or unincorporated businesses owned by individuals. Generally, the existing tax decrees levy income tax on companies operating in the respective emirates at rates of up to 55%.
Further, entities established in the free trade zones (FTZ) are entitled to guaranteed tax holidays for renewable periods of between 15 and 50 years from the date the business is established.
The UAE introduced value-added tax (VAT) on January 1, 2018, and is considering the implementation of new corporate income tax laws in the near future.
Corporate Income Tax
The Dubai Income Tax Decree of 1969 and its amendment of 1970 is based on the French concept of territoriality. The tax decree specifies that an organisation that conducts trade or business in Dubai shall be subject to taxation as follows:
• A chargeable person means a body corporate wherever incorporated, or each and every branch thereof, carrying on trade or business of any type during an income tax year through a permanent establishment situated in the emirate, whether directly, or through the agency of another body corporate, and not entitled under an agreement with the ruler to an exemption from liability to income tax.
• Two or more such branches of a body corporate so carrying on trade shall each be treated as separate chargeable persons. The fact that a body corporate has a secondary body corporate carrying on trade or business through a permanent establishment in the emirate shall not in itself constitute the parent body corporate as a chargeable person.
Carrying On Trade Or Business Means
undefined • Selling goods or rights in such good in the emirate;
• Operating any manufacturing, industrial or commercial enterprise in the emirate;
• Letting any property located in the emirate; or
• Rendering services in the emirate (excluding the mere purchasing of goods, or rights in such goods in the emirate). According to the Dubai income tax decree, all companies carrying on trade or business in Dubai are required to pay tax on their earnings. The rates of tax are on a sliding scale up to a maximum of 50%. In practice, however, taxes are only paid by two groups of companies:
• Oil and gas producing firms, which pay taxes at rates specified in their concession agreements. Oil companies are additionally required to pay royalties on their production output; and,
• Branches of foreign banks pay tax at a flat rate of 20% on annual profits. The taxable income of banks is calculated by reference to their audited financial statements. The UAE is looking into a possible introduction of a federal corporate tax. There have been no public announcements from the UAE regarding the potential introduction of corporate income tax, beyond references from the IMF to economic impact studies carried out by the UAE and general statements from the UAE government in the media. As a result, there is no visibility on the scope of application of a future federal corporate income tax framework, if any, or on the interaction between a federal income tax and the existing emirates tax decrees.
Investment Incentives
There are over 30 industry-focused FTZs in Dubai that offer a combination of tax and business incentives that are introduced to attract foreign investment. The incentives usually include tax holidays for a guaranteed period. For example, most FTZs offer a tax holiday of 50 years. The extension of 100% foreign ownership is also common, as is the suspension of any Customs duties within the free zone and the provision of “one-stop shop” administrative services.
Withholding Taxes
There are no withholding taxes in the UAE.
Capital Gains Tax
There is no capital gains tax in the UAE. For taxpaying entities, capital gains are taxed as part of business profits.
Customs Duty
Generally, a Customs duty of 5% is imposed on the cost, insurance, freight value of imports. Other rates may apply to certain goods, such as alcohol and tobacco, and certain exemptions may also be available.
Goods imported and intended for re-export often benefit from Customs duties discounts or exemptions, as do manufacturers on the import of their machinery, raw materials and spare parts used for industrial purposes. Currently, there are no separate excise taxes levied in the UAE.
VAT
From January 1, 2018 VAT at a standard rate of 5% was applied to most goods and services, with some goods and services subject to a 0% rate or exempt. The 0% VAT rate will apply to goods and services exported outside the VAT-implementing GCC member states, international transportation, crude oil/natural gas, the first sale of residential buildings, and some specific areas such as health and education. VAT exemption will apply to certain financial services, as well as to the residential real estate sector. Designated zones (FTZ) will be treated as being outside UAE territory with certain goods movements not subject to UAE VAT, however services in FTZ will be subject to UAE VAT. The mandatory VAT registration is Dh375,000 ($102,075) and voluntary registration from Dh187,500 ($51,037.5), with VAT grouping allowed. Specific documentary and record-keeping requirements are required, such as tax invoices and monthly VAT returns for large tax payers and quarterly for others. Where businesses have an excess of input VAT to carry forward then they can claim that VAT back from the tax authorities.
Personal Income Tax
No personal taxation currently exists in the UAE.
Social Security
The UAE does not impose social security on expatriates. There is a social security regime in the UAE that applies to GCC national employees only. Social security contributions are calculated at a rate of 17.5% of the employee’s gross remuneration as stated in the employment contract, regardless of whether those employees are employed by entities that operate in a FTZ and subject to tax holidays. Of the total, 5% is payable by the employee and the remaining 12.5% is payable by the employer. For non-UAE GCC nationals working in the UAE, employee contributions are determined in accordance with social security regulations of their home country. The liability to withhold is on the employer. These levies and rates may be administered differently by each emirate, and the emirate government may also make additional contributions.
Municipal & Property Tax
Municipal taxes are imposed on hotel services and cinema shows. Service charge percentages vary among the emirates. A service charge of 5% to 10% is charged on food purchased in restaurants. Hotels charge a 10% to 15% service charge per night on room rates. These charges are usually included in the customer’s bill, which the municipality will collect from restaurants and hotels. Hotels also charge an additional 15% service charge on the services they provide.
Most emirates impose a municipality tax on properties, mostly by reference to the annual rental value. It is generally the tenants’ obligation to pay the tax; however, the tenants’ employer will typically pay the tax on behalf of the employee. In some cases, separate fees are payable by both tenants and property owners. For example, in Dubai, it is currently imposed at 5% of the annual rental value for tenants or at 5% of the specified rental index for property owners.
Real Estate Fees
Registration fees may also be levied on the transfer of ownership of land or property. A land registration fee is levied in Dubai at a rate of 4% of sales value of property, which is shared equally between the buyer and seller, payable to the Dubai Land Department. In Dubai the registration fee may also apply on the transfer of shares of companies that own real estates. There are no separate stamp taxes levied in the UAE.
Reporting Requirements
All companies are required to maintain proper accounting records. There are no national generally accepted accounting principles (GAAP) in the UAE and no specific language requirement for the purpose of keeping books and records, although English is widely used.
International Financial Reporting Standards are mandated by the Emirates Securities and Commodities Authority and the Central Bank of the UAE and adopted as the default GAAP by other companies. The requirement to prepare statutory financial statements (SFS) varies within each regulatory authority. Most authorities ask for audited SFS at the time of the renewal of the annual trade licence. In some cases, exemption from preparing and filing audited SFS may be available but generally companies prefer to prepare SFS as part of good corporate governance and best practice.
As for payroll in the emirates, although there are currently no personal income tax obligations in the UAE, it is important to comply with all labour law requirements together with certain mandatory requirements such as a wages protection system (WPS). WPS applies to employees registered with the UAE’s Ministry of Labour. A key requirement under WPS is that employers are required to pay their employees in local currency, into their local bank accounts and from a local bank account. Employers non-compliant with WPS could face financial penalties and problems with renewing or processing new visas for their workforce.
Foreign Exchange Controls
There are no exchange controls on the remittance of profits or repatriation of capital, and there are virtually no restrictions on foreign trade.
Double Taxation Treaties
The UAE has entered into tax treaties with a number countries, including the following: Albania, Algeria, Armenia, Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Bosnia and Herzegovina, Brunei Darussalam, Bulgaria, Canada, China, Cyprus, the Czech Republic, Egypt, Estonia, Finland, Fiji, France, Georgia, Germany, Greece, Guinea, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Japan, Jordan, Kazakhstan, Kyrgyzstan, South Korea, Latvia, Lebanon, Lithuania, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Montenegro, Morocco, Mozambique, Netherlands, New Zealand, Pakistan, Panama, the Philippines, Poland, Portugal, Romania, Russia, Serbia, Seychelles, Singapore, Slovenia, Spain, South Africa, Sri Lanka, Sudan, Switzerland, Syria, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, the UK, Uruguay, Uzbekistan, Venezuela, Vietnam and Yemen.
Tax treaties have also been signed with Andorra, Argentina, Belize, Benin, Bermuda, Comoro Islands, Ecuador, Ethiopia, Equatorial Guinea, Gambia, Jersey, Kenya, Kosovo, Libya, Lichtenstein, Macedonia, Mauritania, Nigeria, Palestine, Paraguay, Senegal, Slovakia, St Kitts and Nevis, and Uganda.
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