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 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%); and
- Specific banking tax regulations have been enacted by certain emirates (i.e., 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%.
Common Characteristics
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 no 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 (FTZs) are entitled to guaranteed tax holidays for renewable periods of 15 to 50 years from the date the business is established.
The UAE government is considering the implementation of new corporate income tax laws and the introduction of VAT in the near future.
Corporate Income Taxes In Dubai
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.
Definition
“Carrying on trade or business” means:
- The sale of goods or rights in such goods 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).
A chargeable person in Dubai shall be charged taxes on a sliding scale as noted in the table. Taxable income is computed after the deduction of all costs and expenses that are incurred by a chargeable person earning such income. In the UAE, the various deductible costs and expenses include acquisition cost of goods, the expenses of operating the business, allowances for depreciation, obsolescence and exhaustion of both tangible and intangible assets, and losses sustained by the chargeable person in connection with the business.
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 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 the possible introduction of a federal corporate tax. To date there have been no specific 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 government and general statements from the federal government in the media. As a result there is no visibility on the scope of application of a future UAE-wide 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 currently more than 30 industry-focused FTZs in Dubai that offer a combination of tax and business incentives which are designed to attract foreign investment. These incentives usually include tax holidays for a guaranteed period of time. 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 so-called one-stop shop administrative services.
Withholding Tax
There are no withholding taxes in the UAE.
Capital Gains Tax
There is no capital gains tax in the UAE. For tax-paying entities, capital gains are instead currently taxed as part of business profits.
Customs Duty
Generally, a Customs duty of 5% is imposed on the cost, insurance and 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.
Value-Added Tax
There is no value-added tax (VAT) in the UAE at present. However, there has been a preliminary announcement that the GCC states will implement a common framework to be agreed between all six member states (UAE, Saudi Arabia, Oman, Bahrain, Kuwait and Qatar) that will form the legal basis for the introduction of a VAT system. There is currently no clarity on an implementation date as this is pending the final adoption of the common framework.
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, 12.5% is payable by the employer and the remaining 5% is payable by the employee. 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 collects from restaurants and hotels. In addition, hotels charge an additional 15% service charge on the services they provide.
Most emirates impose a municipality tax on properties, usually 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 the tenants and property owners. For example, in the emirate of Dubai, the tax 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 the emirate of Dubai at a rate of 4% of sales value of property (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 an 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, although there are 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 wages protection system (WPS). WPS applies to employees registered with the UAE Ministry of Labour.
A key requirement under WPS is to pay employees in the local currency, into their local bank accounts and from a local bank account. Employers found to be 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 Tax Treaties
The UAE has entered into tax treaties with countries including Algeria, Armenia, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Brunei, Bulgaria, Canada, China, Cyprus, the Czech Republic, Egypt, Estonia, Finland, France, Georgia, Germany, Hong Kong, India, Indonesia, Ireland, Italy, Japan, Kazakhstan, Korea, Latvia, Lebanon, Lithuania, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Montenegro, Morocco, Mozambique, the Netherlands, New Zealand, Pakistan, Panama, the Philippines, Poland, Portugal, Romania, Russia, Serbia, Seychelles, Singapore, Slovenia, Spain, Sri Lanka, Sudan, Switzerland, Syria, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, Uzbekistan, Venezuela, Vietnam and Yemen.
Tax treaties have been signed with countries including Andorra, Belize, Bermuda, Comoro Islands, Gambia, Lichtenstein, Macedonia, Mauritania, Palestine, Senegal, Uganda and the UK in early 2016, however, they have yet to be ratified. There are tax treaties pending with Albania, Bangladesh, Barbados, Benin, Ethiopia, Fiji, Greece, Guinea, Kenya, Kyrgyzstan, Libya, Slovakia, South Africa and Uruguay.
Read More from OBG
