Tax in Dubai

Skyline of Downtown Dubai with Burj Khalifa from a Helicopter. 27 May 2015. Author Tim Reckmann.

Dubai, the city of luxury and oil. This is the common impression that comes in peoples mind when they hear the name Dubai. But Dubai is not only limited to these two terms. There are many fascinating facts about this country in the United Arab Emirates. For example, this emirate is said to be completely tax-free. Or is it? To answer this question, yes it is indeed a tax-free country to some extent. To analyze this idea of free tax we have to consider some parameters like people already living there or people looking to move to Dubai, different types of taxes etc. The citizens and different workers working here are considered tax-free with epic tax advantages, but there can be various situations where you have to pay taxes.

Tax can be grouped into two categories. One is the tax on the money someone makes (i.e. income tax, estate tax etc.) and another is the money one spends (i.e. sales tax, use tax etc.). Let’s start with income taxes. Individuals don’t have to pay taxes on their personal income. This means if one is considered a local he/she won’t be taxed for his/her earnings from any type of income source.  But you have to consider whether you have tax liabilities somewhere else. This place could be your home country or a country where you draw income from. If you are considered a tax resident of another country then you may have to pay taxes on your income in Dubai according to that country’s tax law. If you disregard tax law of a country where you have an income or considered domiciled there you may end up paying fines or faced with legal actions. So if you are not fully assured a smart choice would be to take advice from an experienced professional. Dubai has concluded different double taxation agreement with foreign countries to reduce tax for citizens of other countries when admitting back their profit to a home country. So this country can be considered as a heaven for foreign enterprises.

Taxation in Dubai is based on the residency of the taxpayer which is just like any other country. This process is applied to both persons and companies. Amount of time spent in Dubai and the types of activities done here will determine the fiscal domicile. For individuals, the tax residency depends on the number of days an individual spends in Dubai and the agreements UAE has with the state he/she was living before. This scenario is mainly applicable to foreign citizens moving to Dubai for a certain period of time. For becoming a tax resident in Dubai is dependent upon the agreement UAE and taxpayer’s home country has. For example, if a person who has moved to Dubai in the middle of the tax year, might be considered a tax resident in his home country and pay tax on his worldwide income.

So a common question is- how Dubai manages its expenses without tax from personal income from individuals? Different fees are imposed when creating a company and various fines are imposed on residents to make up for the revenue. For example, there are high fee for parking cars and high tolls on roads.

Dubai sales tax is applied from January 1, 2018, introducing VAT (value added tax). End consumers pay sales tax. This rate is comprised of 5%. The total price of goods and services provided determines the sales tax in Dubai. Because of the introduction of sales tax shopping has become more expensive which may impact customers. But this rate is lower comparatively. Sales tax is imposed on electronics, home appliances, furniture, and other non-essentials. There are some items and services which are deducted from sales tax in Dubai. Healthcare, education areas and other essentials are included in this list. Tourists are also liable to pay this tax. Goods purchased from duty-free shops fall in sales tax.

When considering a company, tax residency is simpler. A company with a management and local in Dubai is considered tax resident of the UAE. In the case of companies, tax residency is simpler to achieve: a company that has a management and a local in Dubai is considered a tax resident of the UAE. There are other aspects to consider when determining the tax status of a company with economic activities here. If Dubai residents own share of a company or all the income generated by the company comes from activities carried out in Dubai, the company will be considered a tax resident of the UAE.

Apart from the UAE taxation system, Dubai has its own corporate tax legislation imposing certain taxes to companies operating within the Emirate. Taxes are only applied to several types of companies only. They are, Dubai companies operating in the gas and oil industry and branches of foreign banks operating in Dubai. Dubai gas and oil companies are to pay a 55% tax rate of the company’s profits. Branches of foreign banks have to pay a 20% tax rate on the taxable income. Companies are levied with different tax rates on the financial activities they complete. Investments made by companies in Dubai are not considered when establishing the tax status of the business.

To help a business grow Dubai has declared trade-free zones. There are more than 30 free-trade zones in Dubai. These free zones offer tax concessions and customs duty benefits to foreign investors willing to trade in Dubai. The Jebel Ali Free Zone in Dubai, for instance, gives access to the market of 2 billion people. It was the largest free zone in Dubai until 2013 when it was overtaken by Dubai Multi Commodities Centre (DMCC). DMCC is now the world’s number 1 free zone connecting more than 15,000 businesses worldwide. Other free zones are available providing services in healthcare, knowledge, finance and more.

For real estate investment, Dubai can be considered as an ideal place. A property owner doesn’t have to pay yearly fixed tax on property but an only one-time fee of the land registry fee which is 4%. 50% of this fee is paid by the seller and another half by the owner. In case of renting a property in Dubai, there is a tax of 5% from the tenancy contract value which is payable by the tenant of the property.

A caveat for expats willing to move to Dubai is the double taxation. Double taxation is when same taxes are imposed in two countries on the same taxpayers for their same tax bases. In lay terms, double taxation is when you have to pay tax twice for the same income. Thankfully, to avoid double taxation, the UAE has double taxation agreements with different countries all over the world. As per this writing, the UAE – Dubai has double taxation treaties signed with 115 countries according to Ministry of Finance (MOF). Some of them are already in effect and some are still pending. Apart from avoiding double taxation, the purpose of these agreements is to remove cross-border trade and investment flows, fiscal evasion, eliminate indirect taxes and more. Note that some major and large countries, like the USA and Russia, are not on the list.

Dubai has created policies to create a free economy and attract business. Compared to international standard practices government, regulation of the private sector is minimum. Because of all these facilities business in Dubai is burgeoning.