Fun fact about the tax system in the United Arab Emirates: there’s no federal income tax. However, in spite of this enormous fiscal advantage, you shouldn’t start packing your bags, thinking you’re getting away scot-free – just yet. We detail which taxes you will still have to pay as an individual or as a business while residing in the United Arab Emirates.
The article includes the following information:
- The United Arab Emirates tax system
- Federal taxes in the UAE
- Regional taxes in the UAE
- Taxes on goods and services (VAT) in the UAE
- UAE tax system for foreigners
- Tax on property and wealth in the UAE
- Inheritance tax in the UAE
- Company taxes and VAT rates in the UAE
- Import and export taxes in the UAE
- Tax avoidance and evasion in the UAE
- Tax advice in the UAE
- Useful resources
The United Arab Emirates tax system
The tax system in the United Arab Emirates – or rather, the lack of taxes – is one of the main draws to the region for many expats. For instance, employees do not have to pay income tax.
Until January 2018, there was also no VAT. This tax on goods and services sold was introduced relatively low, at 5%. There’s also an excise tax that is levied on specific products deemed by the government to be harmful to human health or the environment, such as energy drinks and tobacco.
Since June 2023, a new corporate tax has been in force in the UAE.
Federal taxes in the UAE
The UAE does not levy a tax on income. There is, therefore, no need for an income tax return in the UAE as there is no applicable individual tax within the country. The same also applies to freelancers and self-employed individuals who are residents of the Emirates.
Employees in the UAE who are Gulf Corporation Council (GCC) nationals (this includes the UAE) are subject to a social security regime of 17.5%. Those who are UAE nationals pay 5% (with an automatic deduction off their paycheck) and the employer pays the further 12.5%. Social security obligations also apply to employees of companies and branches registered in a free trade zone (FTZ). Also, residents of other GCC nations may be subject to different social security contributions relative to their home country. Conversely, non-GCC nationals are not subject to social security in the United Arab Emirates.
Corporate taxes are only levied on oil companies and foreign banks in the UAE. However, there are 46 free zones in the country; businesses registered in the United Arab Emirates are exempt from paying tax for a period that can be extended. There are no capital gains taxes unless the company is taxable under another income tax.
Corporate tax rules are due to change from 1 June 2023, when a federal corporation tax will be introduced for businesses with net profits of AED 375,000 or more. The tax will be charged at a flat rate of 9%. Some exemptions will be made available for small businesses. People running businesses that fall under the new rules will need to register with the Federal Tax Authority and submit tax returns on an annual basis.
The United Arab Emirates is expanding its Double Taxation Agreements (DTA) and Bilateral Investments Treaties (BIT) network to encourage strategic global partnerships. The UAE has secured approximately 243 DTAs and BITs with the purpose of exempting or reducing taxes on investments and profits from direct and indirect taxes.
Tourist facility tax
Restaurants, hotels, and resorts (among others) may charge the following taxes:
- 10% on the room rate
- Service charge (10%)
- Municipality fee (0-10%)
- City tax (6–10%)
- Tourism fee (6%)
Property transfer tax
A transfer charge applies to the transfer of property in the UAE. This varies by Emirate; it is 4% in Dubai, for example. Although the buyer and seller both share the burden of this, the buyer generally pays the transfer fee.
There is no regime for inheritance tax. If there is no will, however, inheritance is dealt with according to Islamic Shari’a principles.
Regional taxes in the UAE
Free trade zones
There are free-trade zones in the UAE that have special tax, customs, and import regimes within themselves. In fact, there are more than 40 zones throughout the Emirates. Within these special areas, companies can be exempt from paying corporate tax for up to 50 years and they have 100% exceptions on import and export taxes.
Tourism fees per Emirate
Hotel charges vary by Emirate. In Dubai, there is a Tourism Dirham Fee per room for each night of occupancy (for up to 30 nights) that ranges from AED 7 to AED 20. In general, this depends on the grade of the hotel. Additionally, Abu Dhabi charges a 4% fee onto hotel bills and charges AED 15 per night, per room. Ras Al Khaimah hotels also charge a tourism fee per room per night of AED 15.
Taxes on rented properties vary between the Emirates. In Dubai, residential tenants pay 5% of their annual rent in rental tax, while 10% is added onto commercial tenants. However, in Abu Dhabi, UAE citizens are not taxed on their properties, but their expat counterparts pay 3%. Furthermore, in Sharjah, all tenants pay a rental tax of 2%.
Taxes on goods and services (VAT) in the UAE
There are two taxes on goods and services in the United Arab Emirates: VAT and excise duty.
The VAT rate of the UAE is 5%. However, certain items are excluded from VAT. In 2020, the UAE exempted some personal protective equipment used in the COVID-19 pandemic, such as medical and textile masks, single-use gloves, chemical disinfectants, and antiseptics. Other goods and services that carry a 0% VAT rate include:
- Exports and goods and services to outside the GCC
- International transportation
- Investment-grade precious metals
- Newly constructed residential properties
- Some education and healthcare services.
The UAE implemented an excise tax beginning in 2017. This is an indirect tax that is levied on goods that the government considers harmful to human health or the environment. Goods to which this tax applies are:
- 50% on carbonated drinks (except for unflavored carbonated water). It may also apply to items that can be the basis of a carbonated beverage.
- 100% on energy drinks that contain stimulating substances which include caffeine, taurine, ginseng, and guarana. It may also apply to items that can be the basis of an energy drink.
- 100% on tobacco and tobacco products to include all items listed within Schedule 24 of the GCC Common Customs Tariff.
Refunds of VAT in the UAE
Tourists, expats, and residents all pay VAT at the point of sale. Since November 2018, eligible tourists have been able to request refunds on goods purchased with VAT. To do so, these conditions must be met:
- Goods must be purchased from a retailer participating in the Tax Refund for Tourists Scheme.
- Goods aren’t excluded from the Refund Scheme of the Federal Tax Authority.
- They must have the intention of leaving the USE within 90 days of supply along with the purchases.
- They must export the goods out of the UAE within three months of supply.
- The process and purchase and export of goods must be carried out according to the requirements and procedures determined by the Federal Tax Authority.
Tourists can receive their refunds through a special device found at airports, seaports, and border ports. The devices enable consumers to electronically submit the tax invoices for their purchases from the outlets registered in the Refund Scheme, along with copies of their passport and credit card.
UAE tax system for foreigners
The UAE does not have any income tax for those working in the UAE, regardless of their residency status. However, those who are not tax residents of the UAE may still have to pay income tax in their country of residence depending on their own taxation laws.
The UAE has double tax treaties with 137 countries, and there are no taxes levied to UAE residents on international pension plans.
The UAE has signed up to the Common Reporting Standard (CRS), which is the global standard for the Automatic Exchange of Information (AEOI) system. Essentially, CRS is a legal standard allowing countries to exchange tax data between participants. This can be useful for things like investigating tax evasion.
Tax on property and wealth in the UAE
Capital gains tax
Generally, there is no capital gains tax in the UAE, unless they are derived from the sales of a company that is liable to pay income tax or banking tax.
A transfer charge is applied to the transfer of property in the UAE. This varies by Emirate (for example, it is 4% in Dubai). Although the buyer and seller both share the burden of this, the buyer generally pays the transfer fee.
As previously mentioned, taxes on rented properties vary between the Emirates. Residential tenants in Dubai pay 5% of their annual rent in rental tax, while 10% is added onto commercial tenants. Meanwhile, in Abu Dhabi, UAE citizens are not taxed on their properties, but their expat counterparts pay 3%. Similarly, in Sharjah, all tenants pay a rental tax of 2%.
There is no stamp duty in the United Arab Emirates.
Inheritance tax in the UAE
There is no inheritance tax in the UAE. For cases where the deceased did not leave a will, inheritance is dealt with according to Islamic Shari’a principles, regardless of the nationality of the deceased.
Company taxes and VAT rates in the UAE
Most businesses in the UAE pay no corporation tax. In theory, most emirates are able to impose a corporate tax up to 55% – but this is only applied to foreign oil companies and branches of foreign banks.
As we mentioned earlier, a new corporate tax regime will be introduced in the UAE from 1 June 2023.
Excise tax for businesses
Businesses must register for excise tax if they partake in:
- The import of excise goods into the UAE;
- The production of excise goods to be consumed in the UAE;
- Stockpiling of excise goods in the UAE (sometimes);
- Those overseeing an excise warehouse or designated zone
VAT for businesses
VAT is 5% for the UAE. Businesses must register for VAT if their taxable supplies and imports exceed AED 375,000 per annum. Businesses that meet a threshold of AED 187,500 may join the register voluntarily. Generally, VAT-registered businesses must:
- Charge VAT on the taxable goods they supply;
- Reclaim VAT on any business goods and services they purchase;
- Keep records for government purposes.
Foreign businesses can recover VAT costs while in the United Arab Emirates.
Import and export taxes in the UAE
For most items, customs duties are calculated at 5% of the Cost, Insurance, and Freight (CIF) value. Some categories are exempt, and alcohol has a 50% duty, while tobacco products have a 100% customs duty added.
In addition, VAT applies at 5% to gasoline.
Tax avoidance and evasion in the UAE
If you are considered a ‘taxable person’ in the UAE, you will need to adhere to the rules around reporting relevant taxes (such as VAT or corporate tax, once introduced). If you deliberately fail to settle your tax bill, you could face a prison sentence in the most severe circumstances. Financial penalties are more likely for minor offences. The maximum penalty chargeable is five times the amount of evaded tax.
Tax investigations are becoming more commonplace for companies operating in the UAE. In the first six months of 2022, the Federal Tax Authority conducted 9,948 tax inspections, up 104% year-on-year. The investigations uncovered 1,213 violations.
Tax advice in the UAE
As there is no income tax in the UAE, many people don’t need to hire an accountant – there’s no income tax form to fill.
However, for those with larger businesses, it is still important to seek independent financial advice on business tax liabilities.